"Economics: Which Way for Obama?" (Behavioral Economics Edition)

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Below is an article in the New York Review of Books by John Cassidy about a new book by Richard Thaler and Cass Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness. The piece does a good job of giving an overview of behavioral economics, presenting (and critiquing) how Thaler and Sunstein see it being used to shape policy, and to what degree Obama, who has used taken some ideas from “libertarian paternalism” may adhere to this philosophy.

As much as a lighter touch has plenty of merit whenever it can deliver the goods, some actors, particularly those in financial services, have demonstrated they need restraints. Let’s hope that if Obama is the victor (far from certain, as Paul Krugman notes today), that he has the good sense to be “horses for courses” in his policy choices.

From the New York Review of Books:

The bursting of the housing bubble and the associated credit crunch has so far wiped out about $3 trillion of wealth—nobody knows the exact amount—caused havoc in the financial markets, and prompted hundreds of thousands of homeowners to default on their monthly mortgage payments. Some experts predict that by the end of 2009, the number of homes entering foreclosure could reach two million. Not surprisingly, the question of what to do about the housing crisis has emerged as a divisive policy issue in the 2008 presidential election, with each of the three leading candidates representing a distinct economic ideology.

John McCain, for all his protestations that economics is not his strong point, has put forward a coherent, if somewhat heartless, case for doing nothing, or very little, anyway….McCain has said it is no business of the government to bail out people who took out loans they couldn’t afford….The laissez-faire argument says it is better to let the market “correct”—i.e., let the foreclosures mount up—until people learn to live within their means and prices become more affordable, at which point sustainable economic growth will resume.

Hillary Clinton, after initially equivocating, has emerged as the would-be heir to FDR and John Maynard Keynes. In addition to imposing a ninety-day moratorium on foreclosures and a five-year freeze on certain adjustable mortgage rates, she would have the federal government buy up an undetermined number of troubled home loans, enabling lenders to convert them to more affordable deals and putting a floor under the housing market.

Clinton would also allow bankruptcy judges to reduce the value of mortgages, a proposal the banking industry vigorously opposes….

Barack Obama has also criticized McCain for sitting back and watching while so many American families face eviction. Yet his own proposals are more nuanced than Hillary’s. They include setting up a $10 billion fund to help prevent foreclosures, cracking down on mortgage fraud, providing tax credits to low- and middle-income homeowners who don’t currently itemize their interest payments, and standardizing the terms of mortgages so that potential borrowers can more easily figure out when they are being hoodwinked. Obama has also expressed support for Democratic Senator Chris Dodd’s plan to expand the Federal Housing Administration’s ability to refinance troubled loans. So far, though, he has been noticeably less enthusiastic than Clinton about a large-scale injection of public funds into the market for mortgages and mortgage securities.

Should Obama win the nomination, political considerations may well force upon him a more interventionist position, but his first inclination is to seek a path between big government and laissez-faire, a trait that reflects his age—he was born in 1961—and the intellectual milieu he emerged from. Before entering the Illinois state Senate, he spent ten years teaching constitutional law at the University of Chicago, where respect for the free market is a cherished tradition. His senior economic adviser, Austan Goolsbee, is a former colleague of his at Chicago and an expert on the economics of high-tech industries. Goolsbee is not a member of the “Chicago School” of Milton Friedman and Gary Becker, but he is not well known as a critic of American capitalism either. As recently as March 2007, he published an article in The New York Times pointing out the virtues of subprime mortgages….

When I spoke to Goolsbee earlier this year, he said that one of the things that distinguished Obama from Clinton was his skepticism about standard Keynesian prescriptions, such as relying on tax policy to stimulate investment and saving. In a recent posting on HuffingtonPost.com, Cass Sunstein, who for ten years was a colleague of Obama’s at the University of Chicago Law School—and has said he is “an informal, occasional adviser to him”… Sunstein wrote, “Obama rejects heavy-handed regulation and insists above all on disclosure, so that consumers will know exactly what they are getting.”

If Obama isn’t an old-school Keynesian, what is he? One answer is that he is a behavioralist—the term economists use to describe those who subscribe to the tenets of behavioral economics, an increasingly popular discipline that seeks to marry the insights of psychology to the rigor of economics. Although its intellectual roots go back more than thirty years, to the pioneering work of two Israeli psychologists, Amos Tversky and Daniel Kahneman, behavioral economics took off only about ten years ago, and many of its leading lights, among them David Laibson and Andrei Shleifer, of Harvard; Matt Rabin, of Berkeley; and Colin Camerer, of Caltech, are still in their thirties or forties. One of the reasons this approach has proved so popular is that it appears to provide a center ground between the Friedmanites and the Keynesians, whose intellectual jousting dominated economics for most of the twentieth century.

The central tenet of the Chicago School is that markets, once established and left alone, will resolve most of society’s economic problems, including, presumably, the mortgage crisis. Keynesians—old-school Keynesians, anyway—take the view that markets, financial markets especially, often fail to work as advertised, and that this failure can be self-reinforcing rather than self-correcting. In some ways, the behavioralists stand with the Keynes-ians. Markets sometimes go badly awry, they agree, especially when people have to make complicated choices, such as what type of mortgage to take out. But whereas the Keynesians argue that vigorous regulation and the prohibition of certain activities such as excessive borrowing are often necessary, behavioralists tend to be more hopeful about redeeming free enterprise. With a gentle nudge, they argue, even some very poorly performing markets—and the people who inhabit them—can be made to work pretty well.

In a fortuitous accident of timing, Sunstein and his friend Richard Thaler have just published a book that makes the behavioralist case in nontechnical language: Nudge: Improving Decisions About Health, Wealth, and Happiness. On the face of it, finding two more suitable coauthors would be difficult. Sunstein is a one-man think tank and a prolific writer—by my count, this is his eighth book in as many years. Thaler, who, like Goolsbee, teaches at Chicago’s Graduate School of Business, is one of the founders of behavioral economics…

Thaler’s columns, some of which he coauthored with Kahneman and Tversky, ran under the rubric “Anomalies.” Among the things they highlighted were the failure of participants in economic experiments to pursue their own self-interest; the buyer’s remorse suffered by many auction winners when they contemplate what they have bought; and the popularity of lotteries. (If people were fully rational, they would realize they had virtually no chance of winning.) The articles, which in 1992 were published as a book, The Winner’s Curse: Paradoxes and Anomalies of Economic Life, inspired many bright young economists to take a closer look at human psychology.

For decades hitherto, young economists wanting their elders to take their work seriously had followed a three-step research program that could roughly and uncharitably be described as follows: (1) write down a set of equations to describe how people or firms behaved; (2) fiddle around with the math until it yielded some refutable hypotheses; and (3) using the most highfalutin statistical technique you could master, subject the theory to the data. Thaler and his followers were savvy enough to couch their theories in mathematics. To test them out, though, they borrowed some tricks from experimental psychology, monitoring actual people—groups of students, usually—doing everyday things, such as drinking beer, playing computer games, bidding for cheap objects, and, in one case that has recently attracted some attention, masturbating while viewing on-line pornography. (MIT’s Dan Ariely was one of the organizers of the latter experiment, which he covers at length in his best-selling book, Predictably Irrational.*)

s is true of almost all research programs, some of the results the behavioral economists obtained weren’t exactly shocking. (Ariely “discovered” that sexually aroused young men develop a taste for unprotected sexual intercourse and other, more deviant, sexual practices.) Taken together, however, the experiments confirmed something most people outside of economics hadn’t doubted for a moment: rational economic man, the all-seeing, all-knowing figure on whose shoulders much of contemporary economics had been constructed, was a purely fictional character. Faced with even simple sets of options to pick from, human beings make decisions that are inconsistent, suboptimal, and, sometimes, plain stupid. Rather than thinking things through logically, they rely on misleading rules of thumb and they leap to inappropriate conclusions. Moreover, they are heavily influenced by how the choices are presented to them and, sometimes, by completely irrelevant information.

If you think you are too smart for this description to apply to you, try this simple mental exercise. Take the last three digits of your cell phone number, obtaining a number between zero and 999, and add two hundred to it. Write down the resulting figure and put the letters AD after it. Now, consider this question: When did Attila the Hun invade Europe?

Unless you are an expert on the Dark Ages, or your brain is unusually wired, the chances are that your answer will be pretty close to the date you write down. Say the last three digits of your cell number are 787 and the number you write down is 987 AD. Then, most likely, 900 AD will sound like a reasonable answer to you, and so will 1050 AD, but 400 AD will sound wrong. That was certainly how it worked when I tried the exercise.

The last three digits of my cell number are 314, so I wrote down 514 AD. Then, I volunteered 450 AD as the answer to the history question. (As chance would have it, I almost got the correct answer, which is during the 440s.) My experience was fairly typical. When Thaler and Sunstein asked some of their students to play this game, those who started out with high numbers gave dates that were, on average, three hundred years later than those proffered by students with low numbers.

What is going on here? As a matter of logic, we know perfectly well that there is no connection between our cell phone numbers and the date of Attila’s campaigns, but the figure we write down gets stuck in our heads, where it acts as an “anchor” when we come to answer the subsequent question. “In the language of this book, anchors serve as nudges,” Thaler and Sunstein write. “We can influence the figure you will choose in a particular situation by ever-so-subtly suggesting a starting point for your thought process.” Of course, others can do the same thing. Thaler and Sunstein cite charitable organizations that ask, in their circulars, for a donation of “$100, and $150, $1,000, $5,000.” The fund-raisers know that few people will give $5,000, but by presenting this set of options rather than, say, “$50, $75, $100, and $150,” they manipulate people into giving relatively large amounts….

Anchoring is one of several mental shortcuts that Tversky, who died in 1996, and Kahneman, who is an emeritus professor at Princeton, wrote about in a 1974 paper that marked the beginning of what became behavioral economics. (For this and other contributions, Kahneman received the 2002 Nobel Prize in economics.) Another way of saving mental energy, which Kahneman and Tversky termed the “availability heuristic,” involves assessing risks on the basis of particularly salient examples rather than a calm assessment of mathematical probabilities. Fear of a terrorist attack is a good example. Following September 11, 2001, many people, myself included, greatly overestimated the chances of their being killed in another al-Qaeda attack, relative to, say, their perishing in a car crash. A third shortcut, known as the “representativeness heuristic,” involves seeing patterns where none exist. If I flip a coin and get six heads in a row, I may well conclude that there is something wrong with the coin. Much more likely, the coin is perfectly fair and the run of heads was simply a random event.

Once Tversky and Kahneman got people thinking critically about the rational actor model, they and others quickly identified many more mental quirks, or biases, that are pretty much ubiquitous. From the perspective of behavioral economics, the key ones are inertia, overconfidence, and loss aversion. In their everyday existences, people tend to stick with what they are doing, even if trying something different wouldn’t be very taxing…Families go on vacation to the same spot every year. In the vernacular of behavioral economics, they have a “status quo bias.”

At the start of one of his classes, Thaler makes his students fill out an anonymous survey in which he asks them how they expect to perform relative to their classmates. Typically, fewer than one in twenty say they expect to achieve a grade below the median. That is overconfidence. Loss aversion refers to the fact that once people own something they hate giving it up, be it a house, a car, or even a humble coffee mug. Many years ago, Kahneman and two collaborators divided a class of students in two, giving the members of one group a mug each that they could keep. After waiting awhile, the researchers asked the mug owners how much they would be willing to sell their mugs for, and they asked the students without mugs how much they would pay for one. “The results show that those with mugs demand roughly twice as much to give up their mugs as others are willing to pay to get one,” Thaler and Sunstein write. “Thousands of mugs have been used in dozens of replications of this experiment, but the results are nearly always the same. Once I have a mug, I don’t want to give it up.”

Exploring the limits of human reason is interesting in its own right—witness the popularity of Ariely’s book—but what has it got to do with Obama? Thaler and Sunstein lay out a number of principles that can be used to encourage better choice-making, and they apply them to various topical issues, including retirement saving, health care, and the environment. In a number of cases, the measures that Thaler and Sunstein recommend are mirrored by proposals in Obama’s voluminous policy papers, which can be downloaded from his Web site.

In a chapter entitled “Save More Tomorrow,” Thaler and Sunstein endorse the idea of automatically enrolling people in corporate savings plans, such as 401(k)s, rather than making them fill out a form if they wish to opt in. In the idealized world of neoclassical economics, this shouldn’t make much difference—rational people will decide what works best for them and do it. In reality, because of the status quo bias, or, perhaps, because of sheer laziness, the fallback option matters plenty. Studies show that when employees have to sign up, participation rates are often as low as 50 or 60 percent. When people are enrolled as a matter of course, with an option to opt out, the participation rises to more than 90 percent.

For decades now, economists have been bemoaning the fact that so many Americans save hardly at all. Simply offering tax breaks for saving has been tried many times, and it doesn’t have much impact on overall savings rates. Here is a simple, noncontroversial measure that seems to work. An Obama administration would build upon it by requiring firms that don’t offer 401(k) plans to open a direct deposit retirement account for their workers, with an opt-out clause rather than an opt-in clause. For the first $1,000 in savings that an employee contributed, the government would provide a $500 tax credit.

Yves here. The Australians have a simple idea that also works. It’s called superannuation. 9% of your pay goes to a retirement account. You cannot access it but you do direct how it is invested. Admittedly, it was phased in and replaced some other schemes, but has proven to be popular. But compulsory is a bad word in America.

Elsewhere, Thaler and Sunstein endorse Justice Louis Brandeis’s injunction that “sunlight is…the best of disinfectants.” In financial markets, especially, prices are often opaque, which gives unscrupulous businesses ample scope for ripping off customers by imposing on them hefty hidden charges, late fees, and the like. Thaler and Sunstein propose that credit card companies, mortgage issuers, and other financial services firms should be forced to disclose all of their charges clearly, in plain language, so that potential customers can comparison shop…

Disclosure not only helps consumers make better choices: it can also shame businesses into curbing their egregious behavior. Thaler and Sunstein cite the Toxic Release Inventory, a piece of legislation from the 1980s that forced companies to disclose to the government what potentially harmful chemicals they had stored or released into the environment. As James Hamilton pointed out in his 2005 book, Regulation Through Revelation, the measure was originally intended simply to provide the Environmental Protection Agency with more information, but once enacted it allowed activists and the press to target the worst offenders. Fearful of attracting bad publicity, many companies changed their policies, and overall emissions fell sharply. In light of this experience, Thaler and Sunstein propose setting up a Greenhouse Gas Inventory, which would require companies and other organizations to publish the total amount of carbon they are releasing into the atmosphere:

In all likelihood, interested groups, including members of the media, would draw attention to the largest emitters. Because the climate change problem is salient, a Greenhouse Gas Inventory might well be expected to have the same beneficial effect as the Toxic Release Inventory. To be sure, an inventory of this kind might not produce massive changes on its own. But such a nudge would not be costly, and it would almost certainly help.

All of this makes for interesting reading, and much of it is sensible. Having written many times about the shortcomings of neoclassical economics, and the political ends to which it has been exploited, I am sympathetic to Thaler and Sunstein’s effort to construct a more realistic economic philosophy, and one partly based on insights borrowed from other disciplines. However, the more I read of Nudge the less convinced I was that its authors, for all the useful and interesting material they present, have succeeded in their larger aim.

Some of my misgivings were editorial. After starting out strongly, the book gradually degenerates into a laundry list of proposals, some of which seem out of place. Reforming the medical laws so that patients can get cheaper insurance coverage in return for forgoing the right to sue their doctors might be a good idea, as might removing the state from the marriage industry and confining it to the legal endorsement of civil unions; but neither suggestion has much of a connection to behavioral economics. Rather than spending an entire chapter on each of these issues, plus another shaky one on school choice, the authors could have spent more time on issues like myopia and procrastination, both of which have stimulated interesting research. The failure to include any discussion of the difficulties people have in making decisions over time is particularly striking. Readers wishing to know more about this issue, or about the evidence showing that people are surprisingly altruistic and cooperative, at least according to the findings of economic experiments, would be better off picking up an old copy of Thaler’s The Winner’s Curse, of 1992. (One consistent finding: in so-called “ultimatum games,” where subjects bargain over a small sum of money, say $10, they tend to reach egalitarian solutions.)

In defense of Thaler and Sunstein, their emphasis is on public policy. Yet the program they outline seems unduly restrictive. Not content to be behavioralists, they are also libertarians, and they endorse something they call “libertarian paternalism.” They write:

Libertarian paternalism is a relatively weak, soft, and nonintrusive type of paternalism because choices are not blocked, fenced off, or significantly burdened. If people want to smoke cigarettes, to eat a lot of candy, to choose an unsuitable health care plan, or to fail to save for retirement, libertarian paternalists will not force them to do otherwise—or even make things hard for them. Still, the approach we recommend does count as paternalistic, because private and public choice architects are not merely trying to track or to implement people’s anticipated choices. Rather, they are self-consciously attempting to move people in directions that will make their lives better. They nudge.

A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting the fruit at eye level counts as a nudge. Banning junk food does not.

Many of the policies we recommend can and have been implemented by the private sector (with or without a nudge from the government)…. In areas involving health care and retirement plans, we think that employers can give employees some helpful nudges. Private companies that want to make money, and to do good, can even benefit from environmental nudges, helping to reduce air pollution (and the emission of greenhouse gases). But as we shall show, the same points that justify libertarian paternalism on the part of private institutions apply to government as well.

On the penultimate page of the book, they write:

The twentieth century was pervaded by a great deal of artificial talk about the possibility of a “Third Way.” We are hopeful that libertarian paternalism offers a real Third Way—one that can break through some of the least tractable debates in contemporary democracies.

The addition of the word “real” was presumably meant to distinguish Thaler and Sunstein’s ideas from the “Third Way” approach that Bill Clinton, Hillary Clinton, and Tony Blair endorsed back in the 1990s. But just as that well-meaning intellectual construction project….. suffered from soggy intellectual foundations, libertarian paternalism has some fundamental problems, beginning with the fact that it sounds suspiciously like an oxymoron.

Once you concentrate on the reality that people often make poor choices, and that their actions can harm others as well as themselves, the obvious thing to do is restrict their set of choices and prohibit destructive behavior. Thaler and Sunstein, showing off their roots in the Chicago School, rule out this option a priori: “We libertarian paternalists do not favor bans,” they state blankly. During a discussion of environmental regulations, they criticize the Clean Air Acts that banned some sources of air pollution and helped to make the air more breathable in many cities. “The air is much cleaner than it was in 1970,” they concede, “Philosophically, however, such limitations look uncomfortably similar to Soviet-style five-year plans, in which bureaucrats in Washington announce that millions of people have to change their conduct in the next five years.”

If you start out with the preconceptions about free choice of John Stuart Mill or Friedrich Hayek, it is difficult to get very far in the direction of endorsing active government…..Once again, consider the subprime crisis. At this stage, it is hard to find anybody willing to defend some of the mortgage industry’s practices, such as offering gullible borrowers artificially low teaser rates that shot up after a couple of years. Hard, but not impossible. “Variable rate mortgages, even with teaser rates, are not inherently bad,” Thaler and Sunstein write. “For those who are planning to sell their house or refinance within a few years, these mortgages can be highly attractive.”

Strictly speaking, Thaler and Sunstein are correct. But many of the borrowers who took out loans planning to sell, or refinance at lower rates, within a few years were speculators, and unwittingly they helped to generate the biggest property bubble in American history. Others were simply taken for a ride. Dealing with this bursting of that bubble is going to involve spending a lot of taxpayers’ money, which surely justifies the placing of some limits on future borrowers and lenders. A refusal to accept that individual freedoms sometimes have to be curtailed for the general good is an extreme position even for a neoclassical economist to take, and it is alien to the traditions of the Democratic Party.

As it happens, there is a coherent and well-developed economic philosophy that was explicitly designed to deal with the law of unintended consequences, and it is regulatory Keynesianism of the sort practiced in the United States and Britain from the end of World War II until the 1980s, a period, not coincidentally, in which working people saw their living standard improve at an unprecedented clip. With respect to the national economy, Keynesians worry that unfettered capitalism is subject to ruinous boom-bust cycles, so they advocate management of demand through interest rates or government programs that create jobs. On the micro-level, they believe that some economic activities have harmful effects that the price mechanism fails to capture, so they support taxation and regulation. Behavioral economics, by demonstrating how people often fall victim to confusion, myopia, and trend following, provides another convincing ratio-nale for Keynesian policies, but you wouldn’t realize that from reading Thaler and Sunstein.

Obama, as far as I know, doesn’t refer to himself as a libertarian, but on occasion he appears to be unduly influenced by the need to preserve choice. Rather than mandating universal health coverage, for example, he has promised to set up a new, subsidized, government-operated insurance plan for people who aren’t covered by their employers and who don’t qualify for Medicare. But if a young and healthy person, for whatever reason, didn’t want to buy health coverage, an Obama administration wouldn’t compel that person to do so, despite the strong financial and moral arguments for expanding the risk pool. Just how to compel healthy young people to buy health insurance remains a large question; but it is one that should be addressed.

On other issues, such as trade policy and regulation of the financial industry, Obama has recently adopted a more dirigiste tone than Thaler and Sunstein would care for. More generally, he has talked about confronting entrenched interests and giving a voice to the excluded. Doubtless, he means what he says, and his ability to attract new voters, especially young ones, suggests he could have more success in overcoming the forces of inertia and reaction than the Clintons did in 1993–1994.

But for what policy purposes are the masses to be mobilized? According to Obama’s program, the answers include another middle-class tax cut; more tax credits for education and fuel-efficient cars; a bigger budget for the National Science Foundation; and the establishment of a National Infrastructure Reinvestment Bank, with an annual budget of $6 billion. At best, these proposals would represent a useful start in redressing the inequities and shortcomings produced by twenty-five years of Republican domination. If the next Democratic president wants to leave a truly lasting legacy, he or she will have to do more than nudge the country in a different direction.

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  1. Richard Kline

    The fundamental problem of neoclassical economics, and to me why it remains at base an ideological rather than an analytical perspective, is its inability to reckon fairly with the inherent distortions which large concentrations of capital or chokepoints upon the same wield in their own self-interest. It took decades of work to pass the Pure Food and Drug Act in the US; no amount of ‘shaming’ and ‘nudges’ sufficed. Given a once in a lifetime opportunity with venal Republicans in control of the Congress and the Executive, capital gutted business and environmental regulation, voted themselves a huge tax holiday, and went on a ruinous lend-and-spending spree. Neo-upper class economists decide a priori that regulation and restraints on capital are bad not least because they are demonstrably ‘inefficient,’ and from that perspective set out to collect factoids and shape studies to justify their belief. Their beliefs are not historically justifiable or defensible; their work, however, is very well funded by interests who want a power to the capitalists approach announced loud enough to drown out the past and the intellectual competition both.

    I have a lot of respect for behavioral economics. The idea of ‘nudging’ socially desirable behaviors has a great deal of merit as a general principle because this structures the optimization space and accrues compliance insidiously without generating resentment either excessively or at all. Well and good. Nudging a T. Rex like JPM just doesn’t play; one can set up an electric fence or napalm it, but playing nice with massive predators is more like playing stupid with hulks who don’t play nice or fair. Neo-upper class economists with tenure always think that they will come out on the right side by being reasonable. Remember Enron? Very unreasonable folks, them folks. Remember Rockefeller, the Standard Oil man? Sunshine alone was not sufficient to cure the body politic of his kind of ailment. I find the example of companies ‘shamed’ by disclosure of toxins a telling half-truth: those companies were forced at the time to operate under some new and fairly firm Federal regulations. Bad publicity provoked the then real possibility of _even more restrictive regulation_: this is the reason why they fled bad publicity and activist groups sought to generate such publicity. (I should know: that’s what I did as an activist.) Somehow THE CONTEXT AS A WHOLE didn’t make it into that example. Because it is an essential principle of neo-obfuscatory economics to screen out, regress out, or just flat ignore social and historical context since time and again these point to conclusions said economists find embarrassing to their beliefs.

    Obama clearly has little taste for regulation. His health proposal is scandalously weak. His general approach to dealing with major economic issues, if it can be (poorly) summarized in a sentence, is to sit down with business interests and ask them what they’ll accept. Which is either laughably naive or extremely shrewd, but in neither case is likely to bolster the public interest; such an approach is as likely and more to erode it. I have little confidence that Barack Obama will end either war the country is presently fighting, though he does not appear likely to start another one soon.

    Now, Obama has done absolutely nothing for years but prepare to run for President, and he is clearly _most_ keenly aware that the swing voters who decide who will be President a) find regulation, Keynesian or otherwise, a mild swear word, and b) think that social justice means anti-white [to be blunt about it]. So BA has shaped his approach to be sure he votes for nothing, speaks to nothing, and stands for nothing that could be in any way tagged as either of these positions. Accordingly, it is hard to tell whether he really would act in office in the manner he suggests in this campaign. If so, his policies are to the right of any other Democrat in this election, and indicate that as President he would more nearly resemble Bill Clinton with a tan than anyone else who comes to mind. Except weaker and without prior experience as a political executive to dealmaker.

    Now it should be borne in mind that when FDR ran for office in 32, his campaign consisted of two planks, being a) I Am Not a Repubulican, and b) balancing the budget. He did _not_ suggest that he was going to massively intervene in the economy and extend regulation: he knew very well how much resistance to his campaign such reformist statements would incurr. Indeed, many of his widest regulatory changes didn’t come until late in his second term, although some of this delay was due to context rather than intent. I do not for a second think that Obama wants to or will be an active reformer in office, but there is the potential that he is simply positioning himself for the general election and therefore we don’t really know who he will be once elected. One of the two groups backing him are going to be extremely disappointed, though, either those who think he will bring a ‘soft change’ or those who think he will let vested capital interests enhance their existing position. If BA’s stated policies are any guide, and they usually are in presidential elections, it’s the latter cats who will be smiling fat a year from now.

    . . . Since BA is very likely to win, and handily. What seems missing in Krugman’s gloom—and I have a good deal of respect for Paul—and in many handicap assessments as of today is that Obama’s real strength has been with white independent voters who typically have swung Republican but who are now beyond disgusted with that party. Obama’s ‘let’s all just agree to make money’ approach plays beautifully with that crowd, and they are the folks together with the young who have turned out in the caucuses big for him. Working class Democrats who have problems with blacks running for office have reliably voted Republican in the privacy of the booth regardless of what they do downticket and say in public; Obama’s spokesfolks took a knock for saying that, but it’s a simple and demonstrable truth. Getting independents to swing his way is the key for Obama, he has positioned himself to do it, and they are. McCain can’t get their vote, and they intensely dislike Hilary on grounds which though not entirely rational are completely unshakeable. Obama will be the next president unless someone puts a bullet in him, and I don’t say that to fear-monger but rather because in this country we have a tradition of doing that as I expressed to friends even before the primaries started.

    Oh BTW since McCain has been the nominee presumptive for some time, many in the Republican party who don’t like him have kept their mouths shut; however, many large interests in the GOP dislike him personally, and they are clearly keeping their wallets shut as well, and come the general election many of them will take their vote and go home come election day. I also invite critics to imagine the images of Obama and McCain side by side, one youngish and smooth, the other sagging and crank; kinda like Clinton vs. Dole only with the Republicans in a much, much, much worse electoral environment.

    —But Obama won’t get _my_ vote unless he takes an unequivocal stand for social justice, and against these execrable wars, though if he starts talking substance and sense regarding necessary financial regulations he’ll at least get my feet moving backward from a no-go stance. At the present, I don’t have anyone to vote for in this show.

  2. Been there

    Richard Kline said “The fundamental problem of neoclassical economics…is its inability to reckon fairly with the inherent distortions which large concentrations of capital or chokepoints upon the same wield in their own self-interest…Nudging a T. Rex like JPM just doesn’t play; one can set up an electric fence or napalm it, but playing nice with massive predators is more like playing stupid with hulks who don’t play nice or fair.”

    I couldn’t agree more. So why haven’t there been efforts to create anti-trust laws for aggregators of capital (debt or equity), based upon some large moving-target type metric. (E.g. aggregating capital in excess of 1%, 1/10TH% OR 1/1000TH% of US gross GDP either by individual companies or among various companies acting in a coordinated fashion, would subject those individuals or groups to significant financial penalties, or worse) that’s deemed to be an appropriate threshold for this purpose. It seems that large pools of capital can wreak havoc and cause distortions, especially in small individual markets, and probably contributed greatly to some of the asset bubbles experienced in recent years. An understanding behavioral economics is important for setting economic and regulatory policies but I also think there’s a need for a leader who understands the importance for setting limits on the size and scale of capital from the supply side perspective. Wouldn’t this also give emerging economies a chance for their own internal capital markets to develop before being squashed buy an alien 800 pound gorilla?

  3. eh

    The bursting of the housing bubble and the associated credit crunch has so far wiped out about $3 trillion of wealth…

    I think $3 trillion of presumed wealth is meant.

  4. Anonymous

    I agree that neoclassical economics tells a lot of tall tales that are at odds with reality. However, it does deliver too very important messages that should not be lost when reforming economics:

    1. Incentives matter.
    2. Unchecked regulation can lead to many unintended consequences that are as bad as unchecked capitalism.

    I am particularly concerned with (2) because the people who want regulation are so knee jerk in their proposals and so quick to throw out the baby with the bathwater, that we may revert to the other pole.

    What seems to be missing from the debate are more reasoned, balance discussions that seek out the strong elements of both neoclassical and behavioral economics to try to produce a new theory that improves on both. Instead, these debates typically become polarized where if you are on one side of the argument, you want to completely dismiss the other side.

    Creating a economic system to produce the highest social good is not a trivial matter and is not as simple as saying “neoclassical economics is a fantasy” or “we need more regulation.” This is far more complex than raising kids and anyone who has tried to raise a child struggles with the tension between too much interference (regulation) and letting them figure it out (neoclassical). A sensible parenting method requires wisdom and not just dogmatic adherence to one philosophy or the other.

  5. VennData

    Two data points on the results of Bush’s tax policy:

    High-Income Tax Deductions Rose in 2006


    High income tax deductions rose in 2006 meaning high earners got an actual tax cut on returns filed in 2007. However, since then, the economy has faltered. So tax cuts for the “most productive” in this case, didn’t result in improvements in the economy.

    On to the second point, lower top marginal rates have still left massive amounts of capital offshore, leaving the “cut down on tax cheating” claim without support:

    The New Global Hunt for Tax Cheats


    “…the IRS reckons $295 billion of potential tax revenue goes uncollected—much of it because of underreported income. With governmental budgets strained everywhere, leaders are eager to mop up those missing payments…”

    In summary, two data points that directly countermand GOP tax cut orthodoxy.

  6. Dan Duncan

    “…behavioral economics, an increasingly popular discipline that seeks to marry the insights of psychology to the rigor of economics.”

    A marriage of the “insights” of psychology to the “rigor” of economics….Damn, this seems like a bad idea.

    These insights in psychology just remind me of technological innovation and the “human condition”. A lot of promises, a lot of complexity…and, yes, many specific advances. Somehow, though, there seems to be some mysterious anti-synergy force at play, because the whole often is less the sum of the parts. Only Shakespeare could capture the Tragedy of These Commons.

    Perhaps if we apply the intellectual rigor of the economist, we might find our way out of this existential plastic bag…that’ll be with us for the next 10,000 years.

    But listening to the economist is like a trip back to the Middle Ages. I know I’m going to come across like a real moron to the economists out there, but please don’t take it personal—I’m just ignorant of your complex models. I’m like Phil Hartman as the Caveman Lawyer. “I’m just a Caveman.” That stated, I just can’t help but to feel the rigor of the economist has an astrological feel to it. Complex models derived from some other complex model…that yield a recurring decimal result that always manages a refrain of “years late and billions of dollars short” with the lyrical variety of Paris Hilton covering Britany Spears.

    I love the Freakanomic types who apply economics to everything. How about applying some of that rigor back on your profession? When was the last time an economist applied rigor to the accuracy of economic forecasting? Now that would make for scintillating reading!

    Continuing the loop-back, economists could then go behavioral, and instead of behavioral finance, it could apply complex models and limited sample sizes to behavioral economists.

    What might a behavioral economist model predict? A massive inferiority complex…as economics professors try desperately hard to be a part of a “hard” science?

    There’s a certain irony in an intellectual discipline informing the world about cognitive dissonance, while being so suffused with it.

    Maybe economics should cede some of the science and replace it with a lot more of the art. Then, it wouldn’t take itself so seriously. At the same time, we could actually appreciate the talents of a mercurial Kurt Cobainesque economist who regales us with economic riffs that we all know are so wrong, yet, “oh so right.” There’d be a refreshing invigoration of “theory turn-over” as the economic fashions quickly go “out of style”…plus the Curt Cobain type of economist is much more apt to burn out…as opposed to the interminable fade away of the tenured academic.

    Finally, and most importantly…for the guys, anyways….there’d be A LOT more chicks.

  7. Jesse

    “But Obama won’t get _my_ vote unless he takes an unequivocal stand…against these execrable wars”

    He is the only candidate that has. I find it remarkable that thoughtful people can say something like this at this point. It must be the triumphant of propaganda and willing suspension of reason over the facts.

  8. Anonymous

    Dan duncan, I sympathize with you and know economics has its problems but imo, making it it more “art” will just turn it into sociology. And as far as I know, sociology does not yield any more generalizable conclusions or better predictive ability than economics. In fact, there is a reason why companies, governments etc are willing to pay more to hire economists rather than sociologists.

    The problem with any social science is that unlike physical sciences, we are dealing with forward looking, adaptive entities. The physical world is mostly stationary. That makes it a hell of a lot easier to study. And addressing this problem is not as simple as saying we need more “art” or we need more “math” or we need more “stats” or whatever (though I do agree that more girls in the professional would be an upgrade :)). A perfect example of a forward looking, adaptive non-stationary environment is the stock market. But as far as I know, those who rely on “art” cannot predict stock price movement any better than those who use quantitative models. You have to be a superstar and a real artistic genius to consistently do well as a stock picker. And the economy is about 1000 times more complex than the stock market.

    Social sciences (and I mean ALL social sciences not just economics) are really in their infant stages. That is why the methods seem so crude and the predictive ability leave a lot to be desired. But they are progressing and the types of debates that occur here also occur among academic economists. You just don’t happen to hear much about it because these debates tend to take place at academic conferences and in journals rather than in public forums.

  9. Juan

    prior to the increasingly complex division of (academic) labor, economics was not economics but political economy, the critique of which gave us a better grasp of not-so-apparent dynamics of society’s production and reproduction of itself, not as some wonderous contradiction-free collection of rational utility maximizing individuals and and smoothly functioning equilibrium but instead inherent tensions and discontinuities.

    neoclassical econ developed in reaction to this but moreso rising militancy and organization of the later 19th c. working class on one hand and capital’s need to deny its own basis in labor on the other — it developed as and generally remains an ideology.

    behavioral, and post-keyensian, economics are, in my opinion, legitimate attempts to reform a failed neoclassic orthodoxy.

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