Sunday, June 08, 2008


If this article by John Cassidy in the New York Review of Books is any guide, Obama's grasp of economics may be orders of magnitude deeper than that of John McCain. A long exposure to the market-obsessed Chicago School has probably made him at least familiar with the arguments favoring market outcomes over government intervention. The remainder of the article is mainly about behavioral economics, rather than Obama, but well worth reading.

...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. "The three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans," Goolsbee wrote. "These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital."

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, 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"—made a similar point regarding government oversight of the financial markets: "With respect to the mortgage crisis, credit cards and the broader debate over credit markets," 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.


Anonymous said...


To paraphrase you ... Obama's grasp of economics is deeper than that of McCain's ... Really?

Steve you have a propensity in your writing to treat knowledge as a classroom question. This may be due to your occupation. Regardless of why you hold such a misguided view it is incorrect.

Obama has yet to show any acumen in economic thought. He has pandered shamelessly to his audiences. He has sold real economists down the river for suggesting the false hope is selling is a lie. In addition, the few policy recommendations that he has forwarded do not compute. On the other hand, McCain has shown a greater appreciation for the market as an information processor. Please do not confuse this statement as an endorsement for McCain. It is not. It is just a statement that packaging is not the correct measure of knowledge or judgment. Successful management is a better metric.

Please do not be be fooled by fancy words that are not grounded in real choices that we on planet earth must make each day. Obama simply does not have the experience of managing through the economic and organizational issues confronting the nation.

Steve Hsu said...

Keep in mind that politicians have to pander to their base to get elected. Obama's public positions may or may not reflect his actual understanding of the subject.

Obama might endorse a position or policy that is wrong or suboptimal simply because he *has* to, not because he does not understand. It's hard to say. Similarly, McCain might adopt positions that you (or I) favor, but this doesn't necessarily imply deep understanding.

I recall a lot less anti-free trade pandering from Obama than Hilary when they were both campaigning in Ohio.

Ultimately I don't know what Obama's level of understanding is. But I do know that he is smart and has probably had lengthy discussions with Chicago academics such as Goolsbee and Sunstein, who clearly do have orders of magnitude more understanding than McCain. I doubt McCain would benefit as much as Obama from similar discussions. (He has more or less acknowledged that he doesn't understand economics, and I believe him.)

Note the question of who has a better understanding is different from the question of who will push for policies that you or I favor. I am sure Krugman understands economics far better than any major politician, but I wouldn't necessarily want him as president.

Seth said...

Obama trounced McCain on the gax tax "holiday" (mostly for people selling oil). I'll take more of that any day.

I read that same article and was disappointed. There was this big setup -- so what *is* Obama, if not a Keynesian and then the author just groped around for the latest unclaimed buzzword and awarded it to Obama.

zarkov01 said...

1000 x 0 = 0

Like McCain Obama's economic policies don't compute either. He can't tell us where the money for his spending programs will come from except for vague "tax the rich" statements and some magical efficiency. Likewise McCain proposes tax cuts and more spending under the voodoo theory that the cuts will pay for themselves and more.

Dog of Justice said...

Well, if only Romney were the Republican nominee, it would be obvious which candidate had a better grasp of economic public policy, and it wouldn't be Obama.

However, Obama is instead competing against a guy who would amount to GWB's third term. I would actually assign at least a 20% probability to Obama being an even worse president than GWB, but I'll take that risk since the alternative is certain crappiness.

zarkov01 said...

We are advised to believe that Obama has the better grasp of economics because he taught constitutional law at the University of Chicago where "respect for the free market is a cherished tradition." But that applies to the economics department, and not necessarily the law school. Then Cassidy tells us Obama's economic adviser Austan Goolsbee wrote an article for the New York Times extolling the virtues of sub-prime mortgages. He wrote, "These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital." Sensible? Is he joking? Users of these "innovations" used their houses as ATM machines and took out liar loans they couldn't possibly afford. Anyone who would write that in March 2007 (when the cracks began to appear) has zero creditability as an economist. How is Goolsbee anything but a big minus for Obama?

Seth said...

It might be comforting if Obama had more executive experience, but he's running against someone with no better a resume on that score. Between the two, I'd rate Obama a much quicker study and a more balanced, grounded personality.

Folks old enough will remember when Ronnie Reagan's obvious deficiencies in the more abstruse realms was routinely excused as "not his department" so to speak. Leaders at that level are about values and big ideas, not detailed execution.

The critical decisions Obama will make are the hiring decisions for the top handful of economic policy-makers. I suspect Goolsbee has an inside track for something close to the top, but he ain't gonna be running the Treasury department.

Another thing to bear in mind: Presidential campaigns are start-ups. Obama has just led a start-up organization from zero to a major party presidential nomination in less than two years. Pretty decent executive experience in my book.

Anonymous said...

There's not a lot of detailed information to back up the suggestion, Steve, but if you look at the health policies offered by each candidate (and here I'll plug my summary of them), you can get an idea of where they're coming from.

The overall idea for both is to reduce the cost of healthcare, and McCain's plan proposes tax credits to fund individually-purchased insurance, whereas Obama's plan proposes sticking with the current employer-provided plans plus a Medicare-like system for un- and self-employed, leaving it up to the insurance companies to lower costs.

I personally see the market being able to work under both systems, so no advantage for McCain there, and I see the tax credits and inevitable subsidy of high-risk individuals under McCain's plan being fairly Keynesian as well.

Likewise, you can see evidence of a behavioral aspect to Obama's approach. The major points of debate in Obama's plan are actually behavioral ones.

Will people seek treatment for unnecessary covered expenses under Obama's plan, or will people avoid medical treatment whenever possible, no matter the cost.

Will access to preventative care reduce the number of more severely ill patients, thus reducing the overall cost of healthcare?

In a way, it's like asking whether the public school system or the airline industry is better for the economy.

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