Obama and Economics

Via Tyler Cowen, a long, thoughtful article on Obama and the economy.

Excerpt:

To understand where Obama stands, you first have to know that, for 15 years, Democratic Party economics have been defined by a struggle that took place during the start of the Clinton administration. It was the battle of the Bobs. On one side was Clinton’s labor secretary and longtime friend, Bob Reich, who argued that the government should invest in roads, bridges, worker training and the like to stimulate the economy and help the middle class. On the other side was Bob Rubin, a former Goldman Sachs executive turned White House aide, who favored reducing the deficit to soothe the bond market, bring down interest rates and get the economy moving again. Clinton cast his lot with Rubin, and to this day the first question about any Democrat’s economic outlook is often where his heart lies, with Reich or Rubin, the left or the center, the government or the market.

Obama has obviously studied this debate, and early on during the flight to Chicago, he told me a story about Reich and Rubin. The previous week, Obama convened a discussion with a high-powered group of economists and chief executives. He was sitting at a conference table, with Rubin two seats to his left and Reich across from him. “One of the points I raised,” Obama told me, “is if you just use you, Bob, and you, Bob, as caricatures, the truth is, both of you acknowledge the world is more complicated.” By this, Obama didn’t simply mean that their views were more nuanced than many outsiders understood. He meant that both have come to acknowledge that the other man is, in part, correct. The two now occupy more similar ideological places than they did in 1993. The battle of the Bobs may not be completely over, but it has certainly been suspended.

Among the policy experts and economists who make up the Democratic government-in-waiting, there is now something of a consensus. They agree that deficit reduction did an enormous amount of good. It helped usher in the 1990s boom and the only period of strong, broad-based income growth in a generation. But that boom also depended on a technology bubble and historically low oil prices. In the current decade, the economy has continued to grow at a decent pace, yet most families have seen little benefit. Instead, the benefits have flowed mostly to a small slice of workers at the very top of the income distribution. As Rubin told me, comparing the current moment with 1993, “The distributional issues are obviously more serious now.” From today’s vantage point, inequality looks likes a bigger problem than economic growth; fiscal discipline seems necessary but not sufficient.

In practical terms, the new consensus means that the policies of an Obama administration would differ from those of the Clinton administration, but not primarily because of differences between the two men. “The economy has changed in the last 15 years, and our understanding of economic policy has changed as well,” Furman says. “And that means that what was appropriate in 1993 is no longer appropriate.” Obama’s agenda starts not with raising taxes to reduce the deficit, as Clinton’s ended up doing, but with changing the tax code so that families making more than $250,000 a year pay more taxes and nearly everyone else pays less. That would begin to address inequality. Then there would be Reich-like investments in alternative energy, physical infrastructure and such, meant both to create middle-class jobs and to address long-term problems like global warming.

The article also addresses the Republican/WSJ fearmongering about tax increases on the wealthy:

The second criticism is that Obama’s tax increases would send an already-weak economy into a tailspin. The problem with this argument is that it’s been made before, fairly recently, and it proved to be spectacularly wrong. When Bill Clinton raised taxes on upper-income families in 1993, his supply-side critics insisted that he would ruin the economy. As we now know, Clinton presided over the longest economic expansion on record, the fastest income growth most workers had experienced in a generation and the disappearance of the federal-budget deficit. His successor, Bush, then did exactly what the supply-siders wanted, cutting upper-income tax rates, and the results were much worse. Economic growth wasn’t quite as strong or nearly as widespread, and the deficit returned. At the very least, Clinton’s increases did no discernible economic damage. Rubin, citing academic work on tax rates, made the case to me that rates under an Obama administration would not be nearly high enough to stifle innovation.

And regarding McCain and the Republicans:

Republicans, on the other hand, have an economic strategy that may still sell politically. But is there much reason to think that it would lead to a very different result from Bush’s? There have now been two presidents in the last 30 years — Bush and Reagan — who cut taxes and promised that deficits would not follow. But the deficits did come, and they went away only after two other presidents — George H. W. Bush and Bill Clinton — raised taxes. It also seems fairly clear by now that tax cuts for the affluent do not necessarily trickle down to everyone else.

For Democrats who want to think the worst about their opponents, McCain’s reliance on these ideas may be affirming. But it’s really a shame. For the time being, only one party is applying the lessons of history to the country’s biggest economic problems. There is no great battle of new ideas, and that can’t make it more likely that those problems will be solved.