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Posted by on Jun 10, 2008 in Economy, Politics | 0 comments

Economics: Which Way for Obama?

Yesterday Matt Stoller posted an analysis of Obama’s Raleigh speech on the economy. Stoller says Obama’s economic philosophy is a “split between a neoliberal Rubin-type policy tone and an embrace of behavioral economics, a new school of thought popularized by books like The Tipping Point, Freakonomics and Predictably Irrational.”

The move towards behavioral economics was also noted by The New York Review of Books in its piece, Economics: Which Way for Obama?

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.

Stoller’s analysis runs through the long-term and short-term strategies Obama outlined in his speech and concludes, “As Obama moves forward, it’s worth noting where he is, having adopted a standard set of mainstream Democratic economic policy ideas, so that we can see where he goes.”

The New York Review of Books ends up arguing, I think persuasively (and I’m a staunch behavioral economics advocate), that a Nudge is not going to be enough. I’m betting Matt would agree with that!