Obamanomics vs McCainomics

Obamanomics vs McCainomics

By Steven Cohn, professor of Economics, Knox College

I am an economist. I believe that the economic well-being of the United States will be best served by electing Barack Obama the next president of the United States. This article explains why.

When I originally planned this essay, I hoped to compare in detail the economic platforms of both candidates. Other projects, however, have intervened. Not the least of these has been trying to understand the current financial crisis. As a result, I will attempt a less ambitious comparison. I will compare the basic outlines of the Republican Party’s Supply Side Economics approach to economic policy, which is characteristic of most, but not all, of Senator McCain’s positions, with a variant of Post Keynesian economic policies, that is characteristic of most of Senator Obama’s positions.

I usually write academic articles and books which are much longer and offer an opportunity for more detailed argument than is possible in a short essay. I want to acknowledge, therefore, that the issues discussed below are generally more complicated and nuanced than I can convey in this piece.

I will begin with the Post Keynesian-Obama approach. Its most important policies:

(1) aim to Maintain Aggregate Demand and full-employment in recessionary environments, through increased government spending for economic infrastructure (such as roads and bridges), and tax cuts for middle and low income families.)

2) aim to Increase Economic Productivity through public investments in human resources (such as increased spending for education, child nutrition, and health care programs), economic infrastructure, and research and development.

3) aim to Regulate Business Activity in areas where Market Imperfections (like spill-over costs from pollution or financial sector disruption) threaten to harm people beyond the immediate decision makers

4) aim to Reduce Economic and Social Inequality (through policies like a more progressive tax structure)

5) aim to Renew our Sense of a Common Future (through policies like guaranteeing every American access to a good education, health care, and a secure retirement).

The most important policies of the Supply Side-McCain economic approach:

(1) aim to Increase Incentives for Supply through Large Tax Cuts, especially for corporations and upper income brackets (in the form of corporate tax cuts, capital gains tax cuts, and reductions in the inheritance tax[sc1] )

(2) aim to Reduce Market Interferences and phenomena that might Dull Market Incentives (such as the minimum wage, union power, and some safety net programs)

(3) aim to Deregulate Business (such as the airlines industry and financial sector) and privatize government services (as has been proposed for social security and prisons)

(4) aim to Promote Free Trade and Capital Mobility (as illustrated by the NAFTA agreement)

Basic Orientations: Obama’s Post Keynesian Path

The Obama perspective promotes economic growth that does not require the large economic inequalities that supply-side economics has encouraged. In 1979, just before the beginning of the supply side era, the top 5% of American families made 2.8 times the total income of the bottom 20% of families; by 1989 they made 3.9 times and by 2005, 5.3 times. From 1979-2000, the top 1% of families increased their income 10 times faster than the bottom 40% (Mishel et al. 2007) From 1983 to 2001, the richest 1 percent and 20 percent of the population respectively captured about 33 percent and 89 percent , of the total growth in net worth in the economy (Wolff 2004, 31 Table 3)

The story is similar for poverty rates. When the economic tide came in during the supply side years, the smallest boats did not rise. During the preceding Keynesian period from 1959-1973, per capita income increased in the United States by 49 percent and official poverty rates declined from 22.4% to 11.1%. From 1973-1993, a period dominated by supply side economic policies, GDP per capita increased by another 42 percent, but the poverty rate did not decline, in fact it increased from 11.1% to 15.1% (fluctuating between 11.3% and 15.2%) (Cohn 2007, 234-235)

Although the majority of the increase in inequality during supply side periods can probably not be attributed to supply side economic policies, large chunks can. The real minimum wage fell from $7.23 in 1979 (in real $2005) to $5.84 in 2000, to $5.15 in 2005, putting downward pressure on all of the bottom steps of the wage ladder (Mishel et al. 2007, figure 3x). Policy initiatives that weakened the strength of organized labor reduced employees’ bargaining position. The federal tax rate on the richest 1% of families fell from 37% in 1979 to 28.9% in 1989; while the rate on the poorest 20% hardly fell at all, dropping from 8% in 1979 to 7.9% in 1989 (Mishell et al. 2007, Table 1.13). The Clinton Administration reversed some of this tilt in the 1990s. US trade policy put relatively low skilled American workers in much more direct competition with third world workers, while increased capital mobility strengthened US employers’ bargaining position.

While it is hard to argue cause and effect in macroeconomics because so many things are changing simultaneously, the performance of the economy during the two supply side periods of increasing inequality, from 1981-1993 and 2000-2008 was not clearly better than the Keynesian periods. In fact the data suggests that GDP and output per worker grew more rapidly from 1960-1969, a Keynesian period, than they did from 1982-1990, a supply side period (Kotz 2003, Table 2). The last 8 years of supply side economic policies have been much less successful than either of these periods. Besides stagnating wages, there has also been a massive increase in economic insecurity.

It is also clear that modern capitalism does not require supply side oriented polices. Many countries in Europe and the rest of the industrialized world have followed a very different course than the United States. For example, a just released (Oct. 2008) report by the Organization for Economic Co-operation and Development (OECD), a group of the worlds most developed market economies, found

“The United States is the country with the highest inequality level and poverty rate across the OECD, Mexico and Turkey excepted. Since 2000, income inequality has increased rapidly, continuing a long-term trend that goes back to the 1970s….Redistribution of income by government plays a relatively minor role in the United States. Only in Korea is the effect smaller….spending on social benefits … is low – equivalent to just 9% of household incomes, while the OECD average is 22%. The effectiveness of taxes and transfers in reducing inequality has fallen still further in the past 10 years… ([Furthermore] Social mobility is lower in the United States than in other countries like Denmark, Sweden and Australia. (OECD 2008 [country note: The United States]).

The Post Keynesian economic strategy favored by Obama argues that high levels of economic inequality are inefficient besides being immoral. Reducing inequality is the “smart thing to do” not just the right thing to do. The “social capital” that holds a society together, the trust that allows social institutions to function, the sense of well-being and security that people get from a society with relatively equal living conditions, makes reducing inequality an engine for increases in national well-being. The alternative path of supply side economics may lead to difficult times for large groups of people and gated communities for the alleged winners.

Basic Orientations: McCain’s Supply Side Path

Arguments in favor of supply side economics stress the importance of incentives in explaining and directing economic behavior. There is a tendency to jump from reasonable claims that people respond to economic incentives to unreliable claims, that, for example:

(1) if the tax rate on income from savings (such as interest on a bank account or corporate bond) is lowered there will be a large increase in savings

(2) if savings increase, the cost of borrowing by firms will fall and there will be a large increase in investment

(3) if the tax rate on corporate profits is lowered, there will similarly be a large increase in private sector investment, and

(4) if there are large tax cuts unaccompanied by spending cuts, the economy will grow so much, that there will be minimal increases in the government deficit

The evidence against propositions 1 and 3 is now overwhelming. The US savings rate has taken a nose dive since the coming of supply side economics. It appears that as many people reduce their savings when after tax returns rise (due to target accumulation for some goal) as increase it. The massive budget deficits after the Reagan and Bush supply side tax cuts have virtually ended any claims that these cuts are self financing.[i]

While there does appear to be some inducement for new investment from supply side incentives, the cost to taxpayers of encouraging investment in this way is very high. All income from savings, and all corporate profits, not just the marginal increases in these activities enjoy the tax rebates.

Keynesian economists argue that while many things can effect a firm’s decision to invest, the perception of strong demand for their product is probably the most important. Thus maintaining aggregate demand, through government spending and tax breaks for lower and middle income people is often more cost effective than tax cuts for spurring new investment.

Many critics of supply side economics see it as a Trojan horse for redistribution of income upwards. Just as farmers and automobile producers lobby for government policies favorable to their enterprises, owners of financial assets, like stocks and bonds, lobby for policies that benefit them. They can not be as explicit about their self-interest as farmers, however, as they don’t have the same moral capital. Thus they argue that the best way to help working people or the poor is to help people who own stocks and bonds.

If the actual goal of supply side economics was to strengthen economic incentives and reward capital accumulation (investment), it would seem that significant incentives would be given for human capital accumulation (e.g.: financial aid to working people to go to college or trade school). This has generally not been a focus of supply side economic policies. In fact the implications of budget deficits leads tax cutting supply side proponents like Senator McCain to call for government spending freezes to accommodate the tax cuts on stocks and bonds.

Conclusion

The bottom line is that Post Keynesian and supply side policies for maintaining macroeconomic health seem to benefit different constituents. While both have managed to keep the aggregate economy afloat, the costs and benefits of each policy are very different.

Space constraints preclude detailed discussion of other differences between Obamanomics and McCainomics. The recent financial crisis offers a clear warning against the deregulation fervor of McCainomics. There are also good reasons for not embracing extreme versions of free trade. Some reservations involve the need to regulate the destabilizing impact of volatile short term capital flows around the globe. Other reservations call for encouraging more direct contact between participants in our division of labor than found in a completely impersonal globalized marketplace, but discussion of this will also have to await another occasion.

The Obama program has analogies for private sector behavior. Many firms have a choice between what has been called “high road” and “low road” labor policies. The high road attempts to treat workers well, promising them job security and employer support for skill acquisition, in exchange for increased employee loyalty, higher quality control in production, and a better corporate image with consumers. The low road competes on the basis of low wages and threats of outsourcing. The Obama-Post Keynesian economic strategy meshes well with high road business labor policies. The logic of supply side policies meshes well with low road labor policies. Critics of supply side economics and low road labor policies see shadows of these strategies in the greed which helped bring down Wall Street and now threatens the rest of the economy. Whether this is a fair assessment is difficult to say.

I think we have a path choice to make next week. We have travelled down a road that has led to increasing inequality and mediocre economic performance during the last eight years. I think we can do better.

Bibliiography

Cohn, Steven. Reintroducing Macroeconomics: A Critical Approach (M.E. Sharpe) 2007.

Kotz, David. “Neoliberalism and the U.S. economic expansion of the ‘90s.” Monthly Review April 2003.

Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto. The State of Working America 2006-2007 (Cornell University Press) 2007

Organization for Economic Co-operation and Development (OECD). Growing Unequal? Income Distribution and Poverty in OECD Countries 2008.

Wolff, Edward N. “Changes in Household Wealth in the 1980s and 1990s in the US”. Levy Institute.