What is Obama's Grand Economic Theory?

That's a question that's buggered a lot of economists recently. He's either a socialist revolutionary or a Wall Street poodle depending on whom you read. But this excellent piece from the New Republic is the best I've read explaining why he's neither -- why we're about to embark on four years of an economic policy that is unlike any other this country has ever seen, and why he could introduce a new American paradigm: boyfriend-economics.



The authors track a detailed history of Democratic economics through the blissful Clinton years to the formation of a new economic theory, hardened in the cauldron of the financial crisis. Here's their argument in a nugget:

Obama has set out to synthesize the New Democratic faith in the utility of markets with the Old Democratic emphasis on reducing inequality. In Obama's state, government never supplants the market or stifles its inner workings--the old forms of statism that didn't wash economically, and certainly not politically. But government does aggressively prod markets--by planting incentives, by stirring new competition--to achieve the results he prefers.

The authors trace this softer capitalism approach back to behavioral economics, the cozy nook of the dismal science that manipulates incentives to guide flawed human instincts. Obama, they say, doesn't want to proclaim his policies over a rapt body politic. He wants to tweak incentives to nudge Americans -- bankers, home owners, patients -- toward his policy goals. Four big examples:

--Banks: Obama could nationalize the banks; instead he tinkers with incentives to get private investors to buy the toxic assets themselves.

--Mortgages: Obama could have the feds rewrite troubled mortgages; instead he "gives lenders financial incentives to lower monthly payments for borrowers at risk of default."

--Health care: Obama could push for a single-payer health system; instead, he's beginning by trying to kill insurers' disincentives to provide preventative care.

--Environment: Obama could simply tax carbon outright; instead he's proposed a cap-and-trade system that encourages companies to pay each other for the right to pollute more and prices the negative externality of carbon dioxide to encourage consumers to seek cleaner sources of energy.

To be sure, these nudges are political as much as ideological. Nationalizing the banks and health care in your first year in office is an "all-in" bet wrapped in a headache. But still, I think the authors get as close as anybody has to diagnosing the central animating philosophy behind Obama's economics: "a hands-off approach to markets themselves, but a hands-on approach to the incentives and defaults that influence decisions."

I think the very best example of this philosophy is something a bit under the radar: wage-loss insurance. Workers aren't spending enough time in productivity training at their jobs, Obama thinks, because they're worried about spending money to get better at a job they might not keep. But what if workers knew that the government would cushion their job loss with some extra dough? They would want to spend more time in productivity training.

What emerges is an economic policy with unabashedly liberal goals that respects individual freedom. I'm sorry, but I just couldn't help thinking of this:



Take a look at all the policies described above. Obama's agenda lays out it goals clearly, but it also gives us space, because it wants us to choose its agenda. It wants private investors to choose to buy the toxic assets. It wants private insurers to choose prevenative care. Obama doesn't want to do the dishes. He wants us to want to do the dishes. Socialism is considered paternalistic -- it should feel like a father. Obama's America looks more like a long-term relationship -- part-independent, part-dependent. And maybe just right.