From 1992 to 2004, Barack Obama lectured at the University of Chicago's Law School. By all accounts, our future president was popular with students. He was known to be polite and accommodating to those who disagreed with him. His reputation at Chicago was that of a teacher who broadened your horizons.
It's a pity our president didn't take full advantage of his time at Chicago and broaden his own horizons. For on the same campus was Gary Becker, the economist and original thinker who married economics and sociology into a hybrid that became known as behavioral economics. Becker won the Nobel Prize in economics in 1992--the same year Obama began teaching at Chicago's law school.
The surprise best-seller, Freakonomics, and its sequel, SuperFreakonomics, are homages to Becker's way of thinking. In their introduction to SuperFreakonomics, authors Steven Levitt and Stephen Dubner write:
If pressed, you could boil [the book's theme] down to four words: People respond to incentives. If you wanted to get more expansive, you might say this: People respond to incentives, although not necessarily in ways that are predictable or manifest. Therefore, one of the most powerful laws in the universe is the law of unintended consequences.
If the younger Barack Obama had spent a bit of time with Gary Becker at Chicago, or if he would set aside a weekend to read Freakonomics and SuperFreakonomics today, he would be wiser and his poll numbers would not be in free fall.
What Obama appears to lack is sense about economic incentives. Take this week's dust-up with bankers. It is the duty of bankers to lend to small businesses, Obama said. That's very interesting. Because small businesses have little incentive to borrow and banks have little incentive to lend under Obama's policies. Small businesses that are still healthy and credit worthy are busy right now trying to (1) get as lean and efficient as possible, and (2) build fortress balance sheets. Coming down the pike, they know, are higher taxes and a whole slew of regulations that will drive up costs, particularly around employees. (Speaking of unemployment, does anyone think the administration's policies encourage businesses to hire? Example: What would happen if cap-and-trade passed? A rush to outsource what's left of U.S. manufacturing is the safe bet.)
Banks have little incentive to make money the old-fashioned way (by lending) if they can lazily tap the Federal Reserve for free money and then buy long-term U.S. Treasurys yielding 3.5%. You might not like banks. What you can't do is blame banks for responding to incentives set in place by the government.
A robust recovery, such as the 7% or so annual rate of growth in 1983-84 following the 1981-82 recession, is not in the cards this time. The incentives for private economy investment and growth are confused, distorted, misaligned and even directly counter to a good outcome. That's why the U.S. will likely see a muted recovery and will be fortunate if it dodges a second leg down.
There's always hope. Scrooge saw the light. Maybe someone could slip under the Obama Christmas tree a copy of Gary Becker's The Economics of Life.
Post your comments below. Have you read Freakonomics and its sequel, SuperFreakonomics? How about Becker's The Economics of Life? What did you think? And is there hope that President Obama will see the light and tack to the center on economic policy, as did Francois Mitterrand and Bill Clinton?
Rich, I would bet against President Obama moving too far to center until the results of the 2010 elections are in. The early elections are what woke up the Clintons and the same may be true for the current President. I don’t always agree with the Freakonimics crowd but their points are well made. Great post, thank-you and a Merry Christmas to you and all the folks who read this blog.
Digital still rules!
Rich writes “is there hope that President Obama will see the light and tack to the center on economic policy?”
Nope. Not a chance. Up until recently I believed that Obama was smart enough to not force the left’s big government command and control agenda down the throats of the American people. I was wrong. From his actions in his first year, I now don’t believe he’s that smart. Sure is a good talker though. He’s a one-termer and there is a reasonable chance that the GOP retakes the house in 2010. If so, that will be the end of that for at least a while.
Unfortunately, what the President and Congress does are pretty irrelevant. The real power in our country resides on Wall Street and at the Fed. The important question is this – will the people rise up against these oligarchs, or will they meekly watch as their savings melt away via inflation.
And for those of you naysayers about inflation, my 40 employee company just took a big hit from a 30%+ increase in our BCBS health insurance costs.
I think you got it backwards, Rich. The GOP has decided that they will reject any and everything President Obama proposes, irregardless of its merits. Thus, he will learn he gains zero by moving to the center and can only gain by moving left.
With respect to incentives, I think you should have learned by now that what you call incentives are really just new and better ways for Americans to indenture themselves. Just take a look over the numbers of the last 30 years. Incentives have made the majority of Americans more dependent on the government. We’ve had enough of your “incentives” I think.
Saul of Tarsus also saw the light. But I’m not holding my breath waiting for some light to dawn on the folks in Washington DC.
Rich,
This is the most realistic post I've seen from you in a while. It is one way of looking at why our economy is going to underperform for a long time to come. I love your generally optimistic outlook, but when you are addressing the big picture, the truth is that we have no choice but to pay down some of the overspending relative to our real productivity. This will happen one way or another. Eventually, we will be in a position to have real growth again, but it is a long way off. All we can do with all the financial manipulation (both governmental and private sector) is cover up what is really happening.
Don,
You said “And for those of you naysayers about inflation, my 40 employee company just took a big hit from a 30%+ increase in our BCBS health insurance costs.”
Not inflation. It’s a higher cost to you with the same old money. They are taking away more of your wealth. Not the same amount of wealth as before but at a higher nominal price and with inflated dollars. No. They are actually taking more of your wealth.
You don’t necessarily have inflation just because a price goes up. Sometimes the price goes up even when we have no inflation because the market will bear a higher price and the entity determines to take it. Prescription drug prices, for example, went up 9% during the past 12 months…during a deflationary recession while virtually everything else in our economy went down.
Except that oil went up too because OPEC went right back to taking a larger share of our wealth for themselves. The bankers are doing that same thing to us again. And the universities never missed a beat. Higher taxes are next because the burden of debt service is about ready to take off big time. Interest rate (yields) are too low now and must rise sometime soon even without inflation.
Incentives versus disincentives. Gary Becker spoke of the trade-off regarding punishment versus enforcement as a motivation for ethical behavior in our open society. His assumption was that we could not hope to catch most of the misdeeds that go on out there and that increasing our policing of society becomes prohibitively expensive. The old 80:20 rule. The diminishing returns of adding more government agents into a society or soldiers into an occupation zone. Instead, increase the penalty for getting caught up to the point that no one would dare break the rules.
Of course, this quickly becomes totalitarian and heavy-handed. At some point when the authorities are too abusive people simply refuse to put up with it and they revolt.
There are also diminishing returns for increasing the penalties. Summary execution for drug dealers would probably not be more effective than a $100,000 fine and 10 years in prison if the probability of actually getting caught was very low. On the other hand, to actually start shooting kids on sight for selling weed would certainly spark a revolution in the United States and no such law should ever be written.
Of course, we do kill civilians in Afghanistan today if we see them digging a hole in the ground near a road. Maybe it is an explosive device. But some of the time they are simply burying a dead cat.
We actually have $1,000 fine-for-littering signs on some of our streets here in San Jose. But people still do it all the time because that's just silly and no one ever gets caught.
Gary Becker was wrong. It does no good to increase the penalty if no one is ever going to enforce that law. And it's reckless for the authorities to increase the penalty up to such a point that no one would ever break the rule if we actually imposed such a penalty…just as no one would want to catch them.
Our three strike laws (with life imprisonment without the possibility of parole) when that third strike is shoplifting is a great example of such foolishness. It's already abusive but people get caught anyway. And their families are outraged. Increase the punishment up to the death penalty or cut off their hands for stealing and some guys would still shoplift.
So what would work? We need laws that we want to enforce all the time and penalties that seem appropriate. Then we need to downsize our effective social (and economic) units so that people are living and working inside spaces completely surrounded by folks who have a stake in their behavior.
Make the drug-dealing rule read that if a kid is caught selling dope he is placed under house arrest inside his own neighborhood and all his family and friends living there with him must put up the bond to keep him out of jail. They are going to watch that he stays on the reservation and that he stays out of trouble. Raise the penalty just enough to get all their attention and increase surveillance to include everyone he sees. His misbehavior will stop.
We do this sort of thing inside our companies when any serious theft or a fist-fight, for example, would immediately be reported to management and inside our families when your little sister will run and tell your mother anything she sees you do. But out on the street when we are surrounded by strangers? Anarchy.
Desmond Morris wrote in The Human Zoo (1969) that we build our own cages in this society and how we operate is a direct result of what we design. Sometimes we display neurotic “cage behavior” just like a tiger in a pen that is not large enough for him to run around and jump up in the air as God intended. We do that same thing to ourselves. Lots.
That's what Sociology is supposed to teach us about. But it has been 40 years since 1969 and the marriage of economics and sociology has not yet given us another Desmond Morris. (He's 81 now.) A biologist who really understands capitalism and who can also write. We should have lots of those.
Forest – inflation, price increase, stealing wealth – doesn’t matter what you call it – it’s bad for anyone who wants to buy something. However, it’s just peachy for the money changers at GS et al who get first dibs on newly created money, and who don’t have to pay vigorish because of their pal Ben. Unlike the Hoover’s depression of the 30’s (which the Fed made much worse), the coming depression will rightly be blamed on the Fed and on Ben Bernanke.
Nominal prices, denominated in Federal Reserve Notes, of most goods and services are going up significantly now, regardless of what the Fed and Treasury say with their bogus statistics.
The prime example of bogus: unemployment is 10%. Pure BS. That number doesn’t include those whose unemployment compensation checks have run out, those who’ve become so “discouraged” that they are no longer looking for a job, and those who are underemployed. The real number is at least 15%, and maybe as high as 25%. Another anecdote – Chris Mathews(!) reported on Hardball today that the unemployment rate in the city of Detroit is 45%. Dear readers, if you think it can’t happen in your city, you’re not thinking.
And Rich, you can tinker around the edges talking about incentives, all the while you are missing the big picture which is that the country is broke. Period. All we’re waiting for is the fat lady to sing.
Kirk,
You said “Eventually, we will be in a position to have real growth again, but it is a long way off.”
That time will never come if we don’t come up with something better than Supply Side capitalism in our post-Keynesian economy. Just like the Japanese we will be trapped in deflationary stasis indefinitely.
However, if we do develop an effective bottom-up practice of captitalism then we can start right now. Just like Rich said, when Reagan crushed Stagflation in 1983 we had 7.1% GDP expansion in 1984 and 25 years of Supply Side got our economy up to this point. If we are conservatives then we need to build on that $14 trillion number. Even if Supply Side itself will not do much more for us.
However, if we give up and default to socialism then we must continue to live like this by consuming our wealth until our hegemony will mostly be gone.
Don,
You said “…the coming depression will rightly be blamed on the Fed and on Ben Bernanke.”
I think that’s wrong. If we move into a depression it will be because our banks never did get back to underwriting the Supply Side multinational corporations who were holding this economy above 2% for the past decade (and above 3% for the last 25 years). As it is we will probably recover to a 1% sustainable GDP at best and perhaps not quite that good. But in any case we will be fragile enough to drop right back down into recession again with the least disruption if all we have is a recovered Supply Side.
The Fed is holding back deflation so that’s good and if Bernanke can be blamed for what’s going on now then it’s because he and Hank Paulson did not sweep up all the large banks on September 17th, smack those bankers around real good and make the financial services industry do its job. Including a roll-over of the General Motors paper just like would surely have happened otherwise. But if the banks were in the hands of the government until things got straightened out and the GM deal was not adequate then we could have fixed those boys too. And without all this foolishness.
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