Obamanomics

The man who Obama will be looking to for economic guidance is Austan Goolsbee, a professor at the University of Chicago Business School. Goolsbee has been the principal economic adviser to Barak Obama since Obama ran for the U. S. Senate in 2004.

Goolsbee’s specialties include geek-like things such as the internet, network effects and neuroeconomics. But he is also one of the principal exponents of something new called “behavioral economics and finance,” which some are calling the economics of the 21st century.

Behavioral economics retains the neoclassical model of supply and demand but says that human beings are seldom the perfectly rational homo economicus of that theory. It tries to merge the insights of psychology and sociology with the mathematical rigor of economics. It acknowledges that markets can be engines of efficiency but it insists that government can improve outcomes, increase opportunity and still enhance consumer choice.

Behavioral economics eschews what has become a political choice between laissez-faire free markets and government programs that are designed to overturn market results. This new economics attempts to rescue markets from the failure of their assumption of rationality.

The real question is, what do we have after applying the tenets of behavioral economics to the real world? What kind of an economy will Barak Obama have created coming out the other side of this catastrophe? We have to ask, just what is “Obamanomics” and how will it be used?

Obama said his immediate goal is “to ease the credit crisis, help hardworking families, and restore growth and prosperity.” Those are goals, devoutly to be wished for, but not policies or programs. In regard to action, Obama was no more specific than “by taking all necessary steps”, which isn’t much help.

Obama rightly makes the credit crisis the first order of business. Behavioral finance considers that investors indulge in systematic error such as herding and groupthink and under or over reaction to information. Behavioral finance explicitly asks and explains why these systematic errors lead to crashes and bubbles.

We can expect that an Obama administration will use the insights and tools of behavioral finance. The behavioral economists agree the remedy for our failing financial markers includes greater transparency and government regulation.

“(H)elping working families,” Obama’s second goal, addresses what is probably at the heart of this entire crisis. There is good reason to argue that the failure of real wages to grow post-1980 and the consequent lack of aggregate demand triggered the recession, the beginning of which then triggered the financial crisis.

Goolsbee admits that “The inequality and stagnation of income for 75 to 85 percent of ordinary Americans is a massive problem.” And he states that “Hence, the central issue confronted by Obama’s economic program is, how do we address the squeeze on ordinary Americans?”

The answer is, he says, that we create high-wage jobs and a strong middle class by maintaining a dynamic economy and a well-educated workforce. That answer is just a little too general so he turns to a more macro solution.

Healthcare, education and the environment costs should be viewed as investments in engines of growth with potentially immense investment returns. For example, upon arriving in the Senate, Obama proposed legislation, “Health Care for Hybrids,” that would have offered the auto industry assistance with its healthcare costs in exchange for producing high-mileage clean cars. Such programs create a win-win situation.

Obamanomics is, at this juncture and in the face of a sharply deteriorating economy, preparing to invest huge amounts in job-creating, green infrastructure programs and massive educational spending. America is poised for an economic surge that will lead the world in clean technology.

This is the idea that government investment, properly carried out and directed, can “restore economic growth and prosperity” to America. It is the only way we can get the country back on track.