April 22, 2009


Nudge-ocracy: Barack Obama's new theory of the state (Franklin Foer and Noam Scheiber, 5/06/09, The New Republic)

[W]hen you look at the sum of Obama's early policies, you begin to see the contours of a distinctive philosophy. Unlike the Progressives or the early New Dealers, Obama has no intention of changing the nature of American capitalism. Not through old-fashioned Jeffersonian means (antitrust) or newer-fangled Hamiltonian techniques (industrial planning). His program doesn't set out to reinvent whole sectors of the economy, not even our broken banking system. And, unlike postwar liberals, he has no zeal for ramping up the regulatory state, aside from tightening the screws on financial services. But, even then, he's resisted key parts of Europe's proposal for greater controls on hedge funds.

Like the New Democrats who ultimately shaped the Clinton administration's agenda, Obama has a deep respect for the market and wants to minimize the state's footprint on it. He has little interest in fixing prices or rationing goods or reversing free-trade agreements. But, while he basically shares the New Democrats' instincts, he rejects their conclusions. Reacting against the overweening statism of their liberal ancestors, many New Democrats came to believe that if government largely got out of the way and let markets work properly, the natural result would be widely shared prosperity. You only need to view the extent of Obama's domestic agenda to know he doesn't agree.

Instead, 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. With health care, for instance, he would make it easier for employees to tote their insurance from job to job, eliminating the disincentive for insurers to invest in preventive care. Or take his bank plan, which helps banks dispose of their toxic assets, reducing uncertainty and making the banks more attractive to private investors--a far less drastic step than nationalization. Rather than force markets to conform to his wishes, he shapes their calculus so they conclude (on their own) that their interests coincide with his wishes.

Obama is hardly the first president to grasp the appeal of manipulating incentives and altering the context in which we make decisions. In the mid-'70s, Charles Schultze, Jimmy Carter's top White House economic adviser, sketched out a version of the conceit in a book called The Public Use of Private Interest. Schultze favored "harnessing the 'base' motive of material self-interest to promote the common good"--say, by taxing rather than outlawing harmful activities. A generation later, the behavioral theorists Richard Thaler and Cass Sunstein, both informal advisers to the Obama campaign, hatched a descendant of this approach. In their own book, Thaler and Sunstein suggested that the government inculcate desirable habits like saving and philanthropy through a series of gentle "nudges."

Given the alternatives--even greater federal involvement, even more federal dollars--such "harnessing" and "nudging" makes enormous political sense. But Obama's version also represents a huge gamble. Many countries have nationalized banks and run health care systems--and we have, at least, a good sense of how those programs would turn out. The Obama approach is largely untested on the scale he proposes, which is far greater than anything Schultze or Thaler and Sunstein imagined. His plans can be dismayingly complex; they often involve heroic assumptions about how people respond to new incentives. There's more than a hint of Ira Magaziner--the much-derided architect of Bill Clinton's 1993 health care plan. But, if it works, Obama will have truly found the Third Way Clinton grasped for a decade ago.

He's just a variant on Clinton/Bush. The correct line of attack to take is that he just isn't competent at his job. And given the complexity of the legislation his plans require and his lack of any demonstrated ability to legislate effectively you don't have to worry about being ahead of the curve. His own party isn't going to give him what he wants. The post-midterm GOP majority would.

Posted by Orrin Judd at April 22, 2009 7:09 AM
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