White House Economist Austan Goolsbee Answers Your Questions

INSERT DESCRIPTIONAustan Goolsbee

Two weeks ago, we solicited your questions for White House economist Austan Goolsbee. You will find his answers below. Among the highlights: no, the Obama administration is not socialist; and no, Goolsbee will not be trapped into telling you whether he’d buy an American car. Thanks for the good questions and thanks especially to Goolsbee for the interesting answers.

Question

The Obama administration has tightened its control of the domestic financial industry, the domestic automobile industry, the tobacco industry, and is gearing up to do the same with the healthcare industry. Why do you and the president believe that centralized control of the economy will be productive? What makes the administration think that it will be any better at it than every other country that has done this? — DaveyNC

Answer

Whoa, Davey. The president and the administration firmly believe in the importance of a well-functioning private sector. We are dealing with these historic messes because they were the messes that were on fire when we got here. We are not “tightening our control” of these industries in order to convert them to centralized socialism, impose mind-control, or any other such thing. Our first task was to prevent the worst financial crisis and worst recession since the depression from becoming the next Great Depression. I am from the University of Chicago. You are not going to find anybody more opposed to socialism or corporate welfare than me. But truly, do you really think that stronger oversight of financial markets is anti-business? The loss of public trust in financial institutions undermined the market system and created the biggest crisis in 75 years.

Question

How is your investment portfolio allocated? — VB

Answer

To the extent it exists, basically index funds, money markets, and our house.

Question

Do you think raising taxes on the wealthiest taxpayers can stifle economic growth? Why or why not? — Chris Lawnsby

Answer

In the abstract? If tax rates are too high, yes. But as you probably know, the United States has experienced rapid growth even in periods where the top marginal rate was much higher than it is today and growth has been measly over the last eight years despite major cuts in the top rates. So at the least, tax rates on the wealthiest Americans in the country are not the primary thing driving growth. In Obama’s budget specifically, the top rates would go back to where they were in the 1990’s (when growth was quite respectable); it would invest in education and the health system and cut taxes for 95 percent of workers in the country. I don’t see that stifling growth at all.

Question

What do you think will drive our economy in the next 15 to 20 years? — RC

Answer

The skills and education of our people and technological innovation. Those are the key investments we can’t forget about.

I don’t know what the industries of the future will be, though. When our first kid was about a month old, we visited my wife’s 90-year-old grandma, Betty, in New Jersey. While we videotaped her holding the baby, I asked what she thought her great-granddaughter would be when she grew up. She predicted “something that hasn’t even been invented.” I doubt she based it on a reading of economic history, but the data bear her out.

Question

According to the Wall Street Journal, the U.S. government decided to give G.M.’s secured creditors 29 cents on the dollar when secured creditors are supposed to get paid off first. If you’re trying to get credit markets up and running isn’t this sort of behavior counterproductive? After all, if secured creditors can expect that the government might decide on a whim to take money to which they are entitled, that will discourage lending. — Alan Forrester

Answer

I think you mean Chrysler (secured creditors got fully paid in the G.M. case). But regardless, be careful with your claim. This wasn’t on a whim and it isn’t out of the ordinary in a reorganization. When a company goes into bankruptcy and tries to restructure, critical suppliers often get moved up in the payment line (in the case of Chrysler, warranty holders and suppliers, for example, were made whole despite being unsecured creditors because forcing them to take losses would have threatened to drive away customers or exterminate key suppliers, either of which would have endangered the restructured company). Secured creditors in a bankruptcy like this will get at least what they would have gotten in the event of a liquidation. And in this case, 29 cents on the dollar was better than what they would have gotten.

I do not think this has a negative impact on lending going forward because everyone knows the rules of how things work in bankruptcy reorganizations, especially these days when lots of folks who made secured loans to pretty iffy organizations will have to take haircuts. If secured creditors know that in the event of a restructuring they will get even more than they could get from liquidating everything, they should not be upset (beyond being upset that they lent money in the first place to a company that went bankrupt).

Question

Do you feel behavioral economics is a new paradigm in economics or a tweak on standard models? Following Ian Ayres‘s request for a “richer list of specific applications” on blog in Jan. ‘09, are there any applications making their way into policy? — Mark C. Foley

Answer

Mark, I guess between the two it’s closer to a new paradigm than a tweak, but I am pretty partial to the old paradigm, too, so I wouldn’t go too far in pronouncing it obsolete. In my view, behavioral economics has given us some key insights into certain problems and certain types of people’s behavior. It has given us some interesting insights. But it doesn’t replace old-style economics. Policy areas where behavioral economics has informed things recently include savings policy, financial aid simplification, tax simplification for individuals, credit card regulation and ways to get stimulus money out efficiently (off the top of my head).

Question

From a behavioral economic point of view, thinking (very) long term, to overcome the debt-buying culture that many Americans have grown up in — what cultural-change initiatives might we create to give Americans more confidence in their individual futures, so that we don’t feel the need to resort to credit to have the nice things we want? — Eric Patrick Marr

Answer

Eesh. I am no expert on cultural changes. My answers usually begin with: “change the incentives.”

Don’t forget that credit is not automatically bad; smoothing our consumption over our lifespans is one of the goals economists have for functioning credit markets.

I agree with your question, though, for people who have gotten themselves into unsustainable debts that exceed their ability to repay or where their incomes don’t keep up. And also that for some suppliers of credit, they rather clearly premised their business models on exploiting consumers’ lack of understanding of the details and fees, etc.

So a three-part policy to help this might include 1) strengthening the incentives for savings and behavioral/default enrollment programs for people prone to save little; 2) a macro-economic policy that invests in getting the incomes of ordinary Americans growing again; and 3) implementing sensible credit card and other consumer finance reform to explain deceptive practices and keep consumers out of the kinds of non-transparency traps they have faced in recent years so they are better able to make credit decisions.

Question

Toyota or Chevy — which would you buy? — VB

Answer

I am a guy who drives the car until the wheels fall off so I’m not in the market yet. Plus, since I’ve been in D.C., I take the subway to work. But when it’s time for a new car I will check Consumer Reports and give a test drive to decide.

Question

Which is misspelled more, your first or last name? — VB

Answer

Ah, you appear to know my pain only too well, VB (give it up, mom, I know it’s you). Since Goolsbee is phonetic, sometimes people actually spell it right. That never happens with Austan. My spell check flips it automatically, so sometimes my research papers make it look like I can’t even spell my own name.

Someday I will tell you guys the story of what Levitt told me my name proved when we were first out of grad school and he was doing his names research that ended up in Freakonomics.

Question

What kind of progression in marginal tax rates do you think is ideal? There was a big hubbub over the U.K. getting to 50 percent on their top rate; could we be heading there too, and would it be helpful or harmful? — Tucker

Answer

There is no “ideal” tax rate in isolation. Among other things, it depends what the government does with the money. Whether we are making key investments versus spending on wasteful programs that don’t work makes a big difference in what you think the tax rate should be.

Question

How likely is it that we will experience hyperinflation in the next couple of years? Our expectations for the money supply can even cause inflation, and I’m wondering how the Fed and the government will be able to convince people that they’ve got things under control. They don’t teach any of this in our classes! — S

Answer

I wish there were a textbook to read on this sort of thing, but there isn’t. If you look at market expectations of inflation embodied, say, in TIPS bond prices, clearly the market is not expecting a hyper-inflation. The concern in the near term is preventing deflation, which we have few tools to address when the interest rate is already near zero, rather than inflation, which we have several tools to use should we start seeing inflation rise.

Question

Would you consider yourself a follower of the Friedman/Stigler/Coase/Miller school of economics and finance, or a follower of Keynes and Tobin? — Jeff Carter

Answer

I am more of a data-dog, empirical economist, so I don’t know how that fits in to your schema. The old days of the ideological battles between Chicago and the Keynesians is not really the way things are anymore. I would like to think I took some important things from both camps, though. Tobin was a dear friend and mentor to me when I was a young man and helped get me into economics. I never knew Friedman or Stigler, but Becker, Miller, Heckman, Murphy, and other giants at Chicago and the culture of debate and discovery they helped create there are certainly in my bloodstream. It is a magical place. But basically I just go where the data say to go.

Question

What is the real rate of unemployment? If you add the unemployed and the discouraged and the underemployed, what would it be? And I read that Bush changed the way unemployment is calculated in order to make it seem less awful. If so, is it still being calculated in the same corrupt way? — Kenneth Stretcher

Answer

I don’t think it changed specifically under Bush, but you raise an important point. There are a lot of people out of the labor force including, for example, a huge increase in the number of people on disability who, according to researchers, would have been part of the unemployed in the old days. There are also more people now counted as employed who are involuntarily part-time workers or “under”-employed workers, so we need to be careful making apples-to-apples comparisons across decades in the unemployment rate. It’s hard to compute the exact number because some of these data did not exist in older decades. It’s sort of like trying to compare batting averages now to the 1960’s when the pitcher’s mound was higher. You just have to be aware of the differences.


Gary

Wow. Some great questions, and some great answers!

I knew President Obama brought an economic all-star team to the White House, but somehow it takes a guest post on the Freako blog for me to really gain confidence in someone.

Now we just need Bernanke to put we Freakonomics readers at ease...

Mike

No question those were great questions and great answers.

However, its not what you say but what you do. For example, I don't find comfort is hearing that the government wants a well functioning private sector while taking ownership of large pieces of the private sector (among other things).

Red

Agreed on the quality of the answers. Thanks for being candid.

athelas

He did some really impressive fancy dancing on the more critical of questions. I don't agree with him but you must respect that rhetorical acumen.

david barnwell jnr

I'm very impressed. I wonder if ( according to Mr. Goolsbee ) economists have virtually ended the ideological wars , and are more led by empirical data now, why the politicians haven't followed suit? Isn't it better to be a, "data dog", politically speaking? Doesn't that give you the ability to marshall the best arguments and win elections?

I think special interests can in many cases make representatives abandon common sense.
I think the only hope for the two party system, is the education of the public. I think inaccurate arguments that appeal to special interests, and are put forward solely because of their narrow appeal, will be abandoned if it is seen that "Joe and Jane" public are so knowledgeable that they will no longer accept them.

MM

Whoa, waitaminute, the White House has an "economist" on salary? But, but, what does Summers and Romer do? Aren't they economists? How many friggin' economist are on the payroll just in the White House?? Enough for a good pickup game down in the basketball court? jeez.

Mike Jones

Government regulation of ANY industry is anti-business.

I cannot believe people this backwards on economic theory somehow manage to become an economic adviser for the most powerful person in the world.

Learn some history and basic economics, maybe then we'll avoid the coming Next Great Depression, all you "economists" are doing right now is further driving us into a deeper, harsher, and longer recession with your mindless regulation and subsidies of countless industries.

Rilke

To #7,

All things being equal Mr. Jones, I think I'd prefer to trust the gentleman from Chicago above your commentary.

Government regulation is helpful to businesses in a number of ways.

An easy example. Government regulation (ideally) provides greater clarity in financial markets. Greater clarity in financial markets means it's easier to raise capital because people are less likely to sit with their cash under a mattress and are more likely to invest in the stock market or deposit it in a bank. How is that anti-business?

The problem with buyer-beware theories of economics is that it assumes rational and reasonably honest actors across the board. When those assumptions fail (look at the financial crisis if you need proof of that), then people take to hoarding their resources.

When resources are hoarded, it causes substantial inefficiencies in the market.

Mr. Jones, I'd suggest you take a look at some economic authors beyond the Cliff Notes version of Milton Friedman.

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NG

re: Mike Jones

I know, how dare those economists think they know better about how to run the economy than you? I don't listen to plumbers about plumbing, carpenters about building, or writers about writing, so why should I listen to economists about the economy?

Meredith Schneider

Mr. Goolsbee says "There is no 'ideal' tax rate in insolation." I would be interested to hear his comments on the data in the the Political Calculations blog:
http://politicalcalculations.blogspot.com/2008/04/connecting-dots-for-personal-income.html

According to the data, the tax rate is tied to GDP, so in order to increase revenues to the government, increasing GDP should be the focus rather developing new tax rates or figuring out another tax.

CC

@6 MM,

It's the White House, not the Mayberry City Hall.

Rahm

This man has no idea how real economy works? useless, go back to chicago and get a teaching job, if you can...

J

"the United States has experienced rapid growth even in periods where the top marginal rate was much higher than it is today and growth has been measly over the last eight years despite major cuts in the top rates"

OK. A follow up question: what has more impact on how much tax the wealthy* pay - the marginal tax rate, or the legal definition of what constitutes taxable income?

*Individuals who have the financial means to maintain the lifestyle of the average person in the top marginal tax bracket for the remainder of their life, either because they cannot lose their source of income, or because losing that income would not matter.

DaveyNC

Mr. Goolsbee,

Thank you for choosing my questions to answer. However, you didn't answer them. You jumped to several conclusions in your response, one of which was that I suspect the administration of being anti-business. I said no such thing. I asked the following:

"Why do you and the president believe that centralized control of the economy will be productive? What makes the administration think that it will be any better at it than every other country that has done this?"

If I were going to rephrase the question at all, I would make the first question about centralized control of the various business sectors I mentioned rather than the broad economy.

Your response prompts another question from me. I take at face value that the tightening of control is not intended to convert the country to socialism or anything other than to restore order and stability to the economy. So, then, does that mean that the administration has set a date certain (to borrow a phrase from the Iraq War debate) when it will disentangle itself from these industries and restore a more "normal" business climate?

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Amaturus

Mike,

You're ideological purity is inspiring, but surely you recognize that the benefits of government enforced financial accounting standards outweigh the costs? If you can see that chink in your ideological armor, then every other regulatory measure should be judged by a similar cost-benefit analysis. Obviously there's bad regulation out there and the government will never be able to solve moral hazard issues, but government regulation can benefit business.

Ryan

Right on Davey.... I think a follow up is in order. All due respect, but I don't need Mr. Goolsbee to read me the score with regard to the economy and what a mess we are in (and frankly I don't think it is productive). What I want to understand are his insights into why he thinks a centralized government driven solution will work when historical evidence tells me it never has before. There is nothing novel about big government solutions... it is not a new idea... it is proven to be a bad idea time and again.

Also I would be interested in Mr Goolsbee take on post #10. To dig out of the spending pit we find ourselves we clearly need growth. The evidence provided in the charts suggests that higher marginal tax rates will retard that much needed growth. I think Clinton said it best... "when you find yourself in a hole stop digging."

Mike Jones

"Mainstream Economists" were blind to the upcoming recession or simply ignored it. Most base their views of loony "ideals" not on logic, facts, or history. I would love if someone could show one proper example of where and how government intervention in a free market was successful.

And I know about Milton Friedman, intelligent but his views were slightly flawed.

I suggest you all look into the Austrian school and Ludwig Von Mises "Human Action." Maybe you'll actually learn something instead of relying on "ideals." That is just laughable.

science minded

For me the question is control from above or by us individuals ourselves. Of late, the latter has not been a good option as far as certain organizations (the individuals who make the decisions for them) have been concerned and the control from above concept does not seem to be working so well either. Seems to me that for this economy to move ahead, both sorts of controls should be in place. so what does a smart investor do? How does one go about making wise decisions that minimize the risk or that keep risk to a real minimum. I really do not know and have hit a number of walls in my effort to find out. Perhaps it used to be the case that no news is good news. I heard from a bank to day that they have no new news to report and I wouldn't recommend making it up. But how about pointing out the things that have been done that long term serve to protect investors--assuming things have been done. And if it is still really business as usual, then somebody at the federal level, better let us know about it. No wonder the market is so quirky, real change takes time and investors have no time.

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DaveyNC

I agree that the actions taken so far were necessary to keep us from utter collapse. I am more concerned with the aftermath and the level of control that the administration wants to impose. Government intervention/control does not simply dissipate, it is nearly impossible to roll back. Here in NC, there is discussion of a new, temporary 1% increase in the sales tax. Not one person I have spoken to thinks it will really be temporary. And I'm not convinced that Obama or Congress or any other of our leaders will declare, "MIssion Accomplished" and relax the controls.

In my business, I am affected every day by the unforeseen consequences of Sarbanes-Oxley. It has turned American business into an arm of the government, forcing companies to create an entire bureaucracy that is subservient to the dictates of that law. If more of that is what is coming, I predict that companies will bail out to other, more business-friendly countries before the law even goes into effect. It already prevents some companies from going public and even played a role in many companies going private. I just heard today that the Tim Hortons chain of coffee stores is relocation to Canada from Delaware for its more favorable tax rates!!! We're losing companies to Canada, of all places! Blame Canada! http://www.financialpost.com/story.html?id=1744591

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the_iron_troll

You were lucky to get Tim Hortons from us in the first place, DaveyNC. We Canucks are just taking it back, with softer corporate taxes. Booya!

One could argue that we need our soft tax policies, however, to compete with the black hole of the American market, that sucks everything nearby into its gaping maw.

I have to say, Mr. Goolsbee has impressed me greatly with his wit (see his interview on The Colbert Report for more evidence), and I only wish that we could have encouraged him to find employment north of the 49th parallel. It is rare to find a good economist who is quite so diplomatic and charming.

I must admit, however, that I find #10's post intriguing, and wonder if any more knowledgeable progressive economists can perhaps provide a counterpoint.