White House Economist Austan Goolsbee Answers Your Questions
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.
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
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.
How is your investment portfolio allocated? — VB
To the extent it exists, basically index funds, money markets, and our house.
Do you think raising taxes on the wealthiest taxpayers can stifle economic growth? Why or why not? — Chris Lawnsby
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.
What do you think will drive our economy in the next 15 to 20 years? — RC
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.
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
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).
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
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).
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
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.
Toyota or Chevy — which would you buy? — VB
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.
Which is misspelled more, your first or last name? — VB
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.
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
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.
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
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.
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
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.
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
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.