Friday, November 7, 2008

Obama Economics

One of the amusing things about the American election, was seeing a Republican support ask the Obama team whether Obama was a Marxist.

However, vague Obama might have been in his campaign speeches, I never heard a plan to take private enterprise into common ownership and redistribute 'to each according to his need'. Whatever Marx might have said about Marxism, I'm sure it wouldn't have included voting for a $700bn bailout for banks so they could sell useless junk bonds and continue to pay executive bonuses.

I'm not sure why Americans have such a paranoia about Marxism, anyway let us not get distracted by political philosophy. The interesting question is what does Obama stand for? What kind of economic policies can we expect?

I took many of these policies from Obamanomics by John R.Talbott. It reads a little like a extended election manifesto, nevertheless it is detailed in a way Obama's speeches aren't.

Obama's Economic Policies.

1. An End to 'Trickle Down Economics' - In reality trickle down economics is a very loose term to describe the idea that any wealth created will benefit the whole of society. Trickle down economics can be used to justify tax cuts for the rich, privatisation, and free market economics. Obama is likely to use the tax system to redistribute income in a more progressive way. This will be reversing the tax cuts of the Reagan and Bush years, which favoured high earners.

2. Closer Regulation of financial system. The current financial crisis has illustrated the failings of unbridled free markets. The climate has left even free market exponents admitting the need for greater regulation of financial markets. Obama will never have a better opportunity to impose greater scrutiny on wall street, the mortgage industry and the wider financial sector.

Other specific policies:
  • Increase the Minimum Wage. The US Minimum wage stayed constant for over 10 years before a Democratic congress increased min wage to $7.25, it means its real value has declined increasing relative poverty for the low paid. This level is still lower than the real value of 1968. The UK experience suggests increasing minimum wage did not cause unemployment
  • Retain inheritance Tax. Many wanted inheritance tax, but, Obama will keep it and possibly reduce tax threshold
  • Income Support Extend income support for low paid workers
  • Extend number of statutory sick pay to 7 days.
  • Child Care Expand Child care support tax credits.
  • Unions. Greater Support for workers right to join a trade Union.
  • Education. Greater spending on education, such as preschool education, after school education programmes.
Financial Sector
  • Cut extravagant interest rates for payday loans
  • Greater regulation of mortgage industry. e.g. closing loophole to allow bankruptcy courts to change the individual's mortgage payments.
Global Warming

Push through legislation which commits US to reducing global carbon emissions. He is likely to face fierce lobbying from US oil and manufacturing interests.Policies includes:
  1. Market based cap and trade system to limit emissions
  2. Emphasise energy efficiency, conservation and development of alternatives.
Trade

Whilst Obama has stated free trade and globalisation are here to stay. He has also talked at how American workers have lost out due to globalisation. His rhetoric suggests he would contemplate intervention in the form of tariffs and subsidy to help declining American industries, struggling to compete with Asian economies.

Health Care

Extend health care provision to include all uninsured. But, not attempting to replicate the simpler systems in Europe of free at the point of use.

Personally, I like the shift towards greater redistribution. But, Economists may be concerned about:
  • The prospects of tariff protection for America's declining industries. It may be populist, but, government intervention will not be able to stop the changing comparative advantage of international trade.
  • Greater Labour Market Protection will help low paid workers, but, with unemployment rising, the additional costs for business may lead to further unemployment. However, given the lack of current labour market protection, the impact on job losses maybe muted. It is not implementing a French style maximum working week e.t.c
  • National Debt. Obama's plans to spend on health care and education are laudable, but, with National debt increasing to over 70%, he might struggle to find the money to finance ambitious spending plans.
  • Higher taxes may reduce incentive to work. However, when they were cut, they never caused a productivity boost, many claimed it would.
  • It is also dissapointing that it is too politically difficult to get rid of the complicated layers of bureaucracy endemic in the US health care. His policies are tinkering at the edge without removing the powerful vested interests of health insurance companies.
  • Regulating Financial Markets sounds common sense. But, in practise it is much more difficult that people imagine. It wasn't just free markets who caused the subprime crisis. It was also government policy which encouraged Freddie Mac and Fannie Mae to lend to all and sundry.
  • The fundamental problem is that the economy is facing a serious recession and there is going to be no quick fix. - Problems Obama will face.
This is a long post, without satisfactorily doing justice to the many issues. It will be interesting to see what actually happens.


2 comments:

Anonymous said...

Nice summary. One additional thought. Obama mentioned tax havens in his latest press conference. Commented on a building in the caymans hosting 12,000 US corporations. Said either this is a very big building or it's a tax scam.

If Obama is serious about addressing tax havens thinhgs could get very interesting. I hope he does for all kinds of reasons. and, given he needs tax revenues and given that defending the tax affairs of mega corps will be tricky in current climate, he may make progress. I expect to be disappointed though.

Colin

Anonymous said...

I'd like to hear more about the proposed Minimum Wage legislation. I'm given to understand that it is currently lower (in real terms) than in 1968.