Center-left neoliberalism and the Obama synthesis

Economist, blogger, and former Clinton-era Treasury staffer Brad DeLong made waves with a Twitter thread and subsequent interview with Vox in which he says center-left neoliberals like himself should “pass the baton” to more left-leaning Democrats.

His argument is largely political; more on that later. But what about the policies?

DeLong calls himself a “Rubin Democrat.” That reminded me of a 2008 piece by David Leonhardt in The New York Times on incoming President Barack Obama’s economic philosophy:

To understand where Obama stands, you first have to know that, for 15 years, Democratic Party economics have been defined by a struggle that took place during the start of the Clinton administration. It was the battle of the Bobs. On one side was Clinton’s labor secretary and longtime friend, Bob Reich, who argued that the government should invest in roads, bridges, worker training and the like to stimulate the economy and help the middle class. On the other side was Bob Rubin, a former Goldman Sachs executive turned White House aide, who favored reducing the deficit to soothe the bond market, bring down interest rates and get the economy moving again. Clinton cast his lot with Rubin, and to this day the first question about any Democrat’s economic outlook is often where his heart lies, with Reich or Rubin, the left or the center, the government or the market.

Obama has obviously studied this debate… He [believes] that both have come to acknowledge that the other man is, in part, correct. The two now occupy more similar ideological places than they did in 1993. The battle of the Bobs may not be completely over, but it has certainly been suspended.

DeLong is arguing the Rubin camp should pass the baton to the Reich camp and its left-leaning allies.

But Leonhardt argued in that piece that Obama and his incoming administration had forged a kind of synthesis out of the Reich-Rubin divide. What did the Obama synthesis include? There’s no single paragraph to quote, but here’s roughly how I’d describe it, based on Leonhardt’s article:

  • An appreciation of markets, but also of the many ways they fail
  • An interest in behavioral economics
  • Concern over rising inequality
  • A willingness to make large public investments, particularly in infrastructure, education, and in support of an energy transition

Was this synthesis so obviously wrong? Does the Obama synthesis need to pass the baton, too?

Mike Konczal shows why he’s among the best in the policy-writing business by making “center-left neoliberalism” far more specific, and therefore easier to analyze. His account I think makes it easier to talk about whether the Obama synthesis does or doesn’t hold up. Here’s Konczal:

Here are two statements about acceptable tradeoffs that I associate with left neoliberalism, both of which have failed to describe the economy as it currently exists. The first is that neoliberal policies would create more growth. Sure, inequality might increase, but so would wages; and even if not wages, mobility up and down the income ladder. Delong phrases it this way: “Economic growth first, redistribution and beefing up the safety net second.”

The second is that if we get government out of corporations’ way, the market would become more dynamic, competitive and innovative. Sure, there might be some level of profits and questionable behavior in the short term, but the market itself would fix it, such that in the long term the corporate sector looked much healthier in terms of profits and dynamism.

I want to ground it this way, in two intellectual statements about the tradeoffs of a policy regime, to help understand why the confidence that left neoliberalism once held over the baseline assumption of economics has collapsed.

A full neoliberal would maintain 1) that there is a tradeoff between growth and inequality 2) that maintaining innovation and dynamism in the economy requires a light touch. What would the Obama-synthesis view be on these two questions?

One proxy for that is to look at the views of Jason Furman, Obama’s economic policy director and later chairman of Obama’s Council of Economic Advisors. Furman is, to my mind, a synthesis figure. What would he say about the neoliberal tradeoffs Konczal identifies?

On the second tradeoff, about competition and profits, Furman clearly departs from the neoliberal view as Konczal frames it. In fact, Furman was a key figure in drawing notice to the problems of rising rents and declining dynamism — along with his former Obama administration colleague Peter Orszag.

What about growth and inequality? Here Furman takes more of an in-between view. He argues that this is the wrong question to focus on, and that there is no definitive answer to how inequality affects growth.

By my count, then, Furman gets a 0.5/2 on the Konczal-neoliberalism-scale. He clearly does not adhere to the second tradeoff — the idea that leaving corporations alone is the key to dynamism and innovation. And he’s not lining up to take the neoliberal view that there’s a tradeoff between inequality and growth, either. He just isn’t sure and isn’t focused on it.

One might argue, then, that the Obama synthesis holds up just fine in terms of its position on two failed neoliberal doctrines. That doesn’t mean it has no flaws or that it’s better than the alternatives to its left. But it hardly ought to be seen as a failure in the way that various versions of neoliberalism tend to be. (Side note: One could argue that Cass Sunstein’s cost-benefit book is step toward furthering the Obama-synthesis project, more at the theoretical and methodological level.)

Now, back to the politics.

DeLong argues that center-left neoliberalism was the way it was largely because it was “premised on the understanding that at least a faction of the Republican Party would be willing to support market-friendly ideas like Obamacare or a cap-and-trade system for climate change.”

This makes some sense as an explanation for Obamacare. We’ve long known you can set up a universal healthcare system through government provision; private provision and government insurance; or a highly-regulated system of private insurance and provision. The argument for an Obamacare system was partly that you should be able to get some centrists and conservatives on board by going with a regulated private system. DeLong’s view of things here makes a lot of sense.

For climate change, though, things are different.

In the case of climate change, the logic of attracting centrist support through market-based policy made sense, at best, only in seminar rooms. If you proposed a carbon-pricing scheme, sure maybe that’d play better in the University of Chicago economics department than proposing massive public spending on infrastructure or direct subsidy of certain technologies. But I worked on clean energy policy a bit in the Obama years, and it was obvious by then that carbon pricing was politically hard. DeLong distinguishes cap-and-trade from a carbon tax. He frames cap-and-trade as the more politically plausible alternative compared to a carbon tax plus R&D. And that is probably true. DeLong:

A belief in cap and trade — rather than the carbon tax plus huge, honking public research — was both a belief that the market really ought to rule here, plus a belief that stakeholders who are producing carbon energy can be bought off with cap-and-trade: that the Koch brothers would rather be selling their carbon allowances than having to actually burn coal to produce things. Plus, a belief there were Republicans who would actually think that global warming is a menace, and be willing to argue strenuously within the Republican coalition that something needs to be done about this.

But the idea that politics was one of the reasons to favor cap-and-trade — even if narrowly true relative to a carbon tax — reminds me that political economy was never the center-left’s strength. Even if a market-based approach won you some points from centrist wonks, carbon pricing was the sort of technocratic policy that hurt lots of interest groups (polluters) and didn’t inspire much of anyone. Yes, you could try and buy off various adversaries, but it was fundamentally a case of concentrated costs and distributed benefits. I’m a big supporter of carbon pricing and I (still!) see it as the backbone (though not the entirety) of good climate policy. But if your goal is to draw up something that’s really politically appealing, carbon pricing isn’t it.

Anyway, if the center-left is passing the torch, whether for political reasons or because their core policy ideas turned out to be misguided, what’s next? You might argue that if the Rubin camp is ready to pass the baton, what’s needed is the next form of Democratic synthesis. Instead of Rubin-Reich, maybe we need a Furman-Warren synthesis. (Pick your own stand-ins.) The Center for Equitable Growth under the leadership of Heather Boushey and others strikes me as a natural home for such a synthesis — in fact, DeLong is a contributor. Here is another relevant discussion.

Or maybe that’s just too much focus on policy wonkery and mostly missing the point. Henry Farrell at Crooked Timber makes a really strong argument about the center-left and its weakness on issues of political economy:

If [the center-left is] pushing for market means towards social democratic ends, that is fine and good – markets can indeed sometimes be the best way to deliver those ends, and few of us would want to be completely without them (including Marxists like Sam Gindin). But one key lesson of the last couple of decades is that market provision of benefits makes it harder to build and sustain coalitions – private gain and public solidarity are at best uncomfortable bedfellows. Figuring out the political tradeoffs – when market means are worthwhile even when they make collective action tougher, or where non-market means might be better for sustainability reasons, even when markets are more efficient – is going to be hard, and we need to start building shared language and concepts to make it easier to resolve the inevitable disputes.

He notes, though, that there is no guarantee that the left will achieve its aims:

There may be no plausible choice in American politics other than the left right now. That doesn’t mean that the left has a very good chance of doing the things that it needs to do.

My favorite part of DeLong’s take on all of this is how he recommends center-left neoliberals like himself stay useful:

We need to find ways to improve left-wing initiatives, rather than demand that they start from our basic position and do minor tweaks to make them more acceptable to their underlying position.

Model: Supply and demand

This post is part of a series where I quote and link to short descriptions of different social-science models and perspectives. The idea is to collect important models in easily accessible formats to help people aspiring to take a “many-model” approach to reasoning.

Supply and demand

(Economics)

This video on the equilibrium price and quantity is from Marginal Revolution University, the online economics education site run by economists Tyler Cowen and Alex Tabarrok:

For more, there are several videos in the series that come before and after this one that are helpful. And here’s the section on supply and demand from the free economics textbook The Economy.

Model: Where you stand depends on where you sit

This post is part of a series where I quote and link to short descriptions of different social-science models and perspectives. The idea is to collect important models in easily accessible formats to help people aspiring to take a “many-model” approach to reasoning.

Bureaucratic politics / Where you stand depends on where you sit

(Political science)

From Encyclopedia Brittanica:

Bureaucratic politics approach, theoretical approach to public policy that emphasizes internal bargaining within the state.

The bureaucratic politics approach argues that policy outcomes result from a game of bargaining among a small, highly placed group of governmental actors. These actors come to the game with varying preferences, abilities, and positions of power. Participants choose strategies and policy goals based on different ideas of what outcomes will best serve their organizational and personal interests. Bargaining then proceeds through a pluralist process of give-and-take that reflects the prevailing rules of the game as well as power relations among the participants. Because this process is neither dominated by one individual nor likely to privilege expert or rational decisions, it may result in suboptimal outcomes that fail to fulfill the objectives of any of the individual participants.

Most discussions of bureaucratic politics begin with Graham T. Allison’s 1969 article in The American Political Science Review, “Conceptual Models and the Cuban Missile Crisis,” although this work built on earlier writings by Charles Lindblom, Richard Neustadt, Samuel Huntington, and others…

Perhaps the most-abiding concept from the bureaucratic politics model, and the shorthand many have used to define it, is that actors will pursue policies that benefit the organizations they represent rather than national or collective interests. This idea, that “where you stand depends on where you sit,” is often called Miles’s law after the Truman-era bureaucrat who coined the phrase. A central and intuitively powerful claim of bureaucratic politics explanations, this premise has been criticized for its narrow view of preference formation. For example, critics note that it fails to explain the role of many important actors in the original bureaucratic politics case study of the Cuban missile crisis. Yet even the early bureaucratic politics theorists, including Allison, were explicit in acknowledging that other factors, such as personality, interpersonal relations, and access to information, also play important roles in the bureaucratic politics process. For these theorists, three key questions guide one’s understanding of the policy-making game: (1) Who are the actors? (2) What factors influence each actor’s position? and (3) How do actors’ positions come together to generate governmental policies?

Inequality and public policy

From ProMarket:

Indeed, the analysis shows that the share of public expenditures in GDP has a negative, significant, and large effect on inequality. For a given level of inequality of market income, a rise of public expenditures by an additional percent of GDP reduces the Gini coefficient of disposable income by 0.35 percentage points. Since the size of public expenditures across the OECD countries varies from 35 to 55 percent of GDP, this variable can therefore explain variability of the Gini coefficient of 7 percentage points across these countries. The Gini of disposable income in the OECD countries varies from 0.25 to 0.4. Hence, changes in public intervention can explain half or even more of these differences.

Journalism, academia, and the worst of both worlds

I wrote last week that “Under the right conditions, it’s reasonable to think that the best analytical journalists will outperform at least the average academic.” Here’s a very different view, from Corey Robin at New York Magazine:

When academic knowledge is on tap for the media, the result is not a fusion of the best of academia and the best of journalism but the worst of both worlds. On the one hand, we get the whiplash of superficial commentary: For two years, America was on the verge of authoritarianism; now it’s not. On the other hand, we get the determinism that haunts so much academic knowledge. When the contingencies of a day’s news cycle are overlaid with the laws of social science or whatever ancient formation is trending in the precincts of academic historiography, the political world can come to seem more static than it is. Toss in the partisan agendas of the media and academia, and the effects are as dizzying as they are deadening: a news cycle that’s said to reflect the universal laws of the political universe where the laws of the political universe change with every news cycle.

What’s the economic impact of venture capital?

In my post on the case for technology I cited a 2011 paper that found that an increase in venture capital funding in a city was associated with higher income, higher employment, and more new firms in that place.

In this post, I want to clip together a few resources on what we know about VC’s economic and social impact.

Here’s the conclusion of that paper linked above, on VCs and geography:

We find that increases in the supply of venture capital in an MSA stimulate the production of new firms in the region. This effect appears consistent with either of two mechanisms. First, would-be entrepreneurs in need of capital may incorporate the availability of such capital into their calculations when trying to decide whether to start their firms. Second, the firms that VC firms finance may serve as inspiration and training grounds for future entrepreneurs. We further find that an expanded supply of venture capital raises employment and aggregate income in a region. At least some of these employment and income effects probably stem from venture capital allowing entrepreneurs to create value by pursuing ideas that they otherwise could not have. Table 10 summarizes the magnitudes of these estimated effects across our various specifications.

Here’s a bit from a 2000 paper in the Journal of Economic Perspectives:

After addressing these causality concerns, the results suggest that venture funding does have a strong positive impact on innovation. The estimated coefficients vary according to the techniques employed, but on average, a dollar of venture capital appears to be three to four times more potent in stimulating patenting than a dollar of traditional corporate R&D. The estimates therefore suggest that venture capital, even though it averaged less than 3 percent of corporate R&D from 1983 to 1992, is responsible for perhaps 10 percent of U.S. industrial innovations in this decade

And here are several snippets from a 2011 NBER literature review:

Overall we believe that the body of empirical evidence is consistent with the notion that VCs select more innovative companies, and then help them with the commercialization process. The results suggest that VC plays a greater role for commercialization (as measured by bringing products to market, and forging strategic alliances) than for the generation of further innovation (as measured by patents and TFP)…

Company-level studies typically confirm this positive relationship between VC and measures of economic growth. Puri and Zarutskie (2011), using US Census data, find that only 0.11% of new companies created over a 25 year sample period from 1981-2005 are funded by VC, yet these companies account for 4% to 5.5% of employment. They show that VC-backed companies grow faster at every stage of the investment cycle, i.e., both before and after the receipt of VC. Chemmanur et al. (2011a) find a positive effect of VC on company productivity. Davila et al. (2003) and Engel and Keilbach (2007) also find a positive effect of VC on employment.

Overall the literature consistently finds a positive relationship between VC funding and other measures of economic value creation. While the literature seems to identify social value creation, there remains an open question on the social costs of VC.

And one more recommended paper.