Models of Economic Policymaking

By James Kwak

The evening that he won the Iowa caucus in January 2008, Barack Obama said this:

Hope is the bedrock of this nation. The belief that our destiny will not be written for us, but by us, by all those men and women who are not content to settle for the world as it is, who have the courage to remake the world as it should be… . [the belief that] brick by brick, block by block, callused hand by callused hand, … ordinary people can do extraordinary things.

That speech is at the opening of K. Sabeel Rahman’s new book, Democracy Against Domination. It invoked one of the central mobilizing themes of Obama’s 2008 campaign, which set him clearly apart from Hillary Clinton: the idea that the senator from Illinois would usher in a new kind of politics, a more democratic, more inclusive approach to government as opposed to business as usual inside the Beltway.

Well, that didn’t happen. Whatever you think of President Obama’s policy goals and accomplishments, he had little impact on how our political system works. Plenty of blame for that goes to the Republicans, who set out from Inauguration Day focused exclusively on making him a one-term president. But it’s also true that the new president did not make political reform a priority during those first two years when he had majorities in both houses of Congress.

It can be argued that Obama had other important priorities: stabilizing the financial system, the 2009 stimulus, Obamacare, and the Dodd-Frank Act. But one of the central arguments of Democracy Against Domination is that the president made a conscious choice. When it came to financial regulation, for example, “Obama’s response to the financial crisis evinced a deep-seated … faith in professional, technocratic expertise to solve social problems and transcend the controversies and messiness of ordinary democratic politics” (p. 6).

Let’s step back for a minute. Rahman’s book, on one level, is about how we regulate our economy. Throughout the twentieth century, there were two dominant models of economic policymaking. One, which characterized the New Deal, is technocratic managerialism: the idea that economic regulation is too complex to be left to democratic processes, and therefore must be entrusted to experts who are insulated from day-to-day politics. The other, which became more and more influential as the century wore on, is the ideology of free markets, which dictates that the economy should simply be left to regulate itself.

We all (should) know by now that market self-regulation can lead to catastrophic consequences, such as the financial crisis and Great Recession. But, as Rahman points out, the free marketers developed a pretty powerful critique of technocratic managerialism: the public choice approach to politics and the theory of regulatory capture. So we are left with two main factions—conservatives who want to deregulate everything and moderate Democrats who want to give more authority to to apolitical technocrats (consider the Dodd-Frank Act)—who agree that economic policy has to be insulated from politics. Then we have (some) progressives who think unregulated free markets will produce bad outcomes, but also think that technocracy, at least in areas such as financial regulation, will simply be captured by industry. Simon and I in 13 Bankers fall into that last group.

The question is, if you don’t trust markets and you don’t trust the revolving door, how can you make economic policy? Rahman’s answer is simple, although it raises plenty of other questions: you trust democracy. On a theoretical level, the argument is that if you want economic policies that are responsive to the needs of ordinary people, that will not be captured by elite interest groups, and that are perceived as legitimate, you need to involve ordinary people in the policymaking process.

In the book, Rahman talks about various ways in which democratic participation could be incorporated into the administrative state, such as citizen budgeting or community groups more aggressively engaging with regulators. (Jared Bernstein in The Reconnection Agenda also cites the work of the Center for Popular Democracy, which is trying to encourage Federal Reserve banks to pay more attention to the concerns of the working class.) At present, I would say still there needs to be a fair amount of practice to substantiate the theory. I don’t yet see a way to have non-specialists make substantive contributions to the hundreds of pages of the Volcker Rule. Of course, Paul Volcker himself said the rule should be four pages long, so maybe that’s part of the point. (That was one reason Simon and I argued for simple size caps in 13 Bankers, and why Anat Admati and Martin Hellwig argued for simple capital requirements in The Bankers’ New Clothes.)

At this point, we’re off into questions of democratic theory and political institutional design, in which I am far from an expert. But Rahman’s idea could represent a promising way forward, particularly for people who believe both that the economic playing field is tilted against ordinary people, and that our political system is increasingly deaf to their concerns.

12 responses to “Models of Economic Policymaking

  1. Experts and Democracy both have issues handling these issues. The challenge is to have both work in tandem for an overall better result. Experts tend to only look short distances from the current situation. Complex systems rarely work entirely the way their designers intend; there are always unintended and unexpected consequences. Change or design of complex systems is really an exercise in directed evolution where both the system and designers respond and co-evolve. The problem is that systems tend to find stable local solutions to the forces of the system environment, and perturbing them from such states so they can evolve to a new (hopefully better stable local minima) requires a large initial force in the right direction. This is what Congress and FDR did in the 1930s, for example (also in 1890 with the Sherman Anti-Trust Act).

    The role of Democracy is to give that initial push in the right direction away from the local stable, but undesirable state. It is the role of experts to work on the details. Both are necessary if one is to restart system evolution that is stuck in a stable local, but inferior solution.

    To apply the above to today, we are discovering that income inequality leads to inferior economic results. It should be the role of Democracy to initiate a push to less inequality, and the role of the experts to create options to make that happen.

    The problem is that there is a substantial minority that benefits from inferior economic results (they get a disproportionately larger slice of the smaller pie), and so they work vigorously to prevent Democracy from fulfilling its role. That’s the real address to address.

  2. You don’t mention Gar Alperowitz’s solution: democratize the institutions that make the economy work. Encourage coops, whose economic power would counter the plutocracy’s, and provide the political counterweight previously offered by unions.

  3. The biggest problem in determining who is going to make and implement monetary and fiscal policy is that there is no real agreement on what constitutes desirable policy, and outcome.

    A lot of people believe and opine that a hard money (usually a gold based or real gold peg) monetary policy is simple, foolproof, and necessarily results in oscillations that a lot of people do not like. These hard money types will tell you that the temporary oscillations are always self correcting, and result in much better long term economic performance.

    There are a lot of fiscal types that think the Government can and should take on more and more of the business of the nation, regardless of tax income. In short, that deficits do not matter. These people make common cause with the easy money types.

    That is just one example each, and there are a lot more. If we do not all (pretty much) agree on basic monetary and fiscal policy, and if the citizens (by their votes for people of both parties) indicate their preference for easy money and limitless spending, does it matter who puts the lipstick on the pig?

  4. “you trust democracy” he says to me; does that equate to burning his house down, I ask.

  5. Ray LaPan-Love

    Brian,

    We, the “easy money types” simply understand that limiting the creation of money, by whatever means, including a gold standard, is foolish. Money is simply a medium of exchange and so why limit the volume beyond where the benefits thereof allow?

    And why do you believe that agreement is necessary to implement monetary of fiscal policy? Each has been used extensively of late, and one the most salient complaints has been how little the Fed responds to public opinion. In fact, one of the primary reasons for the Fed in the first place was to sideline Congress and public opinion when it comes to the economy. Surely you don’t actually believe that we live in some sort of pure democracy.

  6. If the Democrats had abolished the filibuster in the Senate they would have had a lot more freedom of action. However — aside from concerns about what a future GOP majority might do — the filibuster helped to empower and give additional leverage to the coalition’s most conservative members. For the trouble the U.S. Chamber of Commerce and big business interests still dumped on the party in 2010.

    During the Great Depression from 1931 to 1933, nearly one-quarter of the seats turned over in the House. In order for there to be systemic changes, it’s going to require getting a lot more new blood in the Congress.

    What’s particularly frustrating in the short-term is the degree to which the politics have reverted. On the Democratic side we aren’t back in 2008, we are back to 2000. The current leadership has learned none of the lessons. Of course on the GOP side, they’ve transformed into the 1860 Southern Democratic Party.

  7. BRUCE E. WOYCH

    You can’t fix a leaky boat from the bottom -up while it is still in the troubled water and on the rocks.
    Democracy against domination is diffusion against concentration. It becomes dandelion seeds in the wind. You will get more nice shiney flowers (aka weeds to many lawns), but it will not alter the systemic.
    As long as we can ignore calling the “Wealth State” a stealth state of welfare for the rich, we sill continue to argue over the peanuts and crabgrass that equivocates poverty with the anxieties of a “welfare state” on the backs of the middle class workers. How is it that the gross economy goes to the top, but we still see the economy itself as welfare and inequality fighting for justice. The very mention of any
    “redistribution” of capital (much like land reforms in history) brings out the heavy hitting propagandists that rally tea party mentality to fight for the American way? Democracy against Tyranny has proven to be self-defeating under the ruling domination structures that exist and finance movements; and this is just a splintering of movements under “identity economics” posturing as political solution. What we might observe over the past decade of experiences, is that economists are the last people to trust with social and political theories of reorganization.

  8. BRUCE E. WOYCH

    https://www.amazon.com/Better-Together-Restoring-American-Community/dp/0743235479/ref=sr_1_5?s=books&ie=UTF8&qid=1478183174&sr=1-5&keywords=Robert+Putnam
    Better Together: Restoring the American Community
    by Robert D. Putnam (Author), Lewis Feldstein (Author), Donald J. Cohen (Contributor)

  9. Democracy stores away it’s wealth for a day which never arrives, then uses a fiat currency as the ends to its insane means.

    The mice will play while the cat is away, but this hillbilly has to shoot for its food or it aint gonna survive.

  10. BRUCE E. WOYCH

    Bowling Alone: The Collapse and Revival of American Community
    by Robert D. Putnam
    209 customer reviews
    “Drawing on vast new data that reveal Americans’ changing behavior, Putnam shows how we have become increasingly disconnected from one another and how social structures have disintegrated.”
    “In this alarming and important study, Putnam, a professor of sociology at Harvard, charts the grievous deterioration over the past two generations of the organized ways in which people relate to one another and partake in civil life in the U.S.”
    (excerpted from editorials)

  11. So let me run this by the wizards, every single lever is “rigged” against an economic middle class, except for the voting machines?

    http://www.salon.com/2014/11/06/5_disturbing_facts_that_show_the_system_is_rigged_against_americas_middle_class_partner/

  12. As we approach little anthony erection day, lets pause for a moment and consider the human race, as it has become a disgrace, and we must now add more charges against the gvt. Prohibition was brought about somehow, the way it wasn’t brought about was by a vote of the people, for the people, and by the people, it proved to be a mistake of the highest order, the gvt foot put in the gvt mouth type offense. Then a few years later the same mistake was made in the form of classifying drugs, one person with a hand full of like minded cohorts made a law without the consent, without a vote of the people, for the people, and by the people, now years later the gvt again puts its foot in its mouth as it forces a majority of some 300 million people to override the conspiring of a few individuals of the past.
    That was an illegal move in 1937, and who should pass laws without the full consent of the citizenry to be subject to those laws, a majority of people should have voted to make those the laws of the land, even an ignorant population.
    Now every politician today should be held accountable for the misdeeds of the past, and pay the consequences for either being corrupt, ignorant, or perhaps both. Would a delegate who voted for Hillary only to find she was impeached be held to the same crimes, or would they simply plead ignorance and walk away scott free? Proving themselves to be an ignorant, but free to roam, delegate.
    The corrupt party line, or ignorance, the democrats are in a doomed place, they are always there to mess up a good thing and hide the skeletons in the closet for a day that never arrives. Just as the person playing pin the tail on the donkey is blind folded and spun, the donkey also feels the pain of the pin when you miss his tail. Reminds me of my tv mom Martha Stewart, not as blind as my real mom ___ mind you, got to love her, but she sure could cook up a tooth ache.