www.tnr.com/politics/story.html?id=4d40a39e-8f57-4054-bd99-94bc9d19be1a
As a young economics professor in the late 1970s, Richard Thaler began noticing small but nagging ways in which ordinary people defied the predictions of economic theory. A friend confided that he mowed his lawn to save $10, but winced at the suggestion that he mow someone else's to make $10. A colleague confessed that he'd never go out and buy a $50 bottle of wine for a family meal, but that he'd recently opened up a $50 bottle at dinner because it happened to be lying around. The textbooks assumed people would behave identically when equal amounts of money were at stake. But here they were doing completely different things depending on the context. By the late '80s, Thaler had begun recording these observations in a column for a leading academic journal. The column laid the groundwork for a book, called The Winner's Curse, published in 1994. And the book widely signaled the arrival of a previously obscure sub-field known as behavioral economics. Behaviorists like Thaler believed that the perfectly rational, utterly selfinterested maximizers of economists' imaginations had little in common with actual human beings, who frequently err when making simple calculations, who have trouble with self-control, who often act out of altruism or spite. But what's really interesting is how Thaler and his fellow behaviorists responded to this fairly critical insight. Though rational self-interest was the central tenet of neoclassical (ie, modern) economics, they didn't take a wrecking ball to the field and replace it with some equally sweeping theory of human behavior. Instead, they labored to bring economics closer in line with how the world actually works, one small adjustment at a time. "'Discovery commences with the awareness of anomaly,'" Thaler wrote in the introduction to The Winner's Curse, quoting the philosopher Thomas Kuhn. "I hope to accomplish that first step--awareness of anomaly. Perhaps at that point we can start to see the development of the new, improved version of economic theory." As it happens, Thaler is revered by the leading wonks on Barack Obama's presidential campaign. Though he has no formal role, Thaler presides as a kind of in-house intellectual guru, consulting regularly with Obama's top economic adviser, a fellow University of Chicago professor named Austan Goolsbee. "My main role has been to harass Austan, who has an office down the hall from mine, " Thaler recently told me. You can find subtle evidence of this influence across numerous Obama proposals. For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401 plans. If, on the other hand, you automatically enroll workers in 401s but allow them to opt out, most stick with it. Obama's savings plan exploits this so-called "status quo" bias. And, yet, it's not just the details of Obama's policies that suggest a behavioral approach. In some respects, the sensibility behind the behaviorist critique of economics is one shared by all the Obama wonks, whether they're domestic policy nerds or grizzled foreign policy hands. Despite Obama's reputation for grandiose rhetoric and utopian hope-mongering, the Obamanauts aren't radicals--far from it. They're pragmatists--people who, when an existing paradigm clashes with reality, opt to tweak that paradigm rather than replace it wholesale. As Thaler puts it, "Physics with friction is not as beautiful. It might as well be the motto for Obama's entire policy shop.
Sociologically, the Obamanauts have a lot in common with the last gang of Democratic outsiders to make a credible run at the White House. Like Bill Clinton in 1992, Obama's campaign boasts a cadre of credentialed achievers. Intellectually, however, the Obamanauts couldn't be more different. Clinton delighted in surrounding himself with big-think public intellectuals--like economics commentator Robert Reich and political philosopher Bill Galston. You'd be hard-pressed to find a political philosopher in Obama's inner wonk-dom. His is dominated by a group of first-rate economists, beginning with Goolsbee, one of the profession's most respected tax experts. A Harvard economist named Jeff Liebman has been influential in helping Obama think through budget and retirement issues; another, David Cutler, helped shape his views on health care. Goolsbee, in particular, is an almost unprecedented figure in Democratic politics: an academic economist with a top campaign position and the candidate's ear. One major reason for these differences is the candidate himself. Cutler told me Obama is adamant about consulting bona fide experts. "The staff kept saying, 'What he wants to know is that he's really talking to experts in the field. It's a field that prizes rigorous results, supported by reams of painstakingly sifted data. Even a very smart non-academic can come up short by this measure. Last year, Goolsbee participated in a panel discussion with the economic advisers of the major presidential campaigns. At one point, he acknowledged the two other academics in the room and noted their dependence on intricate census data. This prompted some grumbling from the other advisers--very accomplished wonks in their own right--which the moderator acknowledged. But the truth is that almost no non-PhD would know what to do with such elaborate data sets. Or take the latest advances in behavioral economics: "We're aware of that stuff, we read the literature, believe a lot of it," says one Obama adviser. "That stuff hasn't filtered to the Washington policy community yet." Bill Clinton favored what you might call a "deductive" approach--an all- encompassing, almost revolutionary idea, out of which fell lots of smaller proposals. In a series of speeches in 1991, he unveiled the product of all his late-night bull-sessions with people like Reich and Galston, which he called "The New Covenant." The old model held that government had certain unconditional obligations to its citizens. Under Clinton's reimagining, many of these obligations would disappear. The government would help only those who fulfilled their responsibilities as parents, workers, and taxpayers. For instance, the government would no longer provide unlimited welfare benefits. It would instead require recipients to work after two years of assistance. For their part, the Obama wonks tend to be inductive--working piecemeal from a series of real-world observations. One typical Goolsbee brainchild is something called an automatic tax return. The idea is that, if you had no tax deductions or freelance income the previous year, the IRS would send you a tax return that was already filled out. As long as you accepted the government's accounting, you could just sign it and mail it back. Goolsbee estimates this small innovation could save hundreds of millions of man-hours spent filling out tax forms, and billions of dollars in tax-preparation fees. Think of the contrast here as the difference between science-fiction writers and engineers. Reich and Galston are the kinds of people who'd sketch out the idea for time travel in a moment of inspiration. could rig up the DeLorean that would actually get you back to 1955. Like their intellectual godfather Thaler, the Obama wonks aren't particularly interested in tearing down existing paradigms, just adjusting and extending them when they become outdated. The Obamanauts are perfectly willing to accept the relationship between long-term rates and economic growth. But recent evidence suggests that low rates weren't quite as central to the success of the Clinton years as they appeared, and that investments in infrastructure and R&D might be as important as deficit reduction. Not surprisingly, Obama plans to focus less on the deficit than Clinton did. The Clintonites were moderates, but they were also ideological. They explicitly rejected the liberalism of the 1970s and '80s. They occasionally reach out to progressive think tanks like the Economic Policy Institute, but they also come from a world-- academic economics--whose inhabitants generally lean right. Just before the Iowa caucus, I saw Goolsbee approach New York Times columni...
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