A Short Primer on McCainomics Versus Obamanomics: Top-Down or Bottom-Up

McCain and Obama represent two fundamentally different economic philosophies. McCain’s is top-down economics; Obama’s is bottom-up.

Top-down economics holds that:

1. If you give generous tax breaks to the rich, they will have greater incentive to work hard and invest. Their harder work and added investments will generate more jobs and faster economic growth, to the benefit of average working people.

2. If you give generous tax breaks to corporations, reduce their payroll costs, and impose fewer regulations on them, they will compete more successfully in global commerce. This too will result in more jobs for Americans and faster growth in the United States.

3. The best way to reduce the energy costs of average Americans is to give oil companies access to more land on which to drill, lower taxes, and lower capital costs. If they get these, they’ll supply more oil, which will reduce oil prices.

4. The best way to deal with the crisis in credit markets is to insure large Wall Street investment banks, as well as Fannie and Freddie, against losses. This will result in more loans at lower rates to average Americans. (Bailing them out may risk “moral hazard,” in the sense that they will expect to be bailed out in the future, but that’s a small price to pay for restoring liquidity.)

All of these propositions are highly questionable, especially in a global economy. The rich do not necessarily invest additional post-tax earnings in the United States; they invest wherever around the world they can get the highest returns. Meanwhile, large American-based corporations are doing business all over the world; their supply chains extend to wherever they can find low labor costs combined with high output, and their sales to wherever they can find willing buyers. Oil companies, too, are operating globally and set their prices largely at the point where global supply meets global demand. Additional drilling here creates environmental risks for us but generates the same marginal benefits for consumers in China, India, and Europe as we might enjoy (most likely not for a decade or more). Credit markets are global as well, so the beneficiaries of bailouts of large investment banks and lenders are also worldwide while the potential costs (including moral hazard) fall on American taxpayers.

This isn’t to argue that top-down economics is completely nonsensical. America is, after all, the world’s largest economy. So whatever helps the top of it will to some extent trickle down to everyone else here, and whatever hurts the top is likely to impose some burdens all the way down.

But in a global economy, bottom-up economics makes more sense. Bottom-up economics holds that:

1. The growth of the American economy depends largely on the productivity of its workers. They are rooted here, while global capital and large American-based global corporations are not.

2. The productivity of America workers depends mainly on their education, their health, and the infrastructure that connects them together. These public investments are therefore critical to our future prosperity.

3. Global capital will come to the United States to create good jobs not because our taxes or wages or regulatory costs are low (there will always be many places around the world where taxes, wages, and regulatory costs are lower) but because the productivity of our workers is high.

4. The answer to our energy costs is found in the creativity and inventiveness of Americans in generating non-oil and non-carbon fuels and new means of energy conservation, rather than in access by global oil companies to more oil. So subsidize basic research and development in these alternatives.

5. Finally, in order to avoid a recession or worse, it’s necessary to improve the financial security of average Americans who are now sinking into a quagmire of debt and foreclosure. Otherwise, there won’t be adequate purchasing power to absorb all the goods and services the economy produces. (As to “moral hazard,” the financial institutions that did the lending had more reason to know of the risks involved than those who did the borrowing.)

Listen carefully to the economic debate in the months ahead in light of these two competing economic philosophies. And hope that the latter wins out in years to come.


Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

One Response to "A Short Primer on McCainomics Versus Obamanomics: Top-Down or Bottom-Up"

  1. RealThink   July 25, 2008 at 7:22 pm

    "Otherwise, there won’t be adequate purchasing power to absorb all the goods and services the economy produces."That way of thinking was valid when the world was far from the physical limits to growth (or in other words, when the world was on the way up to Hubbert’s Peak), and lack of aggregate demand was the factor that prevented economic output (and employment) from growing at their potential sustainable levels. That was indeed the case for the Depression and all recessions up to and including the brief one in 2001, with the exception of the 1970’s oil shocks, which could be viewed as a drill for Peak Oil.But now the world economy is bumping against the physical "limits to growth" – most notably, but not exclusively, in oil extraction -, with the Hubbert’s Peak in the global oil extraction rate most probably occurring in the 2008-2013 timeframe, and on the way down from it the foreseeable negative growth rates in economic output (until stabilizing at a lower REALLY sustainable level(*)) will not be the consequence of insufficient demand but of a physical constraint from Nature, namely the relentless decline in the production rate of fossil fuels. In this new scenario, stimulating aggregate demand with ANY policy (be it monetary, fiscal, or any other kind), however progressively distributive of wealth and/or income it may be, will not be able to increase output at all, as no monetary or fiscal stimulus can reverse the decline of an oil field, and no such stimulus will be necessary to increase oil exploration efforts since the price of fossil fuels will be high enough to do the job by itself. Monetary stimulus in this context only raises the price of the critical limiting resource.Economists aware of this new scenario do not worry about lack of purchasing power to absorb all the goods and services produced. They worry about ensuring enough goods and services are produced to keep people fed and warm.There are a few big mountains in the world where you can drive to the very top. Those who have done that know quite well that it would be very unsafe to drive on the way down in the same way as on the way up. They make a driving paradigm change when they start the descent. In contrast, today’s economists are severely paradigm-challenged. They have known nothing but the way up (to Hubbert’s Peak), and they don’t seem to be able to make the mental adjustment to the way down. As a result, their driving paradigms are becoming unsafe.A clear instance is the approach to the housing issue. From a Hubbert’s Peak-aware perspective, the safe path would be to let mortgage financing dry up and residential (and business) construction in its current form come to a screeching halt. Because construction of more suburban, energy-inefficient McMansions is just digging further in the already deep hole most of the US population is in, as higher fuel prices will turn those homes into traps for their occupants. Instead, the US needs to employ its labor and (ever more scarce) physical resources in a massive wind farm construction plan like Al Gore proposed recently.Related to this, IMV the cars-on-natural-gas part of T. Boone Pickens plan is nonsense. Cars should go electric or at least Plug-in Hybrid (that’s why the US needs so much wind power). Natural gas must be reserved for cooking and heating.(*) Since fossil fuels are an exhaustible resource, any economic activity based on them is by definition unsustainable. That’s why they should be reserved for strictly essential uses, as I said above regarding natural gas.