Beyond Health Care

David Leonhardt makes an effort to get at the domestic policy differences between Barack Obama and Hillary Clinton that go beyond the health insurance mandates issue. According to Leonhardt, Clinton is a great fan of, er, Clintonian initiative that involve narrowly targeted efforts to alter incentives. Obama, by contrast, is more influenced by behavioral economics research that tends to suggest a blunter approach may work better. He illustrates the point with an example from retirement policy:

Her retirement tax credit, for example, would match the first $1,000 saved by couples making less than $60,000. For those making from $60,000 to $100,000, the match would be 50 cents on the dollar. To Mrs. Clinton, these policies are more efficient than old-style bureaucracy and less expensive than across-the-board tax cuts. [...] The problem with Mrs. Clinton savings plan, according to the Obama view, is that many people won’t save even when they are offered subsidies to do so. After all, many workers who are eligible for 401(k) matching funds don’t take advantage of them now.

So Mr. Obama would instead require companies to deduct money automatically from their employees’ paychecks and place it in a savings account the employee owned. Employees could opt out of the program. But if they did nothing, they would end up saving money. It’s an idea that comes directly from academic research showing that savings rates have jumped when individual companies have adopted such plans.

I'm definitely with Obama on this specific question. I'm not sure, though, that it really works out as a general account. Leonhardt, for example, tries to shoehorn the mandates issue into this frame but I don't think I'm convinced that's really what's going on there. My impression is that at the end of the day you'd actually have a similar group of people shaping economic policy in either person's administration.

Comments

"So Mr. Obama would instead require companies to deduct money automatically from their employees’ paychecks and place it in a savings account the employee owned."

This isn't as novel or as useful as it sounds. Under the current administration, 401(k) policy has already been changed to allow automatic enrollment of employees by employers. Non-discrimination regulations already provide an incentive for nearly all employers with 401(k) plans to enroll all full-time employees. The EGTRRA legislation also provided incentives (including $1500 in tax credits to defer set-up costs) for small employers to establish 401(k) plans. The marketplace has also stepped in to offer low-cost solutions here, with providers such as ExpertPlan.

Posted by Fred | January 2, 2008 2:44 AM

As a country, we save far too little. Opt-out (rather than opt-in) savings plans are a very effective way to increase savings. As soon as a Dem starts talking about this, though, the Repubs will probably paint this as a radical government intervention or some sort of tax increase.

Posted by Ben | January 2, 2008 4:48 AM

I don't like all these targeted cuts and mixed percentages because they distort over time and either A) have unintended consequences like the AMT or B) require constant maintenance from future Congresses to stay effective, Congresses filled with politicians more interested in pushing their own accomplishments to voters than running on the ever-popular "I'm great at technical revisions that maintain the status-quo!" platform.

A great President with two terms can set the parameters of taxation and spending for a generation if he/she leaves the country with enduring, simple programs that are embraced. Even if you can get slightly better results in the short term with more targeted programs those results get blown away in the long run by future presidents who enact targeted programs seeking the opposite effect. The 50 cent match gets bid up to 75 cents. The plateau gets raised to $200K instead of $100K. A future Republican President interested in giving a tax cut can't warp an savings account with an opt-out clause into a stealth giveaway.

A lot of very technical legislation from the first Clinton administration (NAFTA, Telecommunications Act, Faith-based initiatives) was kind of OK when Bill Clinton was in power but then when he was out of office all of that technical detail became hiding places for tweaks and revisions to totally subvert the original intent of the legislation. Obama's approach has a lot less potential for that kind of future abuse.

Posted by joejoejoe | January 2, 2008 5:41 AM

"As soon as a Dem starts talking about this, though, the Repubs will probably paint this as a radical government intervention or some sort of tax increase."

Auto enrollment (negative election) is already here, thanks to the Pension Protection Act of 2006, and the subsequent implementing DOL regulations of last year. Obama is just riffing on an existing "radical" Bush Administration policy.

Posted by Fred | January 2, 2008 8:05 AM

My impression is that at the end of the day you'd actually have a similar group of people shaping economic policy in either person's administration.

If some random econo-blogger wrote this about the foreign policy advisors I sense you'd be the first to suggest they should have looked harder at the crews of people actually doing the advising.

As such I'd advise you to look harder at Goolsbee and Liebman, Obama's economic advisors.

Liebman's main claim to fame is his support for private accounts for Social Security.

Goolsbee is "my favourite Dem economist" according to George F Will. Goolsbee is "the Dem economist who should be writing for the NYT instead of Krugman" according to shrill Megan McArdle.

Matt Yglesias, I give you (along with Krug-man) credit for promoting the view that we can understand candidates better by looking at the policy predilections of their advisers. Please extend that analysis to Obama and his economics team. I see a lot of bloggers claiming that "there's not much difference between the candidates on domestic policy" but every time I do the advisor analysis on economics, Obama looks to have some quite different ideas to the other two...

Posted by Meh | January 2, 2008 8:40 AM

Just to add to what Meh suggested, the epicenter of behavioral economics research is the University of Chicago, where Obama taught (and where Goolsbee is a Professor). Indeed, another of Obama's prominent supporters from Chicago is Cass Sunstein, who has incorporated behavioral economics research into his legal work (among other things, he has done fascinating work on judges' decision-making in three-judge panels).

So, I do think it is likely this is actually much more a fundamental inclination for Obama than Matt suggested, and his economic policy team (and indeed legal policy team) is likely to reflect that inclination. Finally, it is true that we have already begun incorporating opt-out programs into 401Ks, but that was in fact driven in part by this research. And I personally think it would be great to accelerate and expand its incorporation throughout public policy.

Posted by DTM | January 2, 2008 8:51 AM

The two devices -- automatic enrollment with voluntary opt-out and the savings credit -- are not mutually exclusive. Nor do they reflect some big philosophical difference. In fact they share the non-Keynesian savings bugaboo common to mildly-left and centrist economists. Both are weak tea, even given their own objectives.

Nor is behavioral econ in and of itself much of an ideological marker. You could be left or not and be attracted to it or not. Goolsbee is a fine not-left economist and all-around human being, but he is not especially typical of "Chicago" economics. For one thing, he is not in their econ dept.

Liebman is for a liberal version of private accounts. The comments above are a little too rough on him, IMO.

But in general Obamanomics is centrist and of course Obama has been shoveling out assorted right-wing talking points -- triangulating the Clinton triangulators.

I'm in the market for a shack in Wyoming.

Posted by Miracle Max | January 2, 2008 9:10 AM

DTM,

The main obstacle to auto-enrollment/opt-out had been the fear of lawsuits; no one doubted that it would increase participation. It took the PPA and the DOL regs to give employers the legal cover to implement this.

There is also a racial/cultural angle in this that had long been ignored until John Rogers of Ariel Funds put a spotlight on it: blacks save about half as much as whites at the same income level, and are less likely to invest in stocks. Rogers used this research to convince McDonald's (where he is a director) to implement an auto-enrollment 401(k).

Posted by Fred | January 2, 2008 9:57 AM

A couple quick notes:

It is true Goolsbee is a professor in the Chicago business school (GSB), but he is actually the Robert P. Gwinn Professor of Economics there. Nonetheless, I didn't mean to pigeonhole him by noting his affiliation with Chicago.

As for 401K opt-outs, I agree they long been suggested, but of course behavioral economics has been around as long as the 401K: Kahneman and Tversky wrote "Prospect theory: Decision Making Under Risk" in 1979, and I'd actually highlight the importance of Daniel Ellsberg's 1961 article "Risk, Ambiguity, and the Savage Axioms", but that paper in turn raised an issue dating back to at least Keynes. And generally before the 20th Century, economics was intertwined with what today we call psychology, which is really what behavioral economics is about (incorporating relevant psychological research into economic models).

More broadly, though, I agree behavioral economics does not really have a political valance, and in practice actually ends up supporting a lot of common sense ideas (the ones grounded in basic psychology). In my view its value is thus in providing a general check against the more impractical implications of the more limited economic models of the mid-20th Century, along with perhaps helping us understand in a bit more detail what sorts of policy measures will be most effective in light of human psychology.

Posted by DTM | January 2, 2008 1:34 PM

For all the talk about health care, NOBODY has even touched the most important question about health care - how do we limit demand? This article
http://www.scragged.com/articles/the-only-health-care-question.aspx
explains that unless that question is answered, everything else is mere details.

Posted by wa taylor | January 4, 2008 9:58 PM