Economic policy wonks rarely get much attention, even if they are advising a presidential candidate. But that's not the case for Austan Goolsbee, a University of Chicago economist who serves as the top wonk for Sen. Barack Obama, a longtime friend. But Goolsbee got plenty of media attention recently after reports that he may have given back-channel assurances to the Canadian government that Obama's tough talk about the North American Free Trade Agreement was just campaign rhetoric. In an exclusive interview, U.S. News chatted with Goolsbee about Obama's economic agenda. Excerpts:
What do you think about the idea of more regulation for Wall Street because of the subprime debacle?
It doesn't make you against capital markets to be for oversight. As Senator Obama has said, if we had had more aggressive, prudent oversight of what people were doing, we very likely would have prevented the most extreme behaviors by a lot of the actors which have ended up being massively devastating to our financial markets. [Even before the crisis] Obama said that the fate of our capital markets is very much tied to the fate of ordinary Americans who are really struggling. If an ordinary person in Indiana can't make the payment on their house, it hurts them but it also hurts Wall Street, too. Wall Street may be on an island, but it is not an island from the economy. That has also proved superprescient.
So what affects one, affects the other?
As he says, if you think a very small group of people can succeed beyond their wildest dreams while the rest of the economy struggles or goes under, it's not that you don't understand what's fair—it's that you don't understand how the economy works...and it is his view that in the last eight years there's been a lot of economic policy geared around an unsustainable economic philosophy that says let's just keep cutting taxes for the very highest-income people whose incomes were already growing and that that's the key to a successful economy.
Does Obama's plan for higher taxes and more government spending and regulation mean a return to big government?
That isn't what Obama is putting forward. The single biggest item in his budget is tax relief for ordinary Americans. His point is that if we are cutting taxes and providing relief to people, not only should they be the people who need it but the people for whom it would be best for the economy to cut taxes. And that is ordinary Americans, because the squeeze on ordinary Americans is the thing that is pulling the economy down now. It's not that high-income people need to have their capital gains [tax rate cut from] 15 percent to 10 percent. They aren't the people who are struggling, and they aren't at the root of the economic downturn we are facing.
This downturn is not a random business-cycle event that just happened. It is the very culmination of six to eight years of really serious struggle for ordinary Americans in which their incomes are flat, the cost of energy, education, healthcare, and now food are up dramatically, leaving zero margin for error, and that is the root, Senator Obama says, of why the personal savings rate literally goes to zero.
People don't have money to save, so they started taking money out of their houses, and now the powder keg is lit, and all we were waiting for is something to go wrong like house prices fall or the price of oil goes to $100 a barrel. You knew given what had happened the past seven years that there would be a consumer debt crisis that would come out of that.
Senator McCain's advisers have told me that before we start spending more money, let's get government as efficient as possible. Does that sound like a good plan to you?
I totally agree with that, but Barack Obama doesn't need to take a lesson in fiscal responsibility from a candidate who has called for $400 billion a year in additional high-income tax cuts and unlimited commitment to war in Iraq, which is currently running at about $150 billion a year. Under the current McCain budget, it is clear the deficit would more than double by the end of his first term. After $400 billion a year in high-income tax cuts, they are going to have a serious revenue problem. And the problem facing the economy is not that high-income people do not have enough money. So I find it extremely strange that the solution that they keep putting forward is to cut taxes more for the people whose incomes have been growing very rapidly.
Big deficits caused Bill Clinton to dump his investment agenda in 1993. I recently saw that Goldman Sachs is predicting a half-trillion-dollar deficit in 2009. Might Obama do the same?
I haven't seen that Goldman Sachs estimate, but the plan Obama has outlined does not increase the deficit. There are some spending cuts, some spending increases, we raise high-income taxes and cut other taxes—but if you add it all together, it does not increase the deficit and very likely reduces it by the end of the first term. He would not have to give up what he is talking about.
When will we return to balanced budgets?
The current administration ran the fiscal situation so far down in the hole that it is going to take some time to get out of that. But compare [Obama's plan] to the Republican candidate, who has called for $400 billion in high-income tax cuts [that will cause] the deficit to spiral out of control.
Does Obama want to raise payroll taxes or uncap the income limit to fix Social Security?
What Obama has said is that the problem with Social Security is not a crisis, but that there are fiscal issues associated with the aging of the population. In his view, the place to start is with the regressivity issue of the payroll tax. It is my own view that the majority of Americans do not understand how the payroll tax works. How it is that a guy making $90 million a year is paying the same tax as a guy making $97,000 a year? I think that at best it would strike them as highly weird and at worst grossly unfair.
But he has not called for uncapping it completely, and there are several different ways to do it. But before anybody starts talking about cutting benefits, let's address that issue. It would also get the trust fund to last another 50 or 60 years. An increase in the payroll tax of 6 percentage points phased in over many years or decades doesn't strike me as a dramatic move. They have uncapped the top rates in Ireland, and they have grown extremely well.
For all the talk about reopening NAFTA, isn't the ultimate conclusion going to be free trade plus greater benefits for displaced workers?
The Bush administration has tried to put a false choice before the American people: Either you are going to support no matter what they put forward, or else you are a protectionist or an economic isolationist. And to me that is an excuse to turn a blind eye to glaring problems in our existing trade agreements and enforcement regime.
But as long as I have known Senator Obama, he has believed that you can't build a moat around the country and that trade overall has been good for the economy—but that there have been a lot of people left out. And if you don't take seriously the concerns of workers, then the political will in favor of open markets dries up and goes away. If you look at these agreements, they are about a thousand pages long, and about 10 have to do with free trade and 990 are a bunch of giveaways to special interests. Like the tax code, they are riddled with loopholes, and that makes the wider public deeply suspicious of the motives of government in signing these agreements.