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.