KATHY HAN

AUSTIN GOOLSBEE IS THE Robert P. Gwinn Professor of Economics at the University of Chicago Graduate School of Business and is currently serving as Chief Economist to Senator Barack Obama’s presidential campaign. Goolsbee’s primary research focus prior to the campaign was public economics and industrial organization with focus on the Internet, media and telecom.

HCER: What subject of work had you been working on prior to focusing on Senator Obama’s campaign?
AG: My research in economics has generally been in two areas-public economics (especially tax policy) and industrial organization with a lot of focus on the Internet, media and telecom. At the exact moment Obama declared, though, I was working on a paper with my old friend and co-author Judy Chevalier at Yale about the college textbook industry, trying to test how rational and forward looking students are when they buy their books. The data suggest they are pretty darn rational.

HCER: As the chief economist for the Obama campaign, is there one particular issue that you feel is important to address?
AG: Presidential campaigns are unbelievably wide-ranging in the subjects that end up getting covered, and that’s especially been true in the Democratic primaries. In my view, the issue of health care is quite fundamental, though most of the plans on the Democratic side have a great deal in common. But the issue of social mobility and the income distribution, most especially the stagnation of incomes for a wide swath of America coupled with the rapidly rising costs of key things they buy-energy, medicines, education for their kids-is, perhaps, the biggest issue of all. In the long run, we know that improving the skills and education of the workforce is the only real solution. But in the short run, this issue has motivated a lot of his [Senator Obama] policy-making in areas such as tax fairness, retirement security, housing, policies toward credit card companies, and so on.

HCER: What kind of economic advice do you have for Senator Obama in addressing the Social Security issue?
AG: Everyone knows this is a very sensitive area and that there has been a lot of misleading information out there over the years. I view the failed Bush privatization effort as, first of all, an example of deliberate confusion on the part of the administration where they tried to conflate the issue of funding with the issue of private accounts. I can’t say this more clearly-private accounts do not address the funding issues of social security! That was a cleverly designed, but completely misleading marketing campaign. If you let people put money into their own accounts, rather than paying for current retirees, then you need to come up with new money from somewhere to pay for the current retirees. But if you are willing to come up with that kind of money, you could just inject it into the current Social Security system and resolve the funding problem. So I certainly don’t advise privatization as a way to relieve the funding issues, and I worry a lot about the issue of financial provider administrative costs and fees eating up private accounts. But, second, this shows you that even with a president and congress of the same party, you really can’t jam a partisan Social Security plan down peoples’ throats. It just won’t work. The only way we can deal with the issues of social security funding is with a bipartisan, Reagan-O’Neil style approach. Overall, the magnitude of our problem with funding social security is, to my mind, fairly manageable once we are at that point. Medicare, on the other hand, oh brother…

HCER: Can you please describe the economic and political conditions that need to be achieved in order to more actively place the United States on an environmentally friendly track?
AG: The basic issue is that the single biggest environmental problem facing the country and the globe-the issue of carbon emissions and global warming-has no price associated with it. The Obama energy plan would cap greenhouse gas emissions and auction 100% of the permits to avoid insider giveaways and special interest cronyism that ultimately reward the worst polluting companies. Transition relief should be above-board and direct. A price on carbon will both penalize polluters and give a great incentive for alternative energy development and conservation. Beyond that, though, I do think it is potentially worthwhile for the government to also give direct incentives for the commercialization and adoption of key technologies, especially when there are big network externalities involved (i.e., no one wants to use the new technology because nobody else is yet using it). To the extent that we find ways to clean up coal, it gives us a chance to help keep the growth of China and India from generating the kinds of emissions they are on path to right now. The environment is definitely an area where economic incentives and market mechanisms have proved exceptionally well suited to getting things done in areas most people don’t think of as economic. I hope the environmentalists and the economists continue to work together going forward.

HCER: Can you describe more in-depth about your work with tax policy and how the government can tackle the issue of Healthcare?
AG: I have done a lot of research work on tax policy as an academic-how high income people respond to changes in their tax rates, how sensitive various economic behaviors are to the relevant tax rates: capital investment, broadband deployment, Internet purchases, CEO compensation, and some other, more technical stuff. In the campaign, the big Obama tax reform effort has centered around the issues arising from the serious pinch facing most Americans-stagnant wages for all but the very top combined with rising costs on lots of the most important things they buy like energy, college education, health care and prescription drugs. That’s one of the big drivers of the dreadfully low personal savings rates in the US lately. He wanted to make sure that we rebalanced the tax code to the benefit of the people who don’t have lobbyists getting them tax loopholes in Washington. On health, I think we have to acknowledge that the existing system that allows insurance companies to cream skim the best patients and drop folks once they get sick has all the attributes of a classic market failure. This is not the best example to rely on the dictum that a completely free-market will solve the problems. I think especially troubling is the issue of preventive care and chronic disease management. These are places where it’s important to do things both for health reasons and cost reasons, and the more you try to force the patients to pay the marginal dollar for their coverage, the less of it they will do. My own view is that the basis of any rational health reform has to be some form of pooling of risk and then no discriminating on the basis of health status. I also believe that we don’t have nearly enough comparative effectiveness research. There are hugely different approaches to the same illness in different parts of the country with wildly different costs and wildly different outcomes. We need to give medical providers an incentive to find the best and most cost effective forms of treatment.

HCER: What economic advice would you give Obama in terms of addressing the changing international economic environment, specifically with emerging markets such as China and India?
AG: My view on the big emerging markets like China and India is that they are getting rich and we need to adjust to that reality. You can’t turn back the clock on the global economy and pretend that it will go away. We need to take the steps necessary to ensure we have highly skilled workers, great technology and high wages for decades to come. That doesn’t mean we should turn a blind eye to circumstances where China flouts the rules, of course. To gain admission to the WTO, for example, China agreed to a lot of things that they simply haven’t done and the view of the Bush administration seems that shouldn’t make trouble over their not fulfilling their obligations. I totally disagree with that. If you sign the contract, you abide by it. If you let people avoid complying with things they don’t want to comply with, it will start happening everywhere. But don’t forget that China and India are middle and low-income countries. Most of what they do in their economies is closer to what they do in Mexico and Vietnam than it is to what we are doing here in the U.S. I think we want to put ourselves in a position to compete in the fastest growing markets of the world and that we can be tremendously successful at it.

HCER: What are the economic implications of our continued military presence in Iraq?
AG: From what I have been seeing, it will end up costing us more than $2 trillion to fight this war. It’s unbelievable. Imagine what we could have done with even half that money to address the school issues in America, to deal with health care or savings or environmental problems. What an astounding waste. The main implication in a short-run sense is that the war (and the consequent issues with Iran) have added great uncertainty to the oil market and contributed to oil pushing $100 a barrel. Fortunately the economy isn’t as energy intensive as it once was so that hasn’t driven us into recession but it has certainly hit everyday consumers pretty hard.