Talk Talk Talk Talk Talk Myself to Death: High-Stakes Economics

Sunday, January 11, 2009

High-Stakes Economics

As the economic news just gets worse and worse, there's been some concern that Obama's stimulus plan isn't strong or robust enough to adequately tackle the problem. This post from TomP at Daily Kos provides a nice summation of the various worries Obama has faced. I pay particular attention to the opinions of Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman.

But throughout the campaign, Obama often seemed to be underplaying a situation, not doing enough to address it, only to demonstrate that his detractors were seriously underestimating both his intentions and his abilities. Is that what's going on here? Nate Silver, in spelling out Obama's Price Is Right negotiating strategy, says it is. He answers the question of whether Obama should've expected push back from Senate Democrats with another question:

My question is: can Obama really be entirely surprised that this is happening?

Before you answer, consider who we haven't heard very much from the past couple of days. We haven't heard very much from Mitch McConnell. And we haven't heard very much from the Blue Dogs. Nobody seems (publicly) to be taking the position that the $800 billion is too much, at least provided that it comes with $300 billion of tax cuts.

Now consider what Obama told CNBC the other day:

Obama also confirmed that he plans to lay out a roughly $775 billion economic stimulus plan on Thursday but indicated that the amount could grow once it gets taken up by Congress.

"We've seen ranges from $800 (billion) to $1.3 trillion," he said. "And our attitude was that given the legislative process, if we start towards the low end of that, we'll see how it develops."

Obama isn't picking these numbers out on accident. This range -- $800 billion to $1.3 trillion -- is most likely the range of outcomes that his administration considers acceptable. He says that "given the legislative process", he's deliberately chosen a number on the lower end of that range.

What does this mean? It means he wants the Senate Democrats to do his dirty work for him. All of the sudden, the administration, which is about to spend at least $800 billion, gets to play the role of the fiscally prudent tightwads, negotiating against the Senate Democrats. This has at least two benefits. One, it requires less of the administration's political capital to sell the package. And two, it completely co-opts the conservative opposition. Unless you're Paul Krugman or Greg Mankiw, you probably don't really have any idea whether $300 billion or $800 billion or $1.2 trillion is the right amount to spend; the numbers are too large, the scope of the stimulus too unprecedented, to provide for any absolute frame of reference. So the frame of reference is relative rather than absolute. If you're Mitch McConnell or Mary Landireu or Bob Corker and you see that John Kerry thinks that $800 billion is too little -- well then, 'gal darn it, this Obama fella must be doing something right.

That makes sense, and it fits how we've seen Obama operate before. And if you're not sure at this point why Silver calls this the Price is Right negotiating strategy, he explains:

I call this a Price is Right negotiating strategy. When bidding on an item on The Price is Right, you want to come as close as possible to the item's price without going over. But if you do go over, your bid is invalidated. Thus, it is worse to bid $1 too much than $100 too little. Here, analogously, the risks of overbidding seem to be considerably greater to Obama than the risks of underbidding.

Bob Barker would be proud.


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