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Barack Obama on Economics:
'We're Going Through a Big Shift'
June 17, 2008
Excerpts from Bob Davis and Amy Chozick's interview with Barack Obama on his campaign bus in Flint, Mich. Some questions have been paraphrased.
WSJ: I wanted to talk about long-term economic growth, sort of following on your speech. I noticed that in an interesting way you use Lincoln, FDR and JFK, heroes in many ways. Maybe you can talk to me a little bit about your view of the government's role in economic growth.
Fabrizio Costantini for the Wall Street Journal Barack Obama explained why he thinks government action on the economy is needed right now: "… We're seeing competition from every corner."
Sen. Obama: This dates back even further, to Alexander Hamilton. The strength of our economy has always been the dynamism of the private sector, but at critical junctures, particularly when we're at a transformative time, say the shift from agricultural era to the industrial era, where you've got some broad-based investment that needs to be made, they're very expensive. They're difficult for any private investor to want to make on their own. …
I think Lincoln's Homestead Act or the land-grant college system was a great example of opening up the West. It's still the American people and business taking advantage of these opportunities, but you needed the government to help get them started.
Obviously, infrastructure is a classic example of these types of investments, whether it is the interstate highway system or the Internet. I think education is another example, whether it's the creation of public schools or the GI Bill after World War II. I think now we need to be thinking about similar investments in critical areas like the ones I listed today.
WSJ: Why do you think at this particular juncture we need it now?
Sen. Obama: Partly because we're going through a big shift from a national economy that was also dominant across the globe to a truly global economy in which we're seeing competition from every corner. We've seen an additional three billion people added to capitalism, partly because of the success of the U.S. creating a working liberal economic order, but also because of technology and the rapidity with which technology is moving. You look at a place like Flint, Michigan, where the old industrial structures have been completely uprooted and we've got to help the residents here transition to this new economy and we've got to make sure that we are putting in place the kinds of structures that will allow us to compete long term.
WSJ: Some people would say with this kind of change that you'd need the opposite -- less government -- because in a globalized world, markets are so much more important. You seem to say that at a point when the global economy is getting so important you'd redouble …
Fabrizio Costantini for the Wall Street Journal Sen. Obama spoke on his campaign bus in Flint, Mich., where he says "the old industrial structures have been completely uprooted and we've got to help the residents here transition to this new economy."
Sen. Obama: I wouldn't say redouble. Revitalized, I would say. Because I think the danger is always to equate size of government with effectiveness, and I don't. It's not clear to me that we want a larger government, but we certainly want a government that is setting more intelligent priorities and using taxpayer dollars more wisely and structuring tax policies that are conducive to long-term economic growth.
As I mentioned during the speech, there may be programs that no longer work. There's certainly all kinds of previsions in our tax code that are antiquated and are not spurring economic growth. We've got offices like the patent office that are outdated to take advantage of new discoveries here in the United States. We need to retool our government so that it works with a 21st century economy and in some ways our campaign has shown what happens when you retool political campaigns to a new requirement. I think we need to do the same thing with government as well.
WSJ: What about the role of taxation? ... For the most part, the way I look at your tax policy, seems to me that you look at it and say, tax policy over the past decade, and maybe even before that, has produced an outcome that has benefited people mostly at the top, and your goal is to try to redistribute it in a different fashion.
Sen. Obama: Here's what I would say: I do believe the tax policies over the last eight years have been badly skewed towards the winners of the global economy. And I do think there is a function for tax policy in making sure that everybody benefits from globalization or at least the benefits and burdens are shared a little more easily. If, as some talk about, we've got a winner-take-all economy where the highly skilled, highly educated are reaping huge rewards and the unskilled or even semi-skilled are getting a much smaller share of the economy, then our tax policies can help cushion some of the blow through providing health care. So if people lose their jobs they're not losing their health care as well. That actually makes a more flexible work force that makes workers more mobile and less resistant to change.
If we've got investments in education, that will make us more competitive in the long run. We've got to pay for that like anything else. But it would be a mistake to say I view our tax code only as a distribution question. I also think that our tax code has come to distort a lot of economic decision making so I'd like to see simplification as part of an overall tax agenda. On the corporate side, for example, one of the things I've asked my folks to look at is: Are there ways we can close existing loopholes in tax havens at the same time as we're lowering overall rates? We've got this new problem: The biggest problem with our tax code when it comes to the business side is that we have one of the highest tax rates -- corporate tax rates -- on paper but our effective tax rate is one of the lowest … You know, how much you pay in taxes as a corporation a lot of times is going to depend on how good your lobbyist is, as opposed to any sound economic theories. So those distorting effects I'd like to actually remove and eliminate from our tax system, but obviously that's a complicated and difficult task. The last time we did it was in 1986. We're going to have to, I think, revisit that.
WSJ: Would you like to reduce the corporate tax rate?
Sen. Obama: If we could eliminate loopholes in taxes, create a level playing field, then I think there's the possibility to reducing corporate rates.
Fabrizio Costantini for the Wall Street Journal Sen. Obama said he has looked at reducing corporate taxes, but only if loopholes are eliminated.
WSJ: Have you proposed reducing corporate rates?
Sen. Obama: We're still working with our team to take a look at that.
WSJ: When you were talking about no taxation of startups, what immediately went through my mind is well, every corporation in American is going to have a "startup" so they won't pay capital gains.
Sen. Obama: There are always folks who are interested in gaming the system, and obviously one of the things you have to do with tax policy generally is to pin down definitions so they're not twisted beyond recognition. But I think the basic concept -- which is companies that are starting off, that have a good idea, that don't have a lot of capital, they should be allowed to accumulate capital, reinvest profits if there are any, to the point that they stabilize -- that's something we should encourage.
WSJ: You talked about the last eight years and the question of redistribution goes way back …
Sen. Obama: Oh, there's no doubt about it.
That's why I say that the combination of globalization and technology and automation all weaken the position of workers. I would add an anti-union climate to that list. But all weakens the position of workers, particularly blue-collar workers, in the economy, and some of it is just historical. You know after World War II, we were in this unique position where Europe was decimated, Japan was decimated. China was off the grid because of Mao. And so we didn't have a lot of competition out there, and now other countries are rising and automation has supplanted a lot of work that used to be done by middle-class workers.
We have drastically increased productivity since 1995, and there was the theory that if you increase productivity enough some of these problems of living standards would solve themselves. But what we've seen is rising productivity, rising corporate profits but flat-lining or even declining wages and incomes for the average family.
What that says is that it's going to be important for us to pay attention to not only growing the pie, which is always critical, but also some attention to how it is sliced. I do not believe that those two things -- fair distribution and robust economic growth -- are mutually exclusive.
You get to a point, I think, if you have a participatory income tax, for example, where you might be discouraging work because marginal rates are so high. You might undoubtedly get to a point where the capital gain and dividend taxes are so high that they distort investment decisions and you're weaker economically. But you know if you've got a sensible policy that says, we're going to capture some of the nation's economic growth … and reinvest it in things we know have to be done, like science and technology research or fixing our energy policy, and then that is actually going to be a spur to productivity and not an inhibitor.
WSJ: The last time I heard someone talk so much about infrastructure as a driver of economic growth was Bill Clinton in 1992, and he had a pretty big infrastructure agenda …
Sen. Obama: Bill Clinton had a lot of good ideas.
WSJ: But then he gets into the White House and deficit reduction becomes a more paramount goal. Also his energy taxes left little money for infrastructure. So why wouldn't that happen to you in spades given the deficit is still an issue and in addition entitlements are more of an issue than they were then?
Sen. Obama: Well, look, the difference I would suggest is that there is a strong recognition in the public mind that we can't continue on our current energy path. It's not sustainable. Which means there's a bigger opening to bring about change.
WSJ: So you think that will add to the political pressure behind it?
Sen. Obama: Absolutely. Because what happens then is we're able to say, look, developing our infrastructure has become the arsenal of a more efficient economy and just a very typical example is the huge spike in mass transit we've seen in the last couple of months. Unfortunately, a lot of these mass transit systems can't handle the increase in utilization.
I also think the fact that you've got both a Democratic and a Republican candidate talking about climate change and the possibility of a cap-and-trade system increases the likelihood of forging a bipartisan consensus on that issue. That can generate billions of dollars to re-invest in infrastructure.
Finally, you've got a war in Iraq that is deeply unpopular, where we've been spending billions of dollars. We're going to have to catch up on deficit reduction but I think people also recognize that if we can spend that much money rebuilding Iraq, surely we can find some money to rebuild America.
WSJ: With the cap-and-trade system, the estimates are as much as $100 billion a year of income coming in, and you're proposing to spend $15 billion of it. Is that right?
Sen. Obama: I think that's right. $100 billion is conservative, but I think $15 billion is about what we can wisely spend on R&D and some of the other proposals that I put out here. And we're going to have to rebate a whole bunch of that money to consumers to accommodate what will undoubtedly be efforts by these [inaudible] industries to pass on the cost of retrofitting the plant or changing processes to consumers. Consumers, potentially, and I've said this publicly, will see a spike short-term in, for example, electricity prices ...
WSJ: Why do you think the additional money is needed? I mean, there's tons and tons of money in Silicon Valley now for clean energy. What is it in your view that the government can do that the private sector can't?
Sen. Obama: Well, there are a couple things. Basic research, we don't see as much money going into that ... I have identified one gap that I think has to be filled, and that is the step between discovery and commercialization. You have this point in time where things haven't quite taken off yet and still entail huge risks. A lot of ventures may not want to get involved in that middle stage. They like the early stage, but if it doesn't take off right away, then oftentimes, innovation stalls. The model I'm looking at the model the CIA put into place in Quintella. But it basically partnered with the private sector to help subsidize investment in socially productive activities, but with an aim towards commercialization as well.
WSJ: Given the last time Bob Rubin played a role in deficit reduction, what role do you expect him to play?
Sen. Obama: I'm sure Bob will be one of numerous advisors. I speak to folks on all sides of that Democratic divide. I've got Bob Rubin on one hand, Bob Reich on another, folks in between.
WSJ: Are you going to give Reich another shot?
Sen. Obama: … I tend to be eclectic. I do think we're in a different time in 2008 than we were in 1992. The thing I think people should feel confident in is that I'm going to make these judgments not based on some fierce ideological pre-disposition but based on what makes sense. I'm a big believer in evidence. I'm a big believer in fact. You know, if somebody shows me we can do something better through a market mechanism, I'm happy to do it. I have no vested interest in expanding government or setting up a program just for the sake of setting one up. It's too much work.
On the health-care front, for example, if I actually believed that just providing a tax cut to everybody would solve the problem of lack of health insurance and cure health-care inflation, I'd say great, that's a nice way to do it. It prevents a lot of headaches. But I've seen no evidence that the kinds of policies John McCain puts forward would actually work.
If I saw strong evidence that an additional $300 billion in tax cuts that John has proposed -- without a clear way of paying for it -- would actually boost economic growth and productivity, I'd be happy to take a look at that evidence. But I haven't seen that. It's all conjecture.
WSJ: A lot of folks would say cutting corporate tax rates are equivalent growth.
Sen. Obama: I don't want a distorting effect of our tax code on corporate decision making. But that's different from just saying you know, let's run up the deficit another couple of trillion dollars …
'We're Going Through a Big Shift'
June 17, 2008
Excerpts from Bob Davis and Amy Chozick's interview with Barack Obama on his campaign bus in Flint, Mich. Some questions have been paraphrased.
WSJ: I wanted to talk about long-term economic growth, sort of following on your speech. I noticed that in an interesting way you use Lincoln, FDR and JFK, heroes in many ways. Maybe you can talk to me a little bit about your view of the government's role in economic growth.
Fabrizio Costantini for the Wall Street Journal Barack Obama explained why he thinks government action on the economy is needed right now: "… We're seeing competition from every corner."
Sen. Obama: This dates back even further, to Alexander Hamilton. The strength of our economy has always been the dynamism of the private sector, but at critical junctures, particularly when we're at a transformative time, say the shift from agricultural era to the industrial era, where you've got some broad-based investment that needs to be made, they're very expensive. They're difficult for any private investor to want to make on their own. …
I think Lincoln's Homestead Act or the land-grant college system was a great example of opening up the West. It's still the American people and business taking advantage of these opportunities, but you needed the government to help get them started.
Obviously, infrastructure is a classic example of these types of investments, whether it is the interstate highway system or the Internet. I think education is another example, whether it's the creation of public schools or the GI Bill after World War II. I think now we need to be thinking about similar investments in critical areas like the ones I listed today.
WSJ: Why do you think at this particular juncture we need it now?
Sen. Obama: Partly because we're going through a big shift from a national economy that was also dominant across the globe to a truly global economy in which we're seeing competition from every corner. We've seen an additional three billion people added to capitalism, partly because of the success of the U.S. creating a working liberal economic order, but also because of technology and the rapidity with which technology is moving. You look at a place like Flint, Michigan, where the old industrial structures have been completely uprooted and we've got to help the residents here transition to this new economy and we've got to make sure that we are putting in place the kinds of structures that will allow us to compete long term.
WSJ: Some people would say with this kind of change that you'd need the opposite -- less government -- because in a globalized world, markets are so much more important. You seem to say that at a point when the global economy is getting so important you'd redouble …
Fabrizio Costantini for the Wall Street Journal Sen. Obama spoke on his campaign bus in Flint, Mich., where he says "the old industrial structures have been completely uprooted and we've got to help the residents here transition to this new economy."
Sen. Obama: I wouldn't say redouble. Revitalized, I would say. Because I think the danger is always to equate size of government with effectiveness, and I don't. It's not clear to me that we want a larger government, but we certainly want a government that is setting more intelligent priorities and using taxpayer dollars more wisely and structuring tax policies that are conducive to long-term economic growth.
As I mentioned during the speech, there may be programs that no longer work. There's certainly all kinds of previsions in our tax code that are antiquated and are not spurring economic growth. We've got offices like the patent office that are outdated to take advantage of new discoveries here in the United States. We need to retool our government so that it works with a 21st century economy and in some ways our campaign has shown what happens when you retool political campaigns to a new requirement. I think we need to do the same thing with government as well.
WSJ: What about the role of taxation? ... For the most part, the way I look at your tax policy, seems to me that you look at it and say, tax policy over the past decade, and maybe even before that, has produced an outcome that has benefited people mostly at the top, and your goal is to try to redistribute it in a different fashion.
Sen. Obama: Here's what I would say: I do believe the tax policies over the last eight years have been badly skewed towards the winners of the global economy. And I do think there is a function for tax policy in making sure that everybody benefits from globalization or at least the benefits and burdens are shared a little more easily. If, as some talk about, we've got a winner-take-all economy where the highly skilled, highly educated are reaping huge rewards and the unskilled or even semi-skilled are getting a much smaller share of the economy, then our tax policies can help cushion some of the blow through providing health care. So if people lose their jobs they're not losing their health care as well. That actually makes a more flexible work force that makes workers more mobile and less resistant to change.
If we've got investments in education, that will make us more competitive in the long run. We've got to pay for that like anything else. But it would be a mistake to say I view our tax code only as a distribution question. I also think that our tax code has come to distort a lot of economic decision making so I'd like to see simplification as part of an overall tax agenda. On the corporate side, for example, one of the things I've asked my folks to look at is: Are there ways we can close existing loopholes in tax havens at the same time as we're lowering overall rates? We've got this new problem: The biggest problem with our tax code when it comes to the business side is that we have one of the highest tax rates -- corporate tax rates -- on paper but our effective tax rate is one of the lowest … You know, how much you pay in taxes as a corporation a lot of times is going to depend on how good your lobbyist is, as opposed to any sound economic theories. So those distorting effects I'd like to actually remove and eliminate from our tax system, but obviously that's a complicated and difficult task. The last time we did it was in 1986. We're going to have to, I think, revisit that.
WSJ: Would you like to reduce the corporate tax rate?
Sen. Obama: If we could eliminate loopholes in taxes, create a level playing field, then I think there's the possibility to reducing corporate rates.
Fabrizio Costantini for the Wall Street Journal Sen. Obama said he has looked at reducing corporate taxes, but only if loopholes are eliminated.
WSJ: Have you proposed reducing corporate rates?
Sen. Obama: We're still working with our team to take a look at that.
WSJ: When you were talking about no taxation of startups, what immediately went through my mind is well, every corporation in American is going to have a "startup" so they won't pay capital gains.
Sen. Obama: There are always folks who are interested in gaming the system, and obviously one of the things you have to do with tax policy generally is to pin down definitions so they're not twisted beyond recognition. But I think the basic concept -- which is companies that are starting off, that have a good idea, that don't have a lot of capital, they should be allowed to accumulate capital, reinvest profits if there are any, to the point that they stabilize -- that's something we should encourage.
WSJ: You talked about the last eight years and the question of redistribution goes way back …
Sen. Obama: Oh, there's no doubt about it.
That's why I say that the combination of globalization and technology and automation all weaken the position of workers. I would add an anti-union climate to that list. But all weakens the position of workers, particularly blue-collar workers, in the economy, and some of it is just historical. You know after World War II, we were in this unique position where Europe was decimated, Japan was decimated. China was off the grid because of Mao. And so we didn't have a lot of competition out there, and now other countries are rising and automation has supplanted a lot of work that used to be done by middle-class workers.
We have drastically increased productivity since 1995, and there was the theory that if you increase productivity enough some of these problems of living standards would solve themselves. But what we've seen is rising productivity, rising corporate profits but flat-lining or even declining wages and incomes for the average family.
What that says is that it's going to be important for us to pay attention to not only growing the pie, which is always critical, but also some attention to how it is sliced. I do not believe that those two things -- fair distribution and robust economic growth -- are mutually exclusive.
You get to a point, I think, if you have a participatory income tax, for example, where you might be discouraging work because marginal rates are so high. You might undoubtedly get to a point where the capital gain and dividend taxes are so high that they distort investment decisions and you're weaker economically. But you know if you've got a sensible policy that says, we're going to capture some of the nation's economic growth … and reinvest it in things we know have to be done, like science and technology research or fixing our energy policy, and then that is actually going to be a spur to productivity and not an inhibitor.
WSJ: The last time I heard someone talk so much about infrastructure as a driver of economic growth was Bill Clinton in 1992, and he had a pretty big infrastructure agenda …
Sen. Obama: Bill Clinton had a lot of good ideas.
WSJ: But then he gets into the White House and deficit reduction becomes a more paramount goal. Also his energy taxes left little money for infrastructure. So why wouldn't that happen to you in spades given the deficit is still an issue and in addition entitlements are more of an issue than they were then?
Sen. Obama: Well, look, the difference I would suggest is that there is a strong recognition in the public mind that we can't continue on our current energy path. It's not sustainable. Which means there's a bigger opening to bring about change.
WSJ: So you think that will add to the political pressure behind it?
Sen. Obama: Absolutely. Because what happens then is we're able to say, look, developing our infrastructure has become the arsenal of a more efficient economy and just a very typical example is the huge spike in mass transit we've seen in the last couple of months. Unfortunately, a lot of these mass transit systems can't handle the increase in utilization.
I also think the fact that you've got both a Democratic and a Republican candidate talking about climate change and the possibility of a cap-and-trade system increases the likelihood of forging a bipartisan consensus on that issue. That can generate billions of dollars to re-invest in infrastructure.
Finally, you've got a war in Iraq that is deeply unpopular, where we've been spending billions of dollars. We're going to have to catch up on deficit reduction but I think people also recognize that if we can spend that much money rebuilding Iraq, surely we can find some money to rebuild America.
WSJ: With the cap-and-trade system, the estimates are as much as $100 billion a year of income coming in, and you're proposing to spend $15 billion of it. Is that right?
Sen. Obama: I think that's right. $100 billion is conservative, but I think $15 billion is about what we can wisely spend on R&D and some of the other proposals that I put out here. And we're going to have to rebate a whole bunch of that money to consumers to accommodate what will undoubtedly be efforts by these [inaudible] industries to pass on the cost of retrofitting the plant or changing processes to consumers. Consumers, potentially, and I've said this publicly, will see a spike short-term in, for example, electricity prices ...
WSJ: Why do you think the additional money is needed? I mean, there's tons and tons of money in Silicon Valley now for clean energy. What is it in your view that the government can do that the private sector can't?
Sen. Obama: Well, there are a couple things. Basic research, we don't see as much money going into that ... I have identified one gap that I think has to be filled, and that is the step between discovery and commercialization. You have this point in time where things haven't quite taken off yet and still entail huge risks. A lot of ventures may not want to get involved in that middle stage. They like the early stage, but if it doesn't take off right away, then oftentimes, innovation stalls. The model I'm looking at the model the CIA put into place in Quintella. But it basically partnered with the private sector to help subsidize investment in socially productive activities, but with an aim towards commercialization as well.
WSJ: Given the last time Bob Rubin played a role in deficit reduction, what role do you expect him to play?
Sen. Obama: I'm sure Bob will be one of numerous advisors. I speak to folks on all sides of that Democratic divide. I've got Bob Rubin on one hand, Bob Reich on another, folks in between.
WSJ: Are you going to give Reich another shot?
Sen. Obama: … I tend to be eclectic. I do think we're in a different time in 2008 than we were in 1992. The thing I think people should feel confident in is that I'm going to make these judgments not based on some fierce ideological pre-disposition but based on what makes sense. I'm a big believer in evidence. I'm a big believer in fact. You know, if somebody shows me we can do something better through a market mechanism, I'm happy to do it. I have no vested interest in expanding government or setting up a program just for the sake of setting one up. It's too much work.
On the health-care front, for example, if I actually believed that just providing a tax cut to everybody would solve the problem of lack of health insurance and cure health-care inflation, I'd say great, that's a nice way to do it. It prevents a lot of headaches. But I've seen no evidence that the kinds of policies John McCain puts forward would actually work.
If I saw strong evidence that an additional $300 billion in tax cuts that John has proposed -- without a clear way of paying for it -- would actually boost economic growth and productivity, I'd be happy to take a look at that evidence. But I haven't seen that. It's all conjecture.
WSJ: A lot of folks would say cutting corporate tax rates are equivalent growth.
Sen. Obama: I don't want a distorting effect of our tax code on corporate decision making. But that's different from just saying you know, let's run up the deficit another couple of trillion dollars …
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