The Audacity of Data

By

As a young economics professor in the late 1970s, Richard Thaler
began noticing small but nagging ways in which ordinary people
defied the predictions of economic theory. A friend confided that
he mowed his lawn to save $10, but winced at the suggestion that he
mow someone else's to make $10. A colleague confessed that he'd
never go out and buy a $50 bottle of wine for a family meal, but
that he'd recently opened up a $50 bottle at dinner because it
happened to be lying around. The textbooks assumed people would
behave identically when equal amounts of money were at stake. But
here they were doing completely different things depending on the
context.By the late '80s, Thaler had begun recording these observations in a
column for a leading academic journal. The column laid the
groundwork for a book, called The Winner's Curse, published in
1994. And the book widely signaled the arrival of a previously
obscure sub-field known as behavioral economics. Behaviorists like
Thaler believed that the perfectly rational, utterly selfinterested
maximizers of economists' imaginations had little in common with
actual human beings, who frequently err when making simple
calculations, who have trouble with self-control, who often act out
of altruism or spite.

But what's really interesting is how Thaler and his fellow
behaviorists responded to this fairly critical insight. Though
rational self-interest was the central tenet of neoclassical (i.e.,
modern) economics, they didn't take a wrecking ball to the field
and replace it with some equally sweeping theory of human behavior.
Instead, they labored to bring economics closer in line with how
the world actually works, one small adjustment at a time.
"'Discovery commences with the awareness of anomaly,'" Thaler wrote
in the introduction to The Winner's Curse, quoting the philosopher
Thomas Kuhn. "I hope to accomplish that first step--awareness of
anomaly. Perhaps at that point we can start to see the development
of the new, improved version of economic theory."

As it happens, Thaler is revered by the leading wonks on Barack
Obama's presidential campaign. Though he has no formal role, Thaler
presides as a kind of in-house intellectual guru, consulting
regularly with Obama's top economic adviser, a fellow University of
Chicago professor named Austan Goolsbee. "My main role has been to
harass Austan, who has an office down the hall from mine, " Thaler
recently told me. "I give him as much grief as possible." You can
find subtle evidence of this influence across numerous Obama
proposals. For example, one key behavioral finding is that people
often fail to set aside money for retirement even when their
employers offer generous 401(k) plans. If, on the other hand, you
automatically enroll workers in 401(k)s but allow them to opt out,
most stick with it. Obama's savings plan exploits this so-called
"status quo" bias.

And, yet, it's not just the details of Obama's policies that suggest
a behavioral approach. In some respects, the sensibility behind the
behaviorist critique of economics is one shared by all the Obama
wonks, whether they're domestic policy nerds or grizzled foreign
policy hands. Despite Obama's reputation for grandiose rhetoric and
utopian hope-mongering, the Obamanauts aren't radicals--far from
it. They're pragmatists--people who, when an existing paradigm
clashes with reality, opt to tweak that paradigm rather than
replace it wholesale. As Thaler puts it, "Physics with friction is
not as beautiful. But you need it to get rockets off the ground."
It might as well be the motto for Obama's entire policy shop.

Sociologically, the Obamanauts have a lot in common with the last
gang of Democratic outsiders to make a credible run at the White
House. Like Bill Clinton in 1992, Obama's campaign boasts a cadre
of credentialed achievers. Intellectually, however, the Obamanauts
couldn't be more different. Clinton delighted in surrounding
himself with big-think public intellectuals--like economics
commentator Robert Reich and political philosopher Bill Galston.
You'd be hard-pressed to find a political philosopher in Obama's
inner wonk-dom. His is dominated by a group of first-rate
economists, beginning with Goolsbee, one of the profession's most
respected tax experts. A Harvard economist named Jeff Liebman has
been influential in helping Obama think through budget and
retirement issues; another, David Cutler, helped shape his views on
health care. Goolsbee, in particular, is an almost unprecedented
figure in Democratic politics: an academic economist with a top
campaign position and the candidate's ear.

One major reason for these differences is the candidate himself.
Cutler told me Obama is adamant about consulting bona fide experts.
"The staff kept saying, 'What he wants to know is that he's really
talking to experts in the field. When you go see him, you know,
make it clear that you're an expert.'" When it comes to economics,
it's very difficult to achieve expertise without an academic
background. It's a field that prizes rigorous results, supported by
reams of painstakingly sifted data. (Though Reich was labor
secretary, he was trained as a lawyer, not an economist.) Cutler,
for example, has made his name with a series of detailed
econometric studies suggesting that, contrary to the conventional
wisdom on the left, Americans actually have quite a bit to show for
the trillions they spend on health care.

Even a very smart non-academic can come up short by this measure.
Last year, Goolsbee participated in a panel discussion with the
economic advisers of the major presidential campaigns. At one
point, he acknowledged the two other academics in the room and
noted their dependence on intricate census data. This prompted some
grumbling from the other advisers--very accomplished wonks in their
own right--which the moderator acknowledged. But the truth is that
almost no non-PhD would know what to do with such elaborate data
sets. Or take the latest advances in behavioral economics: "We're
aware of that stuff, we read the literature, believe a lot of it,"
says one Obama adviser. "That stuff hasn't filtered to the
Washington policy community yet."

Bill Clinton favored what you might call a "deductive" approach--an
all- encompassing, almost revolutionary idea, out of which fell
lots of smaller proposals. In a series of speeches in 1991, he
unveiled the product of all his late-night bull-sessions with
people like Reich and Galston, which he called "The New Covenant."
The old model held that government had certain unconditional
obligations to its citizens. Under Clinton's reimagining, many of
these obligations would disappear. The government would help only
those who fulfilled their responsibilities as parents, workers, and
taxpayers. For instance, the government would no longer provide
unlimited welfare benefits. It would instead require recipients to
work after two years of assistance.

For their part, the Obama wonks tend to be inductive--working
piecemeal from a series of real-world observations. One typical
Goolsbee brainchild is something called an automatic tax return.
The idea is that, if you had no tax deductions or freelance income
the previous year, the IRS would send you a tax return that was
already filled out. As long as you accepted the government's
accounting, you could just sign it and mail it back. Goolsbee
estimates this small innovation could save hundreds of millions of
man-hours spent filling out tax forms, and billions of dollars in
tax-preparation fees.

Think of the contrast here as the difference between science-fiction
writers and engineers. Reich and Galston are the kinds of people
who'd sketch out the idea for time travel in a moment of
inspiration. Goolsbee et al. could rig up the DeLorean that would
actually get you back to 1955.

Like their intellectual godfather Thaler, the Obama wonks aren't
particularly interested in tearing down existing paradigms, just
adjusting and extending them when they become outdated. (Thaler
urges his students to master the same traditional, mathematical
models their colleagues do if they want to be taken seriously.) For
example, a central tenet of the economic thinking favored by Bill
Clinton and his Treasury secretary, Robert Rubin, was that cutting
the deficit lowers long-term interest rates, which in turn
stimulates the economy. The Obamanauts are perfectly willing to
accept the relationship between long-term rates and economic
growth. But recent evidence suggests that low rates weren't quite
as central to the success of the Clinton years as they appeared,
and that investments in infrastructure and R&D might be as
important as deficit reduction. Not surprisingly, Obama plans to
focus less on the deficit than Clinton did.

The Clintonites were moderates, but they were also ideological. They
explicitly rejected the liberalism of the 1970s and '80s. The
Obamanauts are decidedly non-ideological. They occasionally reach
out to progressive think tanks like the Economic Policy Institute,
but they also come from a world-- academic economics--whose
inhabitants generally lean right. (And economists at the University
of Chicago lean righter than most.) As a result, they tend to be
just as comfortable with ideological diversity as the candidate they
advise. Just before the Iowa caucus, I saw Goolsbee approach New
York Times columnist David Brooks in Des Moines and gush when the
quirky conservative agreed to pose for a picture.

And yet, just because the Obamanauts are intellectually modest and
relatively free of ideology, that doesn't mean their policy goals
lack ambition. In many cases, the opposite is true. Obama's plan to
reduce global warming involves an ambitious cap-and-trade
arrangement that would lower carbon emissions 80 percent below 1990
levels by 2050. But cap-and-trade--in which the government limits
the overall level of emissions and allows companies to buy and sell
pollution permits--is itself a market-oriented approach. The
companies most efficient at cutting emissions will sell permits to
less efficient companies, achieving the desired reductions with
minimal drag on the economy.

Earlier this year, the Times' economics columnist, David Leonhardt,
noted that Obama "tends to look at economic policy more like a
foreign-policy realist looks at the world." One could argue that
the same observation applies in reverse: Obama's foreign policy
advisers tend to look at the world the way a behaviorist looks at
economic policy.

Probably the closest thing the Obama campaign has to a Richard
Thaler on foreign policy is Lee Hamilton, the longtime Indiana
representative who recently co-chaired the 9/11 Commission and the
Iraq Study Group. Hamilton was a moderate internationalist during
his years on the House Foreign Affairs committee. He opposed aid to
the Contras under Reagan and urged George H.W. Bush to let
sanctions play out before invading Iraq. On the other hand, he
supported the U.S. intervention in Bosnia in 1995 after some
initial reservations.

All in all, Hamilton is the kind of pragmatic, non-ideological
foreign policy eminence who can flirt with heterodoxy without
losing respectability. For example, one of the pillars of Bill
Clinton's Middle East policy in the 1990s was a concept known as
dual containment--the idea that the United States should try to
isolate and neutralize both Iraq and Iran. Dual containment enjoyed
widespread bipartisan support. And one of its practical
achievements was the Iran Libya Sanctions Act (ilsa), which
sanctioned foreign companies against doing business in either
country, and which Clinton signed into law in August 1996. Hamilton
himself voted for ilsa. But, two years later, he decided that the
rise of reformist Iranian President Mohammad Khatami had made
engagement worth contemplating. He said as much in a speech at the
Council on Foreign Relations, going so far as to call his ilsa vote
a mistake.

Like Thaler, Hamilton has no formal role advising Obama--he hasn't
even publicly endorsed him. But his legacy is very much alive
within the campaign. Ben Rhodes, the Hamilton aide who helped write
his 9/11 Commission memoirs and key chunks of the Iraq Study Group
report, is Obama's foreign policy speechwriter. Another former
Hamilton aide, Denis McDonough, is the campaign's top foreign
policy staffer. Hamilton alum Dan Shapiro advises the campaign on
Middle East policy; another alum, Dan Restrepo, does the same for
Latin America. By all accounts, Obama uttered his nowfamous remark
about his willingness to meet with foreign dictators like Mahmoud
Ahmadinejad off the cuff. But it wasn't such a departure from
Hamilton. One of the Iraq Study Group's recommendations was to open
a dialogue with Iran. Hamilton himself has publicly embraced this
idea.

In economics, it's the academics who are first-rate engineers and
the nonacademics who are either dreamers or technicians. In foreign
policy, it's often the practitioners whose engineering prowess
stands out. And so it's no surprise that Obama would attract the
latter. Obama's most influential foreign policy advisers--former
Clinton officials like Assistant Secretary of State Susan Rice,
Navy Secretary Richard Danzig, and National Security Advisor Tony
Lake--all cut their teeth in the policy world.

Of course, that's also true of just about every top-tier Democratic
candidate in recent memory. The real difference between the Obama
campaign and, say, Hillary Clinton's, is twofold. First, while many
of the Obamanauts had previously served in the Clinton
administration, they tended to be younger or less influential than
the officials who signed on with Hillary. Clinton advisers like
former secretary of state Madeleine Albright and former U.N.
ambassador Richard Holbrooke tend to be "more invested in justifying
or glorifying" the Clinton record, says one Obama foreign policy
hand, whereas the Obamanauts don't have the same "permanent need to
fight for the legacy of your time in government."

The second difference is that the Obama hands tend to feel less
hemmed in by establishment opinion. As one Obama adviser puts it,
"Democrats want to be just a little bit different from Republicans,
but not so different that they get attacked for being weak." Like
Hamilton, the Obamanauts generally reject this calculus--not
because they favor some radical alternative, but because clinging
to received foreign policy wisdom can preclude highly practical
courses of action.

One case in point is a retired Air Force general named Scott
Gration. In 2006, Gration joined the senator on a trip to Kenya,
and the two men have been close ever since. Gration is a fluent
Swahili speaker who grew up in the Congo, the son of evangelical
Christian missionaries. He flew nearly 300 missions as a fighter
pilot in Iraq and spent part of the second Bush era as a nuclear
planner.

You can see Gration's influence on any number of issues, perhaps
none more significant than nuclear doctrine. Gration is a vocal
proponent of eliminating nuclear weapons globally. This may sound
like a utopian idea, but it would almost certainly enhance
stability. "We realize we are trying to deter the actions of
non-state actors who don't have population centers, don't care
about dying," Gration says, explaining why nuclear stockpiles have
outlived their usefulness. "But these weapons can get into the
wrong hands." Moreover, eliminating nukes would actually increase
American military superiority. (We have a far more powerful
conventional force than any other country on the planet.)

This position was almost completely taboo in respectable foreign
policy circles prior to 2007, when a bipartisan group of Washington
elders--Henry Kissinger, Sam Nunn, George Shultz, and Bill
Perry--penned a Wall Street Journal op-ed touting denuclearization
as a desirable goal. Since then, much of the Democratic
establishment has pooh-poohed the idea, though it's caught on in
less stodgy corners of Capitol Hill, like Joe Biden's Foreign
Relations Committee. Obama endorsed it partly at Gration's urging
last October, saying he would seek a world without nukes but would
never disarm unilaterally. (The RNC promptly sneered that he was
playing to the "fringe elements of his party," one possible
explanation for why Hillary Clinton didn't follow suit.) In the
short term, Obama suggested a number of incremental steps, such as
ratifying the Comprehensive Test Ban Treaty, that would advance
this goal without drastically altering the nuclear status quo.

Still, there's probably no better illustration of the Obama camp's
Hamiltonian sensibility than the debate over the war. Former Clinton
officials like Lake, Rice, and Danzig all opposed the idea from the
get-go (as did Hamilton himself). In doing so, they faced down
pleas from within the Democrats' permanent
State-Department-in-waiting that opposition would be politically
disastrous. "Many Democrats had opposed [the first Gulf war]. And
these people--particularly the older people, felt like that had been
a big mistake. They didn't want to make it twice," recalls an Obama
adviser. "It got rather acrimonious."

In the face of these arguments, the would-be Obamanauts didn't
invoke some sweeping alternative paradigm--say, the kind of
abstract theorizing you'd get from a Kissinger tome. They simply
pointed out where the Bush doctrine of preemption and
democracypromotion broke down--the "anomalies," if you will.
Intuition told them that an easy war was a fantasy, that the United
States would face a long and brutal occupation. Many had security
clearances during the Clinton administration and had never seen
credible evidence of an Iraqi nuclear program. Almost everyone
worried that an invasion would detract from the fight against Al
Qaeda. "It should have been obvious to anyone who'd served in
government that we can't walk and chew gum at same time," says one
Obama adviser. "That's not a paradigm, that's a judgment."

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