Obama’s Economic Policies Suffer Without Moral Guide: Ron Klain

July 12 (Bloomberg) -- The science of economics rests on the idea that we are rational actors seeking to maximize our wealth. Economic policy making, similarly, seeks to maximize the financial well-being of the people affected by the policy, subject to distributional concerns. Policy makers presume that their constituents, collectively, prefer economic measures that, collectively, enrich them.

These assumptions, however, overlook the importance that people place on noneconomic values and morality in assessing policies. That blind spot has been the cause of one of the primary disconnects between policy makers and the American public over the past two years.

Take, for example, policies related to home-foreclosure prevention. Assume that on a block of 10 houses, two are about to be foreclosed; assume that for the eight remaining homeowners, the value of their homes will fall $50,000 each because of their proximity of the foreclosed homes. If $40,000 of mortgage relief to each of the two delinquents would prevent the foreclosures, then each of the eight others on the block, at a cost of $10,000 per solvent homeowner, could subsidize such aid, and in doing so, retain $50,000 in equity in their homes.

Economically, the plan is a winner. Everyone comes out ahead: The families facing foreclosure get to keep their homes, and their solvent neighbors see the value of their houses preserved at a small cost.

Who could be against such a plan?

Almost everyone, it would seem. From the start of the Great Recession, various government policies to provide debt relief to homeowners facing foreclosure have been hugely unpopular with voters. With some exceptions, Americans see underwater homeowners as people who lived beyond their means, irresponsibly indulged themselves and deserve to bear the consequences.

Although we now associate the Tea Party with a general opposition to government spending, it was mortgage-relief policies that were the target of the seminal rant by the CNBC commentator Rick Santelli in February 2009 that is credited with getting that movement off the ground: “How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?”

A striking aspect of the conservative backlash against the administration’s mainstream economic policies -- from using federal money to keep teachers on the job, to saving the domestic auto industry, to investing in job-creating public works projects -- is how much the opposition’s arguments have been based on morality and values, not economic considerations. Sure, critics offer facts and figures to challenge these policies, but the most potent weapons have been values-laden attacks about borrowing from the future, being irresponsible about spending, and failing to hold the profligate responsible for the consequences of their ways. Even direct beneficiaries of the president’s policies have pressed these moral critiques.

Criticism From Left

Conservatives aren’t the only ones who have leveled morality-based attacks against the administration’s economic policies. When, after the 2010 midterm elections, President Barack Obama (emulating Franklin Roosevelt after the 1938 contests), pivoted to more pro-business economic policies, the objections on the left were largely cast in moral terms.

That is, the attack against the new administration approach isn’t really about whether a more pro-business stance will help create jobs, or expand the economy -- rather, it reflects the moral outrage of progressives over the administration’s refusal to punish key figures or institutions for their role in causing the 2008 financial collapse. This sentiment was recently expressed by Frank Rich in New York magazine, where he argued that “what haunts the Obama administration is what still haunts the country: the stunning lack of accountability for the greed and misdeeds that brought America to its gravest financial crisis since the Great Depression.”

‘Original Sin’

Thus, while some progressives directly question the economics behind the administration’s view that more pro-financial sector policies will boost confidence and help spur growth, Rich’s essay is tellingly headlined “Obama’s Original Sin,” clearly a moral critique and not an economic one.

Caught between the moralists on the right and those on the left (who are oddly united in their criticism of the bank rescue under the Troubled Asset Relief Program, for example) is a set of Obama economic policies that have helped our country try to overcome some very difficult challenges, even if they by no means finished the job. Although the administration needs to do more, as I have argued previously, any objective analysis would concede that it arrested a precipitous slide from recession to depression, avoided potentially catastrophic collapses of many state and local governments in 2009, saved the financial industry from calamity, turned around the auto industry, and provided a vital kick-start to nascent industries that will be creating jobs in the next decade.

So why aren’t these policies more popular?

One reason is that the country remains mired in very tough times -- as last week’s jobs report illustrated -- and economic policies aren’t going to gain much acclaim when the news remains grim.

But that alone doesn’t explain the lack of support. After all, the unemployment rate at this same point in the Reagan administration was significantly higher than the most recent number under Obama (10.1 percent compared with 9.2 percent), yet Reagan’s economic policies were more popular than Obama’s.

Part of the explanation is that the president and his economic team eschew moral rhetoric when addressing economic policies -- and reject that sort of thinking when formulating them. Yes, economic policy making should mostly be about maximizing growth and improving well-being for as many people as possible. But moral notions of accountability, fairness, consequences and responsibility do need to be part of the mix, in formulating and articulating policy.

Judgment of Voters

It isn’t surprising that an administration that states its policies solely in economic terms will be judged by the economic results. A president who also takes account of moral and value considerations is less vulnerable to the vicissitudes of statistics in building and maintaining support for his policies.

President Bill Clinton offers a precedent. He paired rational economic policies with a moral guide star: a focus on help for people who “worked hard and played by the rules.” For example, Clinton’s policies were less generous to welfare recipients, but they included a major boost for the working poor, via an unprecedented increase in the Earned Income Tax Credit.

He expanded college access, but as an earned opportunity -- with help for those who committed to national service, or who met academic standards under the HOPE scholarship -- as opposed to an entitlement.

In good economic times and bad (and there were some bad times under Clinton, too), this emphasis on values helped rally support for his economic policies.

Obama would be well served by adding more of this moral element to his economic policy making and rhetoric as he enters the last stretch of the debt-ceiling fight and pivots to the 16 months before Election Day 2012.

He cannot guarantee (or even rely on) better economic times between now and then. But he can give us all a crisp sense of whom he is fighting for and the values that guide his policies, and he can insist that moral standards of conduct need to be enforced even if they don’t meet immediate economic ends.

(Ron Klain is a Bloomberg View columnist. The opinions expressed are his own.)

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