Obama Gets Economic Challenge Right, Regulations Wrong

The president is right we need a new social compact, but he still underestimates the impact of regulation.

Barack Obama Shinzō Abe
American president Barack Obama and Japanese prime minister Shinzō Abe walk to a state dinner at the White House in Washington DC, April 28, 2015 (White House/Pete Souza)

Reading Bloomberg Businessweek‘s interview with Barack Obama, I get the sense the president understands the big economic and social challenges of our time but still underestimates the impact of regulation on businesses.

New social compact

Let’s start with the good.

The president argues that we need to find a new social compact in the West, just as we did after industrialization and again after the Great Depression of the 1930s.

The notion of a forty-hour workweek, a minimum wage, child labor laws, etc. — those will have to be updated for these new realities.

Businesses tend to resist such changes. They opposed regulations in the early nineteenth century and opposed the New Deal.

Today’s economic elites are “inattentive to the issues of wages, incomes and opportunity for ordinary people,” according to the president.

If you’re selling globalization and saying it’s great, even though each year, not just in the United States but across the advanced economy, you’re seeing more and more of a winner-take-all economy, where not just the top 1 percent, but the top .01 percent, are getting a larger and larger share, then, yes, it’s going to be pretty hard to make the argument that “Don’t worry, this is great for you.”

The postwar welfare state — with its strong labor unions, lifetime employment and social insurance — spread the benefits of economic change across society.

That model is no longer sustainable. It nearly bankrupted Western countries in the 1970s and has since been steadily eroded. The new or “gig” economy — with weak unions, job hopping and freelancing — requires a different approach.

We just have to update those for the twenty-first century in the same way that in previous eras we updated those for the shift from agriculture to industry.

Last war

Many on Obama’s side, though — the Democratic Party, the trade unions — argue the solution is going back to the welfare state of the 1960s and 70s.

They are fighting the last war, the president said. “They have to recognize that globalization is here to stay.”

That to keep one of the auto plants that have reopened and grown here in the United States operating at full capacity — they’re relying on parts from all over the world and trying to disentangle that is all but impossible.

The answer is not closing borders or turning inward. “Our goal then should be to try to shape trade deals that raise standards everywhere,” Obama said. “And that’s what we’ve done with the Trans Pacific Partnership.”


What I think the president gets wrong is his lack of concern for the impact of regulations on especially small businesses, which will become even more important if we’re headed for a more flexible, laissez-faire economy.

Talking specifically about the impact of financial regulations, Obama said reduced lending is “not justified by the regulations. It’s a byproduct of them rethinking their business model.”

And so if you talk to a number of bankers, what they’ll say is, “Look, these loans just aren’t that profitable to us.” Or, “These small-business loans may just not be worth us churning through the paperwork.” And that’s independent of any regulatory requirements that are being placed on them.

Where else is the paperwork coming from, though?

Many of the rules enacted after the financial crash might be sensible on their merits, but they are too much to bear for small banks and discouraging big ones from making loans to struggling young companies.

That matters within the context of the new social compact the president talked about, because the information revolution is likely to lead to more Americans working as agents and small entrepreneurs. They’ll need access to financing.