Recently I stumbled across this opinion piece in the Wall Street Journal. It is written by Robert Rieich, a professor of public policy at the University of California at Berkeley, and a former U.S. Secretary of Labor under President Clinton. In it he defines "Obamanomics" and compares them to the conservative coveted "Reaganomics". One point I found particularly interesting because it relates to our recent lectures in class; Top Down vs. Bottom Up economic policy.
Top Down Policy: During the Reagan administration, it was widley believed that lowering taxes on the top earners would incourage them to invest more into capital in hopes of attaining a higher return. The theory here is by allowing them to be rewarded more, they would in turn create more opportunities for everyone from the "Top Down" and the economy would benefit. This is the idea that growth is enhanced when people are allowed to retain their wealth and be rewarded for investing it, or Alpha form our model.
Bottom Up Policy: Obama's Administration believes that the economy grows better form the other direction. By increasing taxes on the top 2%, Mr. Obama plans to better fund U.S. infrustructure, create more pell grants for low income students, and improve health care and education. In doing so, he hopes to create a better educated more efficient workforce which will help the economy to grow.
Personally I would like to see the Model that Team Obama is using. Each of their goals is admirable and on a social scale would improve the lives of many. However if by accomplishing these goals they hamper the growth of the economy the effects would surely be short lived. It seems to me they are missing a key point from Adam Smith's Wealth of Nations. Most people don't set out to become better educated to improve the lives of others, but rather to improve their own life. Unfortunate as this may be, it is a fact of life. Removing the incentive to earn more, by raising taxes, is not going to result in a better workforce.