Alan Krueger Appointed Economic Advisers Chair: Don’t Expect a Miracle

Alan Krueger, Obama’s new economic adviser, is a serious, competent academic—but won’t end our doldrums.


After months of bleeding economic advisers, President Obama just nominated Princeton economics professor Alan Krueger to be the chairman of the Council of Economic Advisers. Krueger is no stranger to the Obama administration, having served as assistant secretary of the Treasury until late last year, when he returned to Princeton in order to retain his tenured status. In the 1990s, Krueger also did a stint as the chief economist of President Clinton’s Labor Department, then headed by Robert Reich.

Give that the 2012 election is likely to hinge almost entirely on matters economic, the ability of the Obama administration to respond, or at the very least to be seen as responding, to chronic weak employment and static growth will be the key determinant of who wins the White House and the Congress. The policies launched by the Obama team in 2009 may have stanched the worst of the financial crisis, but they did little to convince many Americans that the White House has a coherent plan for the future. With the departure of the architects of those initial policies—Larry Summers, Christina Romer, Peter Orszag, and Austan Goolsbee especially—the appointment of Krueger has particular weight just now. The question, of course, is whether he can do anything to steer the administration on a course likely to generate jobs and electoral support. The answer, for now, looks like no.

That is no knock on Krueger’s resume. He is known in academic circles as a labor economist. Trained at Harvard before landing a tenured post at Princeton, he has focused on issues such as the efficacy of a minimum wage and what constituted full employment in the 1990s, but his CV includes other interests, including the economics of terrorism and education. As a senior member of Treasury Secretary Tim Geithner’s circle, Krueger was apparently instrumental in designing the 2009 “cash for clunkers” programs that gave a temporary boost to U.S. sales, and he was active in the preparations for a carbon “cap-and-trade” system that never made it out of Congress. Having met him once in a small group meeting at the Treasury, I was struck by his seriousness and competence, a hallmark of the current White House. But these very qualities—esteemed academic pedigree, long focus on the most pressing current issue, high-level Washington policy experience—may be exactly why not much will change.

First, there is the problem of economics professors making policy. That’s an admittedly broad brush to paint a variegated profession, but it does seem that economists have a predilection for developing theories believed to be scientific and then applying them to the governance of real-world economies that are rather messy and unpredictable. The results, often, have not been pretty. On the one hand, economists as leaders of central banks and finance ministries over the past decades have helped to reduce the frequency and intensity of economic swings. Or at least those swings are less dramatic than they were in the 19th and early 20th centuries. Maybe it was the policies of economists; maybe it was the effects of globalization and technology. We will never really know.

On the flip side, the belief that economies are mechanical systems that can be figured out like engines or bodies has led to ineffective and at times destructive policies, whether “shock therapy” for post-Soviet systems or misguided incentives in the United States to spur easy credit and too much home building. Even the 2009 stimulus plans, which were launched by Obama and his team with the promise of millions of new jobs, were based on formulaic assumptions that when you spend X number of dollars, you create Y number of jobs because that was the statistical average throughout the 20th century. Of course, it was more complex than that, but the logic wasn’t, and the results proved that the logic is flawed.

The failure of the stimulus to deliver what was promised is one of the great liabilities of the Obama administration and one that is already haunting the 2012 election. Health care and deficits are the other, but the lack of employment growth trumps both. Krueger, as a labor economist, is presumably poised to do something about that.

But the tools he can recommend are limited. Tax breaks to companies for every worker hired, which Krueger championed over the past two years, only produce jobs if companies really need to hire people. They might take advantage of a tax break by hiring in October of a fiscal year and then firing in January and, more likely, they won’t hire if they don’t need extra bodies to generate profits. Judging by the trillions of dollars sitting unused on corporate balance sheets, they don’t lack resources and they don’t need incentives to hire. They need reasons, and no tax break will create those reasons absent substantially higher domestic demand for the goods and services, and even then, if companies can meet those demands with the workers they have now, they still won’t need more bodies.

And neither Krueger nor the White House can authorize stimulus spending. Only Congress can, and as we saw with the debt ceiling debate, this Congress is as likely to pass more stimulus spending as Rush Limbaugh is to donate to Planned Parenthood. Obama could solidify his base by calling for more spending, and might, but that will simply be good politics rather than real policy.

That brings us to the final challenge for Krueger. Does the White House believe that anything can be done to change the economic picture, or are the politicos and the campaign team sufficiently in charge that the appearance of doing something is now what matters? The only thing likely to make a dent in the structural unemployment issues confronting the U.S. is first admitting that traditional economic policy tools won’t alter the landscape much. That would open up new avenues, and allow for the championing of truly unorthodox policies—from a latter-day works program like the New Deal WPA to a return to the energy policies bandied about in the 2008 election.

Those initiatives would channel innovation, capital spending, and unemployment insurance in potentially productive directions, but they are not economists’ tools. They are policy tools, and radical at that. They would require a fight with Congress that only the 2012 election could settle. But with an election looming and no apparent stomach for those fights, it looks more likely that Krueger and the White House will eschew the grand plans. Instead, as of now, and I would love to be proved wrong, it looks as though Krueger will be left to mind the store, with integrity and intelligence but little in the way of influence, while the Obama team gears up for an election that it may well win but without the stirring policies that will make it worth winning.