President Obama’s big economic speech at Knox College in Galesburg, Illinois, was light on fresh, innovative policy proposals. Such is a second presidential term, especially in today’s dysfunctional Washington. But if Obama wasn’t going to offer lots of good, new ideas, at least he could have avoided repeating some bad, old ideas.
Unfortunately, the progressive president couldn’t help himself. And here’s the worst of them: the only thing America got for its pro-market shift 30 years ago — from deregulation to tax cuts to free trade — was more income inequality and less income mobility. Well, that and the Great Recession and Financial Crisis. Obama the economic historian:
In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.
But over time, that engine began to stall. That bargain began to fray. Technology made some jobs obsolete. Global competition sent others overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.
Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up. But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes, and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.
Time for a fact check.
1. It’s tough to draw policy lessons for today from the immediate post-World War II decades. Would a return to strong labor unions and high marginal tax rates really accomplish Obama’s goal of “shared prosperity” and more equality? The 1950s and 1960s were affected by a host of one-off factors: (a) America’s competitors were recovering from WWII, (b) the US labor force was constrained by the 1930s baby bust and war casualties, boosting wages, (c) wages also experienced a catch-up period to productivity after lagging prewar. We’re not going back to the future.
2. Obama is flat-out wrong that median family incomes were flat between 1979 and 2007. Analysis from the Congressional Budget Office, economist Richard Burkhauser, and economists Bruce Meyer and James Sullivan suggests median household incomes actually grew more like 40%. Overall, the median household in the US is twice as rich as it was at the peak of Obama’s postwar golden age.
3. Obama is very worried about income inequality: “This growing inequality isn’t just morally wrong; it’s bad economics.” But high-end inequality — which has grown a lot — has not led to income stagnation, as Obama suggests. And it also seems doubtful that inequality is reducing income mobility much, if at all. For instance: Brookings’ Scott Winship finds that men born in the early 1980s have experienced, at most, “only a bit less mobility” than those born in the 1950s.
Income mobility is an legitimate issue, and Obama is certainly correct in emphasizing it. Research from Winship and others at Brookings shows that a child starting out in the bottom 20% of incomes has only a one-in-three chance of being solidly middle class (escaping the bottom two-fifths) as an adult and only a 17% chance of ending up in the upper middle class. But the Reagan tax cuts aren’t to blame here.
What Obama didn’t talk enough about was how to boost economic growth (beyond spending more on infrastructure) to boost incomes and unemployment. A new report from Capitol Economics warns that the economy’s potential growth rate is probably now only slightly above 2%. To get back to just the postwar GDP trend of 3%, we need more workers and more innovation. And a reminder: We are still some 10 million jobs short of what we would need to return to the prerecession employment trend, while the unemployment rate, adjusted for the drop in labor force participation, is closer to 10% than 7%. But Obama mentioned “unemployment” just once.
Want to boost the middle class, Mr. President? Help them get a job and a raise.