The President’s Economics Speech Today

December 5th, 2013 at 5:30 am

President Obama gave a strong speech on the economy today, focusing on the long-term problems of inequality and its negative impact on opportunity, mobility, and growth.

In terms of diagnosis, it was a speech of great depth.  In terms of prescription, it was ambitious.  Clearly, he knows this Congress will not legislate his economic agenda.  But he must set the terms of the debate, and I thought his terms were exactly right.

Diagnosis: His narrative began with the widely accepted view that while we don’t expect equal economic outcomes in America, we do strive for equality of opportunity.  Of course, that aspiration has been thwarted throughout our history by exclusion, sexism, and racism.  But it remains a highly legitimate national goal, and thus fair game for public policy.

The President made an important connection between higher inequality and the lack of economic mobility experienced by the increasing share of those on the “have-not” side of the great wealth divide.  When such a disproportionate share of the economy’s growth eludes the poor and middle class, the barriers to realizing their potential are heightened.  Historically, and the President drew pointed examples from Lincoln to FDR, this has invoked a role for government.

If the market fails to provide adequate opportunity, or, more precisely, the returns from the market economy grow so skewed that they block the opportunities of large swaths of households, there is a role for government to take corrective action.

He went further in important ways as well, commenting of the impact of inequality on economic growth itself.  When I was coming up in this biz, the widely held notion among economists was: you can tackle the inequality problem but you’ll hurt growth:

…these trends are bad for our economy.

One study finds that growth is more fragile and recessions are more frequent in countries with greater inequality.

…when families have less to spend that means businesses have fewer customers and households rack up greater mortgage and credit card debt. Meanwhile, concentrated wealth at the top is less likely to result in the kind of broadly-based consumer spending that drives our economy and, together with lax regulation, may contribute to risky, speculative bubbles. [my bold]

And rising inequality and declining mobility are also bad for our families and social cohesion, not just because we tend to trust our institutions less but studies show we actually tend to trust each other less when there’s greater inequality. And greater inequality is associated with less mobility between generations. That means it’s not just temporary. The effects last. It creates a vicious cycle

…rising inequality and declining mobility are bad for our democracy. Ordinary folks can’t write massive campaign checks or hire high-priced lobbyists and lawyers to secure policies that tilt the playing field in their favor at everyone else’s expense. And so people get the bad taste that the system’s rigged. And that increases cynicism and polarization and it decreases the political participation that is a requisite part of our system of self-government.

The bubble point is particularly germane and worrisome.  If the only way middle class families can get ahead is through leverage, while at the same time the wealthy “buy” a policy agenda that blocks the necessary financial oversight, there will be loose lending standards, underpriced risk, excessive leverage, and another destructive bubble.  Important, note the role of inequality and middle-class income stagnation in that chain.

Prescription: So, what to do about all this?

In fact, part of President Obama’s message was a reminder—a necessary one in these times of bath market and government failure—that we’re actually already doing a lot of inequality reduction through public policy.  Social Security cuts elderly poverty from 44% to 9%.  Medicare provides universal health coverage to seniors.  The EITC lifts millions out of poverty every year, and does so through work.

These measures have kept the less advantaged from drowning in inequality’s rising tide, but they cannot stem that tide.  The factors driving inequality are playing out in market outcomes.  Tax and transfer policies can repair some of their damage.  But they cannot, on their own, restructure the way growth is distributed before taxes and transfers kick in.

The President did, however, hit on some policies that would help improve the equity of market outcomes.  Starting with education, he’s long advocated a broad agenda with stops along the full education life-cycle, from pre-school to community college and beyond.

He talked about the tilted playing field against those who would form unions to gain back some sorely missed bargaining clout.  He had a lot to say about raising the minimum wage, wherein he cited the father of capitalism:

This shouldn’t be an ideological question. You know, it was Adam Smith, the father of free-market economics, who once said, “They who feed, clothe and lodge the whole body of the people should have such a share of the produce of their own labor as to be themselves tolerably well-fed, clothed and lodged.” And for those of you who don’t speak old English, let me translate. It means if you work hard, you should make a decent living. If you work hard, you should be able to support a family.

Interestingly, he also talked about the ACA in the context of inequality, a connection I’ve often thought is overlooked (David Leonhardt effectively made this point back in 2010).  The structure of the bill is progressive in its subsidies, and states that took up the Medicaid expansion will reach millions of low-income adults who were formerly ineligible.  Yes, it’s got to start working right if folks are going to access those benefits.  But that looks like it might finally be coming together.

At least the ACA is the law, despite the best efforts of those who would kill it.  All that other stuff above doesn’t have much of a chance of clearing any legislative goal posts.  So what is the President up to?

I think he’s doing just what he should be doing: setting his economic agenda for the rest of his term.  He cannot, of course, set that agenda based on what House Republicans will allow.  To the contrary, he must continue to hammer on precisely these themes not because Reps Boehner and Ryan will come to see their wisdom.  But because these themes are at the heart of our fundamental economic problem: the disconnection between growth and the living standards of most households.

These issues of inequality, immobility, diminished opportunity, and their fallout—financial bubbles followed by intractable recessions and weak recoveries—must become the policy benchmarks that those who seek office are forced to address.  This critical conversation cannot, as Mitt Romney preferred, be relegated to “quiet rooms.”

I’m not suggesting that everyone will have the same solutions the President spoke of today. But if you’re not talking about how you’re going to help solve these problems, you’re not having the right conversation with the American people.  President Obama, to his credit, began that conversation today.

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17 comments in reply to "The President’s Economics Speech Today"

  1. smith says:

    “Tax and transfer policies can repair some of their damage. But they cannot, on their own, restructure the way growth is distributed before taxes and transfers kick in.”

    Beg to differ. Taxing incomes over $2 million dollars at a 90% marginal rate as they were in the Eisenhower era, and so on down the line, will definitely on it’s own restructure the way growth is distributed before taxes. The critics of this high tax policy not only concede the point, they give it primacy. Tax at high rates and the incentive to earn more disappears claim the Republican defenders of lower taxes. To those turning down CEO jobs because $1 million dollars after taxes doesn’t cut it, I say hurray and good riddance. The power to tax is the power to destroy, as the Supreme Court so famously put it, so let’s destroy excessive compensation and resulting inequality. You can’t legislate the salary of the president of G.M. or Google, but you can effective cap it with taxation by restoring rates. You must get rid of the stock option nonsense (tax loophole for employee and issuing corporation) too.

    • procopius says:

      Yes, the Republicans and many, many economists claim that high marginal tax rates destroy the incentive to earn more. I think they have it backward. The policy actually encourages them to work harder, because they are obsesses with getting that next dollar. They don’t stop working when they have “enough.” They don’t know the meaning of “enough.” When six people (the Walton heirs) have as much wealth as the 120 MILLION people in the lowest 40% of warners, there is something wrong. When the retiring CEO of a multinational corporation gets a retirement package of $460 MILLION dollars, something is wrong. We need to impose an inheritance tax. We need to restore high marginal income taxes. We need to do away with the “carried interest” loophole. We need to tax capital gains the same as other income, or at least increase the rate to 50%. We need to impost the financial transaction tax, like Great Britain did two hundred years ago.

      • DonB says:

        The studies by Piketty and Saez show that the top marginal rate can be as high as 70% and maybe a bit higher before the (executive) worker feels the supposed “disincentive” of high marginal rates.

  2. Kevin Moore says:

    How do Obama’s stated positions square with him including chained CPI for social security in his budget? The whole speech is right out of Orwell.

    • procopius says:

      Right on, dawg! This speech is at odds with much of what Obama has said and done in the last five years. Right now the best thing he could do to show his sincerity is to scrap the secret Trans Pacific Partnership which hi people are trying to sneak through without allowing people to know how it enriches Big Pharma and Big Entertainment. Then he could start looking at ways to actually reduce trade barriers: allow doctors who can meet American standards to immigrate easily and compete with the highest paid doctors in the world.

  3. PeonInChief says:

    A couple of points:

    First, Obama had plenty of opportunity to do something when the Democrats controlled Congress. Instead he bailed out bankers who should be in prison and allowed millions of homeowners to lose their homes. (It took more than a year and a half for him to do something for tenants in foreclosed properties, and Fannie Mae and Freddie Mac are still not following the rules. He could easily do something about Fannie and Freddie with a phone call or two.) So it’s easy to natter on about inequality when he can’t do anything about it.

    Second, the ACA is only progressive as long as you are eligible for subsidy. Once you fall of the cliff–at 400% of poverty–it reverses, as people pay the same amount whether they earn 401% of poverty or 900% of poverty.

  4. Perplexed says:

    -“I’m not suggesting that everyone will have the same solutions the President spoke of today. But if you’re not talking about how you’re going to help solve these problems, you’re not having the right conversation with the American people.”

    The unfortunate reality is that no amount of talking, regardless of who’s doing it, will alter the incentives of the “Lesters.” Our wealth GINI is .87, the talking our way into a solution option is many years behind us. As Lessig points out, the first thing that needs to be done is obvious (hint: is has little to do with talking). If we don’t do the first thing, we can’t begin to solve the important things. Its the difference between democracy and DINO.


    • DonB says:

      I don’t know of a responsible economist that did not and does not think that the serious financial state of the economy in the fall of 2008 required an action the equivalent of TARP. And the conditions for that bill, after Congress initially balked at passing it, were set by the Republican President George W. Bush administration, and thus were minimal.

      What many people now and some then thought that President Obama should have done would have been to make some strong requirements on the banks to renegotiate the mortgages of those who were underwater and facing bankruptcy as long as the homeowners could meet reasonable new payment schedules. This would have been a big help in reducing homeowners’ balance sheets and restoring their purchasing power with its big effects on increasing aggregate demand and then reducing unemployment.

      • Perplexed says:

        Are you possibly forgetting that it was these “responsible economists” that pretty much agreed that it was a good idea to dismantle the Glass–Steagall Act and let banks self-regulate? “Responsible economist” is an oxymoron. Where is there any evidence that any economist was held responsible for any of this? Which economists are “responsible” for the fact that we’re still immersed in the dire consequences of this tragedy more than 5 years later? If there’s a single thing we can identify that economists are really experts at, it would have to be avoiding responsibility.

        Banks have been nationalized hundreds of times just in the last few centuries. Simon Johnson and others were recommending it this time around as well. Once the government provided the liquidity (which they ended up having to do anyway) the outcome would have likely been the same regardless of who owned the banks. What was achieved by doing it through TARP was that if it worked, the existing bank stock holders, bond holders, and managers would be the big winners instead of the American people who were the ones taking all of the risk. Where were all of these “responsible economists” when the Wall Street insiders were calling all of the shots and determining what was best for Americans?

        • DonB says:

          I definitely DID NOT SAY / WAS NOT REFERRING TO “reasonable economists” supporting the dismantling of Glass-Steagall.

          But there are economists and lawyers that reasonably claim that the growth of the use of derivatives would not have been stopped by Glass-Steagall, while the prohibition on regulation of derivatives that Senator Phil Gramm (R, TX) incorporated in the Commodity Futures Modernization Act of 2000 did allow that growth.

          I used the word “reasonable” to discount those few “economists” with views so outlandish that they have almost no followers, although their words are sometimes taken in vain by those who wish to cast aspersions on various schools of thought with ideas that those schools have never promoted.

          • Perplexed says:

            -“But there are economists and lawyers that reasonably claim that the growth of the use of derivatives would not have been stopped by Glass-Steagall…”

            Yes, but which ones of these were telling you that the “high-tech-new-innovation” “derivatives” story was largely a “smoke screen” that was used to cover up what was essentially an old time counterfeit fraud story? With the exception of AIG who used “derivatives” to conduct insurance fraud, (and Goldman Sachs who arbitraged it) most users were issuing and trading the derivatives based on the underlying asset values. The biggest problem with the derivatives was that they were based on counterfeited assets. If billions of $’s of fake treasury bonds suddenly appeared in the system, you wouldn’t need derivatives for it to cause a major meltdown, this was no different.

            -“…discount those few “economists” with views so outlandish that they have almost no followers…”

            It appears that those with the “outlandish views” may well have been the ones that “got it right.” What other “science” uses the “number of followers” as the primary indicators of reliability and validity? Is there so little real “science” that the audience and news show determinations of the “winners” now becomes the state of what we know?

            -“What many people now and some then thought that President Obama should have done would have been to make some strong requirements on the banks to renegotiate the mortgages…”

            What many other people now and some then thought that President Obama should have done would have been to recognize that these people with underwater mortgages were victims of a massive criminal counterfeit fraud, arrested and prosecuted the criminals, clawed back any ill gotten gains, and done whatever was necessary to assist the victims.

            I’m not sure if he’s “voted” to be as credible as one of your “responsible economist” but you might take a look at some of what Bill Black (The Best Way to Rob a Bank is to Own One)has written for a different point of view.

  5. purple says:

    Yet their solutions for education are market based, which inherently means excluding the people they are supposedly interested in helping.

    I can tell you how to make money on a charter school: subtly exclude special ed, poor academic achievers, and students who cost extra money or are difficult to deal with. Set up your own unique rules, location, and advertising so there is a process of self-selection; snare the motivated and organized. Pay teachers much less and give them a much worse pension.

    There’s your market based solution and it’s pretty much the reality of charter school reform.

  6. Joseph Dillard says:

    Regarding solutions, does anyone have any information on the pros and cons to a Negative Income Tax? It is essentially a libertarian wealth redistribution with incentives to work built in and the advantage of no government welfare bureaucracy.

    • Perplexed says:

      Absolutely; Bakunin laid them out here years before Ayn Rand was born and plagiarized them:

    • smith says:

      We have something similar, the Earned Income Tax Credit (EITC), but with better incentives to work, to avoid the disincentives a straight negative income tax creates (why work for $15,000 if the government will pay you $15,000).

      EITC requires income, and the steep slope, long plateau, slow incline downward is the key, this blog in fact spoke about previously, really good graph of EITC here

      However, both a negative income tax and EITC are forms of corporate welfare that reward employers paying substandard wages, put employers paying fair wages at a competitive disadvantage, and distort market mechanisms that would discourage low paying jobs.

      There is a difference between lowering rates on low incomes making the system more progressive and actually paying instead of collecting from an erstwhile taxpayer. Effectively it’s a wage subsidy without qualification as to the work involved. Conservative support (Bush increased credits) should make you suspicious. It’s a sop to help disguise the real beneficiaries of tax cuts (higher incomes), while also shaving funds available for important government programs. It masks the further erosion of the labor market, opportunity, and growing inequality. It has a ripple effect on higher wage earners (the opposite of a higher minimum wage).

      Instead of enlarging EITC, provide money for education, research, child care, even temporary make work programs, restore the 40 hour week for all, phase in a 35 hour week, 4 week vacations, lower the retirement age, all these will increase labor demand and raise wages. Don’t put companies paying fair wages out of business. Walmart is already taking care of that.

  7. tyler says:

    “Clearly, he knows this Congress will not legislate his economic agenda.”

    I doubt the GOP would oppose a tax cut for the middle class and the poor. We are approaching an election year.