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.