Obama’s plan to save the middle class: Redistribution now, education later.

February 13, 2013

My colleague Jim Tankersley writes that "there are two kinds of middle-class Americans struggling today. There are the people who can’t find work or can’t work as many hours as they’d like. And there are full-time workers who can’t seem to get ahead. In Tuesday’s State of the Union and its response, there wasn’t much for either group — at least when it comes to their biggest problem."


Obams reads the State of the Union speech. (AFP/Getty photo)

That problem is that growth has stopped benefitting the middle class, at least to the degree that it used to. "A point of increased growth today simply delivers fewer jobs across the economy and less money in the pockets of middle-class families than an identical point of growth produced in the 40 years after the Second World War," Tankersley writes.

This is among the scariest realities of the modern American economy. It used to be enough that we grew. But in recent years, a growing economy hasn't been enough to lift all incomes. Growth was healthy throughout the George W. Bush years, for instance, but it all seemed to accrue in the bank accounts of the very wealthy. I call this the conehead economy: We keep growing, but all the wage growth seems to happen amongst the top 1 or 2 percent.

This accounts for the Obama administration's obsession with inequality. As Jared Bernstein, the former chief economist to Vice President Joe Biden, told Zach Goldfarb, "we’ve gotten to the point that inequality is blocking opportunity.”

The question, of course, is what can be done?

Tankersley doesn't give enough credit, I think, to the Obama administration's actual answer: Redistribution to save the middle class now and education to help it grow later. Their theory, put simply, is that if the economy isn't going to share the gains of growth naturally, then it's the government's job to step in and make sure the rising tide lifts all incomes.

To that end, the Obama administration has been among the most explicitly redistributive presidencies in modern memory. The health-care law taxes the rich to give health care to the poor. The post-"fiscal cliff" tax code features higher taxes on the rich than we had under President Bill Clinton and lower taxes on the working class than we had under President George W. Bush. The stimulus included a raft of redistributive measures, like the expanded Child Tax Credit and Earned Income Tax Credit, and the Obama administration has successfully fought to keep them even after the rest of the law expired.

And Obama's State of the Union continued the trend. He proposed raising yet more revenue from the rich. He proposed ensuring universal access to pre-kindergarten for families with low or moderate incomes. He proposed raising the minimum wage to $9.00, its highest inflation-adjusted level since 1981. He proposed passing the American Jobs Act, which wouldn't just restore the payroll tax cut -- it would double it. He proposed tying federal student aid to various measures of college affordability and quality as part of a bid to keep secondary education from becoming too expensive for most Americans to afford.

Even if all this passed, would it be sufficient to ensure that the gains of growth are widely shared? That's harder to say. Inside the Obama administration, the optimistic example is the Clinton years, in which growth really was widely shared.

Median family income -- adjusted for inflation -- rose from $57,866 in 1991 to $66,259 in 2000. By 2008, however, it had fallen to $64,264. Obama's top economists find it implausible that the American economy underwent a deep, structural transformation over that period such that the shared growth of the Clinton years is no longer possible.

Their basic view is that the economy has been battered by a terrible recession and a series of unwise and regressive policy choices. The hope is that if we can just get the economy back on its feet and reconfigure policy so it's much more redistributive and much more focused on helping working Americans, we're likely to find that growth can be more widely shared, more easily, than we think. And if we can upgrade the nation's educational system at the same time, then the next generation will hopefully have less need for redistributive policies to share growth because they'll be better able to navigate the demands of the modern economy.

That's the theory you see the Obama administration pursuing over these last few years. It's the theory that they're trying to continue to pursue in their second term. Whether it'll work -- in fact, how much of it will even pass -- remains an open question.

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Neil Irwin | February 13, 2013