President Obama calls it “the defining issue of our time”: forging a fairer economy by reversing years of widening income inequality and building a strong middle class.
And for much of last week, beginning with Tuesday’s State of the Union address, Obama made proposals to do that, unveiling plans to levy higher taxes on the rich, provide financial incentives to companies that manufacture domestically and invest in education and transportation.
But these ideas, say economists and other scholars, confront decades-old trends that will make it difficult to build a middle class that enjoys a far higher quality of life and sees significantly increased earnings.
While he has addressed the issue throughout his presidency, Obama began late last year to shower even more attention on the importance of lifting middle-class wages. In the days after his address to Congress, he traveled the country to make arguments in favor of new investments in manufacturing, energy and college affordability.
But it is not clear that the measures — or any others — could compensate for the factors behind the decline of the middle class, including the rise of nations with abundant cheap labor and the development of new technologies that allow companies to operate with far fewer workers. Nor is it clear that the bruised American economy of 2012, with a growing population of retiring workers to support, can sustain a prospering middle class.
“There has been an avalanche of developments that have played out in the last 30 years or so that make it a huge challenge to think about real increases in wages and therefore a sustained rise in incomes,” said Lane Kenworthy, a sociologist at the University of Arizona. “I think, in truth, a lot of people are at a loss for what exactly can be done.”
Republicans, both in Congress and on the campaign trail, favor a far different approach than Obama has embraced. They generally regard government efforts to promote equality and strengthen the middle class as counterproductive. By this thinking, reducing taxes and shrinking the government’s role in the economy will free up capital that entrepreneurs can invest, creating good new jobs.
But Obama concluded that the Republican philosophy, which motivated the Bush administration, had proven ineffective. Middle-class earnings declined in the 2000s, while top earners saw their wealth skyrocket. These trends represented the culmination of nearly 30 years of expanding inequality in the country and a shrinking middle class.
To reverse the trends, which are related but not identical, Obama made changing the nation’s tax system a centerpiece of his agenda, proposing to raise taxes on the rich while reducing what the middle class pays. Obama has succeeded in offering middle-class tax relief, though so far only temporarily, but has failed in raising taxes on the wealthy.
But even economists who support making the tax code more progressive question how much it will do in the short term to lift the fortunes of the middle class and reverse inequality.
“Tax policy occurs after you’ve made your earnings, not before, so a lot of inequality is pretax earnings,” said David Autor, an economics professor at the Massachusetts Institute of Technology. “I don’t think tax policy reduces inequality in the short term. It can reduce it in the long run by providing a more equal opportunity and a better starting point for lower-income individuals.”
Jason Furman, a senior official at the White House National Economic Council, acknowledged the economic head winds confronting the administration’s proposals to reduce inequality — often referred to by economists as “polarization.” But he said Obama can nonetheless make a major difference.
“To the degree that polarization is exacerbated by government action, that can be undone overnight, for example by the expiration of the upper-income tax cuts,” Furman said. “On the deeper economic forces, we can start making significant progress right away, but it will certainly be an ongoing effort, which is why the president has made leveling the playing field for the middle class his priority.”
Perhaps Obama’s biggest success in helping the middle class, economists say, is the passage of his health-care bill, which they expect to keep medical costs down over time if the initiative works as advertised. The biggest challenge may be the slow recovery of the economy.
To achieve more fundamental improvements, Obama also is calling for a range of policies that would support economic growth at home. Examples include offering companies with employees abroad tax incentives to bring jobs home, investing in roads, bridges and rail systems that would make America a competitive place to work and investing in education at all levels. Research shows — unsurprisingly — that better-educated Americans have higher incomes.
But even if Obama was able to overcome Republican opposition in Congress and advance his agenda, economists say they can’t tell how long it could take to overcome the forces working against the middle class.
“It’s important to realize it’s difficult and, no matter how effectively we’re going to pursue it, we’re not going to have anything to show in one year or three years or even five years,” said Benjamin Friedman, a Harvard economist.
The middle class has been under pressure for decades. The factors most widely cited by economists are changes in technology that have allowed workers to be replaced by machines and globalization. Other factors include the long-running decline of labor unions and the dwindling number of two-parent households.
Recent research has showed that at least one of these trends, such as increasing productivity in China as a result of the nation’s investments in technology, are accelerating, adding to the economic pressure on the U.S. middle class.
“It’s not the result of any single policy and the forces that are contributing to it are not ones that politicians create,” Autor said.
Obama has spoken nostalgically of his grandparents’ generation and said he hopes to “restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.”
Economists have come to call that period, following World War II, the “Great Compression,” because inequality dramatically declined as middle-class wages surged. It lasted until the 1970s.
Some economists today are skeptical about whether that could happen again.
The economy often achieved growth of nearly 4 percent per year in the decades after World War II, and much of the gains accrued to middle-class workers. Over the past 30 years, it has grown at an annual pace of less than 3 percent.
In 1960, there were more than five workers for every retiree. Today, there are fewer than three. And in 1960, the U.S. economy represented about 40 percent of the world economy. Today, it represents less than a quarter of the world economy.
“It’s a very different world and I don’t think it’s going to come back close,” said James Heckman, a Nobel winning economist at the University of Chicago.