Six years ago this month, the newly elected President Obama declared in a speech that “the strength of our economy can be measured directly by the strength of our middle class.” By that direct measure, the economy is weaker today than it was then - despite accelerating economic growth, tumbling unemployment and rising stock prices.
The nation's median income remains lower than it was when the Great Recession ended, $52,000 at the end of 2013 compared to $54,400 at the end of 2008 in today's dollars. Scan down the typical family's balance sheet and the picture looks even worse. From 2010 to 2013, middle-class families sold off assets and spent down what little savings they had, in order to pay off debt and compensate for stagnating wages, according to calculations by New York University economist Edward N. Wolff.
The home ownership rate for the middle class is now more than 10 percent lower than it was in 2007, per Wolff’s calculations. Stock ownership rates are down 15 percent, and pension ownership is down 17 percent. Business ownership is down by a quarter. Middle class Americans, in other words, are in a much worse position to benefit from the rising asset values that have marked this recovery so far. They bought high and sold low.
This was the economic conundrum Obama needed to navigate deftly in the State of the Union: How to claim credit for broad economic improvement while acknowledging just how poorly the middle class – his essential economic indicator – has fared during his tenure. A second conundrum was this: How to pitch policies aimed at a middle-class turnaround that his policies thus far have failed to deliver.
Obama did that by arguing he had done the necessary work to get the economy into recovery, and by making the case, going forward, for building on a policy philosophy he dubbed "middle-class economics."
"Middle-class economics works," he declared. He went on to make clear that, in his reckoning, "middle-class economics" requires aggressive new government actions on multiple fronts, including new workforce regulations, new pressures on corporate behavior and new benefits through the tax code.
"In fact," he said, "at every moment of economic change throughout our history, this country has taken bold action to adapt to new circumstances, and to make sure everyone gets a fair shot. We set up worker protections, Social Security, Medicare, and Medicaid to protect ourselves from the harshest adversity. We gave our citizens schools and colleges, infrastructure and the internet – tools they needed to go as far as their effort will take them. That’s what middle-class economics is – the idea that this country does best when everyone gets their fair shot, everyone does their fair share, and everyone plays by the same set of rules" - as guaranteed by government.
Team Obama appears to have invented that term fairly recently, as a counterpoint to Ronald Reagan's "trickle-down economics." Whatever you call it, though, the idea that the economy performs best when average workers thrive has been gaining steam among academic economists, Democratic politicians and, of late, Republican presidential hopefuls. It has been a centerpiece of Obama's agenda since he first ran for president. Indeed, that 2009 speech came at an event launching a presidential Middle Class Task Force, which issued exactly one major report, in 2010. But the reality was that his first two years were consumed with lifting the nation out of recession and getting growth going again, not addressing the long-running problems that have held the middle class down for years.
Where he has tried to address middle class issues, Obama's proposals relied heavily on taxing the rich to pay for government programs (most notably the Affordable Care Act) or expanding tax breaks meant to help typical workers endure their rough new economic reality. Congress has rarely embraced those proposals. Voters haven't exactly risen up to demand them, either, though some have polled well, and Obama did win re-election on a middle-class message.
On Tuesday night, Obama's State of the Union pitch had three essential components: How to help middle-class paychecks stretch further, how to set the stage for more high-paying jobs in America and how to prepare workers for those better jobs. The third part is all about education and skills training - hence Obama's focus on access to higher education, especially community college.
But while that third part is largely about getting Congress to sign off on the money to pay for more education, the second part presents Obama with much more of a conundrum: Even if Americans get more education, where, exactly, will they find better jobs?
This president's answer to that, it appears, is mostly improved infrastructure coupled with light industrial policy -- targeted support for manufacturing, in particular. But that's probably not enough to deliver the number of jobs Obama imagines; even if factory jobs have bounced back a bit with the overall economy, there's not nearly enough to sustain good paying work for millions of middle class Americans who want it.
This is where his tax reform plan comes into play: Changing the incentives for success in America. He does that by trying to narrow the difference between the taxes on labor income and capital income, or what you earn by working versus what you earn by investing. Many economists say the preferential treatment for capital income has led to the excessive growth of Wall Street, which has robbed the broader economy of precious brainpower that would be better employed solving human problems and creating more high-paying jobs.
This could eventually prove to be the key difference in Obama's latest middle-class plan, compared to his past plans -- a difference in policy and in politics. If you talk to American workers much, you find that, sure, they'd enjoy paying less money to the government. But mostly, they'd like a better-paying job.