Jim Tankersley covers economic policy for The Washington Post.
When it comes to the most important economic challenges facing the nation, President Obama offers soaring rhetoric. He campaigned vigorously against the decline of the middle class. He launched his new term this past week with a speech declaring widespread prosperity to be a deeply American virtue — and a threatened one.
“We are true to our creed when a little girl born into the bleakest poverty knows that she has the same chance to succeed as anybody else,” Obama said in his second inaugural address, “because she is an American; she is free, and she is equal, not just in the eyes of God but also in our own.”
Then he talked a little about tax reform.
Of course, cleaning up and simplifying a complicated tax code is important. But it is not, by any stretch of the imagination, a cure for widening inequality and declining economic mobility. This is the problem with the president’s approach to America’s big economic problems: His rhetoric seems way ahead of his policy proposals.
There are several reasons for that, including the complexity of the challenges at hand, the polarized political climate and the difficulty of crafting comprehensive solutions (let alone poll-tested ones). But the simplest explanation is that Obama’s economic team is built to tackle a totally different set of issues than the ones the president loves to talk about. It is built largely to address the problems of the federal budget deficit.
The political reality in Washington is that everyone is focusing on deficit reduction. The economic reality is that deficits are, at worst, a medium-run problem — at a time when America is struggling with some very immediate economic woes.
The past dozen years produced anemic job creation, even if you don’t count the massive job losses of the Great Recession. It has become harder for workers to climb into the middle class. Within the middle class, the average worker is making less money in real terms than he or she did at the turn of the millennium, even as incomes have soared among the wealthiest.
“The most important economic policy challenge going forward,” said Jeffrey Liebman, a Harvard University economist who worked in both the Clinton and Obama administrations, “is to create prosperity that is broadly shared.”
How has Obama girded himself for that challenge? By surrounding himself with the descendants of an economic dynasty that, depending on how charitably you view it, either missed those big problems as they were emerging or pursued policies that exacerbated them.
Most of Obama’s top economic advisers, during his first term and entering his second, came of age in the service of President Bill Clinton. The current crop includes Jack Lew, a former budget chief and the current Treasury secretary nominee, and Gene Sperling, the head of the National Economic Council.
In the Clinton administration, this group came under the influence of Robert Rubin, a longtime investment banker who ran Clinton’s first National Economic Council and later served as Treasury secretary. Rubin espoused an economic philosophy that would dominate Democratic policy circles through the Great Recession: one that favored opening global markets, deregulating Wall Street and limiting federal budget deficits.
For all its success in the 1990s, much of Rubin’s philosophy took a beating in the following decade. The financial crisis spurred a move back to stricter rules on Wall Street institutions and financial products such as derivatives, which Rubin had advised Clinton against regulating. The disappearance of millions of manufacturing jobs in the face of technological change and foreign competition cast the downsides of free trade in a harsher light.
“Ten years ago, 15 years ago, you looked at things like trade and you said, on a net basis, we’re better off if there’s freer trade, but there are losers,” said Laura D’Andrea Tyson, a former Clinton economic council director who now sits on Obama’s Council on Jobs and Competitiveness. “The view in the economics profession now — which has changed — is there are a lot more losers than we thought.”
But the Rubinesque focus on the deficit, if anything, is stronger in the Obama administration than it was in Clinton’s. Even before his first inauguration, while the economy was in a job-shedding, recessionary free fall, Obama’s advisers were discussing an eventual pivot to deficit reduction. Now, by tapping Lew as Timothy Geithner’s successor at Treasury, the president is signaling clearly that budget negotiations with congressional Republicans will dominate economic policymaking in his second term.
Within the administration, the deficit has become a “black hole” of economic policy discussion, said MIT’s Michael Greenstone, a former chief economist in Obama’s Council of Economic Advisers. Advisers from the president’s first term who pushed for more aggressive action on, say, unemployment or inequality largely find themselves at think tanks or universities today — just as Clinton advisers who worried about shared prosperity, such as Labor Secretary Robert Reich, found themselves losing out to Rubin.
Obama advisers stress that widening inequality is a 30-year trend that can’t be quickly reversed. A senior administration official pointed to the Affordable Care Act, which taxes the rich to help provide health care for the middle class and the poor, as a major victory against inequality. The official also said the tax increases in the “fiscal cliff” deal will reduce the income of the top 1 percent relative to the rest of the population.
In 2011, the president picked one of the foremost academic thinkers on inequality, Princeton economist Alan Krueger, to lead his Council of Economic Advisers. A year ago, Krueger gave a speech on what he called the “Great Gatsby Curve,” warning against the economic dangers of growing inequality.
Krueger says Obama will propose more steps to address inequality. “The president is genuinely motivated by concern about growing inequality and the stress it puts on the middle class and those struggling to get into the middle class,” he said. “That really animates his views on the economy.”
But the policy options Obama has talked about — such as tax reform — tend to work around the edges and focus on the budget. Raising tax rates a few points on the rich or limiting their charitable deductions won’t do much to help middle-class wages break out of their decades-long stagnation. Protecting federal spending on education and innovation is an attempt to keep the middle class from slipping even further, but it’s nowhere near the fundamental overhaul in skills training that many economists believe is necessary to help workers thrive amid global competition.
If he wants more serious plans to fix the big problems, Obama needs to build a new bench. By turning so much to trusted Clinton hands, he has developed precious little economic talent of his own. The most prominent young economist on his team, Jason Furman, is in his 40s and got his start under Clinton.
In this administration, said Dean Baker, co-director of the Center for Economic and Policy Research and a critic of Obama’s deficit-reduction focus, “people who have alternative views aren’t getting a foothold.”
Anyone eager for greater progress on inequality and jobs must hope that Obama’s team settles the budget debate so that it recedes to the back burner, allowing other economic challenges to move forward — and hopefully without tighter budgets exacerbating them even more.
“It’s always important for policy to begin with the Hippocratic Oath,” said Larry Summers, a former Clinton Treasury secretaryand Obama National Economic Council director who teaches at Harvard. “We have to make a set of long-term adjustments. A time when middle-class Americans are having more and more difficulty is an odd time to make a priority out of cutting basic social protections or investments in education. Before we can do new, good things, we have to be very thoughtful in making sure that as we address looming budget deficits, we don’t put past accomplishments at fundamental risk.”
With his current team and polices, that may be the best Obama can hope for: clearing space for a new generation of economic policymakers — whoever they are — to solve the problems he couldn’t get to.