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, simplifying a complicated tax code is important. But it is not a cure for widening inequality and declining economic mobility. That is the problem with the president’s approach to economic problems: His rhetoric seems ahead of his policy proposals.
There are several reasons for that, including the complexity of the challenges, the polarized political climate and the difficulty of crafting comprehensive solutions.
But the simplest explanation is that Obama’s economic team is built largely to address the problems of the 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 immediate economic woes.
The last dozen years produced anemic job creation, even if you don’t count massive job losses of the recession. It has become harder to climb into the middle class. Within the middle class, average workers are making less money than they did at the turn of the millennium, 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 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, an investment banker who served as Treasury secretary. Rubin espoused an economic philosophy that would dominate Democratic policy through the recent 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 next decade. The financial crisis spurred a move back to stricter rules on Wall Street institutions and financial products like 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 downside 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. By tapping Lew as Timothy Geithner’s successor at Treasury, the president is signaling that budget negotiations with congressional Republicans will dominate economic policymaking.
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, like 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.
In 2011, the president picked one of the foremost academic thinkers on inequality, Princeton economist Alan Krueger, to lead his Council of Economic Advisers. 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 raising tax rates a few points on the rich or limiting their charitable deductions won’t do much to help middle-class wages. And it’s not nearly 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.
In this administration, said Dean Baker, co-director of the Center for Economic and Policy Research and 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, allowing other economic challenges to move forward – and, with luck, 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 secretary and Obama National Economic Council director who teaches at Harvard.
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.