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The public policy blog of the American Enterprise Institute
Extraordinary claims, it’s been said, require extraordinary evidence. And President Obama made quite an assertion in a speech Thursday at the Center for American Progress: “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American dream, our way of life and what we stand for around the globe.”
But Obama wasn’t just giving a warning, he was also teaching a partisan, progressive, left-wing history lesson. As he sees it, these toxic trends have been slowly poisoning the US economy and the American Dream for decades. The pro-market or “neoliberal” turn in the nation’s economic policy — tax cuts, deregulation — that started in the late 1970s was, according the president, a big mistake that made rich people even richer and little else.
But much of Obama’s argument is either dubious, deceptive, or demonstrably false. Let’s start with his “fundamental threat” claim. Is Team Obama aware of a 2009 study by researchers Dan Andrews, Christopher Jencks and Andrew Leigh that finds “no systematic relationship between top income shares and economic growth” in advanced economies. Actually, more inequality is associated with higher GDP growth, according to the analysis.
Let’s move on. Obama:”Since 1979, when I graduated from high school, our productivity is up by more than 90 percent, but the income of the typical family has increased by less than 8 percent.”
Reality check: Obama grossly overstates the productivity-income gap, and the middle-class stagnation argument is a myth. According to the Congressional Budget Office, for the 60 percent of the population in the middle of the income scale (the 21st through 80th percentiles), the growth in average real after-tax household income — meaning after federal taxes have been deducted and government transfers including Social Security and unemployment insurance have been added – was just under 40% from 1979 through 2007, the end of the last business cycle. The CBO numbers sync well with those of Cornell University’s Richard Burkhauser who finds that mean income growth — also taking into a account a broader measure of income — for the middle 20% rose by 37% from 1979 through 2007. And research by the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan find accounting properly for inflation shows median incomes have gone up by about 50% since 1980.
But there’s so much more. Obama claims that starting in the late 1970s, “businesses lobbied Washington to weaken unions and the value of the minimum wage. As the trickle-down ideology became more prominent, taxes were slashes for the wealthiest while investments in things that make us all richer, like schools and infrastructure, were allowed to wither.”
Really? Union membership as a share of total employed peaked in 1954 not the late 1970s, according to the Cleveland Fed. Most Americans in 2010 — not just the rich — paid far less in total taxes — federal, state and local — than they would have paid 30 years ago, according to an analysis by The New York Times. And a 2011 study by Marco Percoco, a professor at Bocconi University in Italy, shows US. public investment has tracked the OECD average since at least 1970, according to Bloomberg. And when a proper inflation adjustment is used, the current minimum of $7.25 is just a nickel below the average from 1960 to 1980.
But it’s not just inequality. Obama also claims “we’ve seen diminished levels of upward mobility in recent years.” Yet a survey of the economic literature by inequality researcher Scott Winship of the Manhattan Institute finds, “Most of the evidence on earnings and income mobility suggests only small changes over recent decades.”
Here’s the bottom line: America’s pro-market turn some three decades ago reversed what then seemed like unstoppable national decline. (Nations that didn’t make that choice, such as Japan and France, have not fared well.) Yes the rich got a lot richer, mostly due to technology and globalization. But the middle-class did pretty well, also. Pre-tax incomes at the bottom end suffered, but the safety net has helped a lot. Inequality has likely increased sharply at the very high end, but has been stable elsewhere along the income distribution spectrum. Mobility could be better, but the big problem is really upward mobility from the very bottom. And America remains the world’s innovation leader.
Obama’s revisionist history and one-sided, black-and-white economic analysis may please his dispirited base, but they won’t help America make the right decisions going going forward about how to boost growth and ensure those economic gains are as broadly shared as possible. Obama makes inequality and mobility just seem like convenient excuses to raise taxes and expand government. By placing those issues within a harshly partisan, left-liberal, progressive framework he makes it harder for right-of-center folks who worry about, say, the effect of automation on the US labor force, to engage in a much-needed policy debate.
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