Middle Class Economics: Real or Rhetoric?

President Obama

By Eric Ramoutar.

In January of this year, Barack Obama delivered his penultimate evaluation of our nation to Congress and to the country. In his sixth State of the Union, Mr. Obama gave the usual nods to the grandeur of American democracy and to the resilience of the American spirit, but the main event was the President’s policy vision of how to wrap up his final two years in office.

Mr. Obama’s proposals are classic elements from the neoliberal playbook. He would start with raising taxes on the wealthy by closing loopholes and raising the capital gains rate. The saved money would then be reinvested in the middle class through tax credits for childcare, paid parental leave, free community college, and infrastructure spending.

This attention to what the President’s press shop is calling “Middle-Class Economics” is also Mr. Obama’s most recent attempt to cover up an unsightly blemish on the otherwise impressive economic growth over the last few years: bourgeoning inequality. Mr. Obama has overseen a massive recovery from the brink of disaster, but the riches of that recovery have been disproportionately concentrated in the pockets of those in the upper echelon of society.

It Has to Work First

Let’s all ignore for a moment that few of these proposals have much chance of passing through Congress. Mr. Obama is dealing with a combative, confrontational legislature that has shown little inclination to work with the White House. This Republican Congress might well reject Mr. Obama’s proposals even if they liked them, and are far less likely to move on tax increases that they traditionally loathe.

The intentions behind Mr. Obama’s proposals are noble, but that does not make them effective policy. The White House’s own report on the policy package was, unsurprisingly, generous. The evaluation speaks of, “Creating a 21st Century Economy” by developing an educated workforce and giving middle-income earners some much needed financial relief.

Unfortunately for the President, the ringing endorsements for the package seem to stop at the West Wing. The Tax Policy Center (TPC), a center-left think tank, argues that the benefits that Mr. Obama was so enthused about in his State of the Union address may be wildly overblown.

In fact, they concluded that the amalgamation of the President’s proposals would leave most middle-income households only slightly better off and would even leave some worse off. According to the TPC, those who earn between $49,000 and $84,000 (the middle 20% of the income distribution) stand to lose an average of $7 in after-tax income due to the policies. That certainly isn’t a huge hit, but it would mean that a program intended to bring massive financial benefits would be operating in the red.

The TPC explained that Mr. Obama was going about collecting revenue in the wrong way. Specifically, he wants to increase taxes on large banks, but that cost is likely to be passed on to workers through lower wages. If Obama were to remove just that tax and retain the other middle class social spending, the average family in the middle quintile of the income distribution would see an income increase of about $2,100.

The Treasury Department, however, was quick to dispute the TPC’s analysis. Treasury officials estimate a $150 income bump for those in the same middle-income range. But even if that ultimately proves to be the more accurate figure, the notion that this package alone is enough to revive an entire class of Americans is pure political hyperbole.

Not All Bad News

Just because Mr. Obama’s economic proposal might turn out to be toothless does not mean that we should shed a tear for the fortunes of the middle class. Indeed, the most important conclusion made by many analysts in the wake of the State of the Union was that, regardless of how powerful the President’s agenda is, the future of the middle class is bright.

The reason lies in the hugely dominant role of the private sector in shaping middle class outcomes. For instance, abnormally low oil prices will have an effect on middle class incomes that Mr. Obama could only dream of replicating. Moreover, a tight labor market, one in which there are more jobs than job seekers, is making it easier for qualified candidates to find good, high-paying jobs.

Reality Check

This reality speaks to the limited ability of any government to dramatically alter the economic fortunes of an entire nation. Sure, policy has an impact on the margin and very directed action can help a segment of the population, but economic outcomes should be viewed first and foremost as a function of private sector trends.

That should also color our political rhetoric. If the middle class is doing substantially better in November 2016 than it is today, then it is most likely Mr. Obama who will get the credit and the Democratic nominee for President who will most acutely reap the political rewards.

The tendency of our political culture is, in that way, towards convenience. It would be easy to ascribe credit to the incumbent, but an informed political conversation will require an extra degree of nuance. We should be able to evaluate candidates’ platforms without immediately pegging powerful economic trends to a single speech or legislative initiative.

The alternative is an electoral system in which candidates win for things they never did and pay for mistakes they never made. Only time will tell how these new developments will affect things in 2016, but it just might lead to the coronation of a second Clinton.

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