President Obama, the Neoliberal

I was delighted last night to find an essay penned by President Obama in this issue of The Economist. It serves as a wonderful counterpoint to British Prime Minister Theresa May’s recent speech before the Tory conference.

I’ve pulled nuggets of text and highlighted those I find most important, much as I did for May’s speech. (This one isn’t nearly as long, and I urge you to read his whole essay.)

But some of the discontent is rooted in legitimate concerns about long-term economic forces. Decades of declining productivity growth and rising inequality have resulted in slower income growth for low- and middle-income families. Globalisation and automation have weakened the position of workers and their ability to secure a decent wage. Too many potential physicists and engineers spend their careers shifting money around in the financial sector, instead of applying their talents to innovating in the real economy. And the financial crisis of 2008 only seemed to increase the isolation of corporations and elites, who often seem to live by a different set of rules to ordinary citizens.

So it’s no wonder that so many are receptive to the argument that the game is rigged. But amid this understandable frustration, much of it fanned by politicians who would actually make the problem worse rather than better, it is important to remember that capitalism has been the greatest driver of prosperity and opportunity the world has ever known.

He correctly identifies the culprits: politicians, the elites and those in charge of corporations. But by denying the game is rigged he propagates the most fundamental, malicious falsehood among the American people. It’s the simplest defense against the forces chipping away at neoliberal socioeconomic structures.

The argument that capitalism has driven prosperity and opportunity is a red herring. How could we judge otherwise? Aside from the failed totalitarian states, the only system we operated under was capitalism. We have nothing with which to compare capitalism-spurred growth. So, yeah, we can leave that there.

The profit motive can be a powerful force for the common good, driving businesses to create products that consumers rave about or motivating banks to lend to growing businesses. But, by itself, this will not lead to broadly shared prosperity and growth. Economists have long recognised that markets, left to their own devices, can fail. This can happen through the tendency towards monopoly and rent-seeking that this newspaper has documented, the failure of businesses to take into account the impact of their decisions on others through pollution, the ways in which disparities of information can leave consumers vulnerable to dangerous products or overly expensive health insurance.

More fundamentally, a capitalism shaped by the few and unaccountable to the many is a threat to all. Economies are more successful when we close the gap between rich and poor and growth is broadly based. A world in which 1% of humanity controls as much wealth as the other 99% will never be stable. Gaps between rich and poor are not new but just as the child in a slum can see the skyscraper nearby, technology allows anyone with a smartphone to see how the most privileged live. Expectations rise faster than governments can deliver and a pervasive sense of injustice undermines peoples’ faith in the system. Without trust, capitalism and markets cannot continue to deliver the gains they have delivered in the past centuries.

There’s a lot to unpack there but most of it is stuff we already know. The part I want to focus on is about the widespread use of smartphones and the ability of the masses to now see just how well-off the wealthy are. People feel the injustice even more acutely when they compare with their own eyes their suffering to the riveting beauty of the powerful and wealthy’s sphere — a sphere they will never enter. It’s almost as if giving people a clear view of who is profiting from their labor might incite anger at the injustice, and maybe even a passion for change.

A major source of the recent productivity slowdown has been a shortfall of public and private investment caused, in part, by a hangover from the financial crisis. But it has also been caused by self-imposed constraints: an anti-tax ideology that rejects virtually all sources of new public funding; a fixation on deficits at the expense of the deferred maintenance bills we are passing to our children, particularly for infrastructure; and a political system so partisan that previously bipartisan ideas like bridge and airport upgrades are nonstarters.

We could also help private investment and innovation with business-tax reform that lowers statutory rates and closes loopholes, and with public investments in basic research and development. Policies focused on education are critical both for increasing economic growth and for ensuring that it is shared broadly. These include everything from boosting funding for early childhood education to improving high schools, making college more affordable and expanding high-quality job training.

In the beginning, he names off clear neoliberal policies (no or lower taxes on the very wealthy, choking off of government services, etc.) and, at the end, he offers a few lukewarm fixes. He’s merely tossing the poor and working class a bone to keep them quiet — all the while he offers to help the wealthy with business tax reform.

Second, alongside slowing productivity, inequality has risen in most advanced economies, with that increase most pronounced in the United States.In 1979, the top 1% of American families received 7% of all after-tax income. By 2007, that share had more than doubled to 17%. This challenges the very essence of who Americans are as a people. We don’t begrudge success, we aspire to it and admire those who achieve it. In fact, we’ve often accepted more inequality than many other nations because we are convinced that with hard work, we can improve our own station and watch our children do even better.

As Abraham Lincoln said, “while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else.” That’s the problem with increased inequality—it diminishes upward mobility. It makes the top and bottom rungs of the ladder “stickier”—harder to move up and harder to lose your place at the top.

. . .

I believe that changes in culture and values have also played a major role. In the past, differences in pay between corporate executives and their workers were constrained by a greater degree of social interaction between employees at all levels—at church, at their children’s schools, in civic organisations. That’s why CEOs took home about 20- to 30-times as much as their average worker. The reduction or elimination of this constraining factor is one reason why today’s CEO is now paid over 250-times more.

Economies are more successful when we close the gap between rich and poor and growth is broadly based. This is not just a moral argument.

. . .

America has shown that progress is possible. Last year, income gains were larger for households at the bottom and middle of the income distribution than for those at the top (see chart 2). Under my administration, we will have boosted incomes for families in the bottom fifth of the income distribution by 18% by 2017, while raising the average tax rates on households projected to earn over $8m per year—the top 0.1%—by nearly 7 percentage points, based on calculations by the Department of the Treasury. While the top 1% of households now pay more of their fair share, tax changes enacted during my administration have increased the share of income received by all other families by more than the tax changes in any previous administration since at least 1960.

Whoa. Let’s stop here. He was going pretty good but, no. For how many years — and how high a percentage — did the top 1-percent increase their wealth at the expense of the “bottom and middle of the income distribution?” Small gains for a single year (2015) don’t really count for much when your pay is lower — in real dollars — than it was ten years ago.

Involuntary joblessness takes a toll on life satisfaction, self-esteem, physical health and mortality. It is related to a devastating rise of opioid abuse and an associated increase in overdose deaths and suicides among non-college-educated Americans—the group where labour-force participation has fallen most precipitously.

There are many ways to keep more Americans in the labour market when they fall on hard times. These include providing wage insurance for workers who cannot get a new job that pays as much as their old one. Increasing access to high-quality community colleges, proven job-training models and help finding new jobs would assist. So would making unemployment insurance available to more workers. Paid leave and guaranteed sick days, as well as greater access to high-quality child care and early learning, would add flexibility for employees and employers. Reforms to our criminal-justice system and improvements to re-entry into the workforce that have won bipartisan support would also improve participation, if enacted.

. . .

America should also do more to prepare for negative shocks before they occur. With today’s low interest rates, fiscal policy must play a bigger role in combating future downturns; monetary policy should not bear the full burden of stabilising our economy. Unfortunately, good economics can be overridden by bad politics. My administration secured much more fiscal expansion than many appreciated in recovering from our crisis—more than a dozen bills provided $1.4 trillion in economic support from 2009 to 2012—but fighting Congress for each commonsense measure expended substantial energy. I did not get some of the expansions I sought and Congress forced austerity on the economy prematurely by threatening a historic debt default. My successors should not have to fight for emergency measures in a time of need. Instead, support for the hardest-hit families and the economy, like unemployment insurance, should rise automatically.

Maintaining fiscal discipline in good times to expand support for the economy when needed and to meet our long-term obligations to our citizens is vital. Curbs to entitlement growth that build on the Affordable Care Act’s progress in reducing health-care costs and limiting tax breaks for the most fortunate can address long-term fiscal challenges without sacrificing investments in growth and opportunity.

I’ll stop there. The essay goes on a little bit longer. You can finish it here.

Ultimately, President Obama’s essay nowhere near matches Prime Minister May’s when it comes to articulating a more just world. Unfortunately, May is as likely as Obama to not really accomplish anything — assuming she wants to.

I prevaricated on the title, I admit. I thought it too ostentatious. Too clickbaity. But it’s also the truth. Certainly Obama, and now Hillary, are better politicians than Trump, who himself is a great danger to neoliberals’ designs, but none of them will change the public’s plight. You don’t see me telling you how to vote.

Something for your weekend:

I’ll be a middle-income earner at my current pay rate in San Antonio.

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