March 31, 2013 5:42 pm
US inequality will define the Obama era
Since the financial crisis, each year has brought lower median incomes than the last
©Matt KenyonBarack Obama has said his biggest goal is to revive the US middle class. “Our country cannot succeed when a shrinking few do very well and a growing many barely make it,” the president said in his inaugural address. It remains to be seen whether higher inequality lowers the US growth rate, as Mr Obama hinted (and some economists fear). The chances are that it does. Either way, Mr Obama has been unable to check America’s most unequal distribution of income since the 1920s. Is it within his means to do so?
The tide against him is powerful. For the past three years, Washington has been consumed in fiscal battles. But in his budget launch next week, Mr Obama will have his best chance before the 2014 midterm elections to shift the focus from deficit reduction to broad-based growth – though the two are entirely compatible. The US budget deficit is already on course to fall to about 4 per cent of gross domestic product within five years. And America’s real fiscal challenge will only start to be felt 10 years from now when retirement costs, such as those from the Medicare healthcare programme, begin to rise sharply. It might be a good moment to pivot to today’s problems.
In June the US will enter its fifth year of post-financial crisis recovery. However, each year has brought slightly lower middle-class incomes than the last. According to data from Sentier Research, US median household income dropped by 1.1 per cent from January to February, to $51,404. It is now 5.6 per cent below where it was in June 2009, when the recovery began ($54,437).
And it is 8.9 per cent below where it was at the start of the century. At this rate – and for all Mr Obama’s efforts – the middle class could suffer a double-digit fall during his presidency.´
It is a different story at the top. According to David Cay Johnston of Syracuse University, the wealthiest 10 per cent of Americans have taken 149 per cent of the growth since 2009 (the bottom 90 per cent have seen their incomes shrink). The top 1 per cent – those earning $366,623 or more – have taken 81 per cent of the fruits of the recovery. And the top one in 1,000 – those starting at $7.97m a year – hogged an astonishing 39 per cent of the growth. That means America’s top 15,837 households have gained almost as much as the remaining 158.4m.
This is not the kind of record Mr Obama wants. John Rawls, the great US political philosopher, said inequality was justified if it was of greatest benefit to the worst off. Clearly, Rawls’ condition no longer holds. There is nothing inherently wrong with wide inequality. The prospect of large rewards spurs talented people to excel, which benefits everyone. But if growing inequality is accompanied by absolute declines in incomes, society is far less likely to tolerate it.
And there is a lot of evidence to suggest economic growth does suffer if inequality becomes too acute. In 2011 the International Monetary Fund published a paper that suggested economies grow faster when there is less inequality – a key reason why east Asia outpaced Latin America in the last generation. Sceptics point out that the IMF’s findings only show a correlation between inequality and lower growth, rather than a causal link. That is true.
But US growth is driven by consumer demand. It is hard to believe that higher spending by the very wealthy will indefinitely make up for the rest’s belt-tightening. Everyone, including US chief executives, who are sitting on $1.45tn of uninvested cash, has a stake in an economy that fires on all cylinders.
Few disagree that inequality is also blunting the effectiveness of US monetary policy. The Wall Street bull market has clearly returned. Last week both the Dow Jones Industrial Average and the S&P 500 broke through to new highs. But very little of the US Federal Reserve’s easy money has found its way on to Main Street.
Such deep-rooted trends are not easily fixed. There are many contributors to US inequality, including the rise of robots, faster globalisation and a domestic tax code customised largely for special interests.
Some of the more obvious palliatives, such as a higher minimum wage and a more progressive Social Security tax, would have an almost instant effect on incomes. Others, such as boosting the quality of US education, will take 20 years to bear fruit. Upgrading the quality of US infrastructure would fall somewhere in between.
In one form or another Mr Obama has proposed all these steps since 2009. But few stand any chance of enactment unless Republicans feel they have a stake in the outcome.
The White House’s only realistic chance lies in a fiscal grand bargain that would combine its “cut to invest” proposals with the promise of once-in-a-generation tax reform. Unlikely though its chances may be, it would still get better odds than the status quo.
And it would offer Republicans a chance to escape their plutocratic branding. Everyone likes to pay lip service to equality of opportunity.
Most Americans do not begrudge people such as Google co-founders Sergey Brin and Larry Page their fortunes. Nor should they. The question is whether high self-sustaining growth is possible amid flat or falling incomes. There are reasons to be sceptical. Mr Obama has so far failed to convince Washington that a stagnant middle class is bad for US growth. He should keep trying. If the US president means what he says, this is the challenge of his time.
Copyright The Financial Times Limited 2013
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