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Obama is right to put spotlight on economic inequality

Virtually every economic problem we have today — slow growth, high unemployment, low social mobility — is both a manifestation and a cause of economic inequality.

Michael Hiltzik

The Economy Hub

8:00 AM EST, December 22, 2013

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You may have missed it, given the launch of the Christmas shopping season and all the foofaraw about the rollout of the Affordable Care Act, but earlier this month Barack Obama gave the most important speech of his presidency.

The topic was the rising level of economic inequality in America, which Obama identified as "the defining challenge of our time."

Numerous trends have come together over the last few decades, he said, to create "an economy that's become profoundly unequal and families that are more insecure." The trends are "bad for our economy … bad for our families and social cohesion … bad for our democracy."

The greatest threat is to America's tradition of social mobility: "A child born in the top 20% has about a 2-in-3 chance of staying at or near the top. A child born into the bottom 20% has a less than 1-in-20 shot at making it to the top," Obama said. The prospects of that poor child have worsened. And that poses "a fundamental threat to the American dream."

In Washington, a town where missing the forest for the trees has been raised to an art form, Obama's Dec. 4 speech has set off intense debate over such issues as whether economic inequality really is "the defining challenge," or whether maybe something else should win the trophy. Unemployment, for instance. The suggestion was made that Obama focused on inequality because it's easy for people to get morally huffy about it.

It's an easy score, in other words, because it offends people's delicate sensibilities and yet is so complicated a phenomenon that no one has to suggest specific remedies. Unlike unemployment, which is an acute problem today with straightforward remedies confounded by the political system.

But Obama is absolutely correct. Virtually every economic problem we have today — slow growth, high unemployment, low social mobility among the underclass — is both a manifestation and a cause of economic inequality. Income inequality produces stagnating wages for middle- and working-class employees, which suppresses overall economic growth, which creates low employment. The capital-owning class spends its income at a lower rate than the working class, which consumes most of it in the near term; that reduces overall demand in the economy, causing low growth and less employment. Slow growth also suppresses public investment in schools and social programs, which create obstacles to social mobility.

The importance of Obama's speech lies not in any roster of remedies — in fact, it was fairly criticized for offering few new specific ideas for reversing inequality — but in placing the issue squarely on the table. "It was more agenda-setting than legislatively directed," observes Timothy Smeeding, director of the Institute for Research on Poverty at the University of Wisconsin.

What made the address especially effective, Smeeding said, was that it described inequality "not just about the poor and the middle class and the top 1%, but about the whole picture."

What that means is that fighting unemployment and fighting inequality are not mutually exclusive efforts — they're the same effort. Policies that significantly lower unemployment will also reduce inequality, Jared Bernstein, a former economic advisor to Vice President Joe Biden, now at the Center on Budget and Policy Priorities, asserts in a recent blog post on the subject.

Bernstein acknowledges that evidence that rising inequality has impeded economic growth is hard to come by. The main reason, he argues, is that the effect has been masked by higher credit card debt and by the housing bubble, which provided middle- and working-class families with the spendable wealth they lost through the stagnation of wages. When the bubble burst and credit contracted, the hangover showed just how far out of whack the distribution of income had become.

Economic growth, Bernstein writes, "has become a spectator sport for too many poor and middle-class households that watch as the gross domestic product, or GDP, productivity, the stock market, and corporate profits rise."

Inequality not only fostered the credit boom and bust, it also promoted the loose regulatory environment and other public policies that have fueled the imbalance. That's because inequality also is a self-perpetuating political phenomenon.

"The rich speak louder in the political debate," writes Berkeley economist J. Bradford DeLong, "and the rich want to keep what is theirs."

He might properly have said "what they claim to be theirs" — the argument against inequality is that they're claiming a portion of economic wealth that really belongs to the workers who are responsible for the productivity gains of recent decades.

There are few aspects of public policy that aren't poisoned by the increasing imbalance of political clout. When you hear it said that Social Security benefits need to be cut because "we can't afford them," even though raising or eliminating the payroll tax ceiling would fund their expansion, that's inequality talking its own book. The systematic underinvestment in our K-12 schools and our public universities because improving them would require higher taxes on the wealthy? That's inequality at work. The suppression of union organizing rights? That's inequality protecting its power at the expense of the working class.

Inequality, DeLong argues, creates perverse incentives that divert production and effort toward wasteful ends. More money goes to buy the services of financial intermediaries engaged in nothing like the allocation of capital to productive industries.

The argument that the top 1% deserve their share of economic growth because they're "job creators" and "innovators" is just a marketing pitch. "Tell me, if you can do so with a straight face, that any aspect of the large upward leap in inequality we have experienced has paid any benefits at all in terms of true … human material welfare-enhancing economic growth," DeLong wrote. "I don't think you can."

Recent efforts to stem inequality have addressed the symptoms, and even so only nibbled at the edges and been overwhelmed by trends in the opposite direction. Attempts to limit compensation of top corporate officers through the tax code have largely failed. But laws and regulations aiming to reduce the power of labor unions in the private and public sectors, and to cut into worker pensions, have burgeoned. And what is the opposition to the Affordable Care Act if not an effort to obstruct the spread of health coverage to 30 million mostly working-class and poor Americans — an essential component of social mobility.

Reversing the inequality trend requires a combination of near-term and short-term policy changes. A direct attack on unemployment is essential; that means more spending by the public sector through infrastructure building programs and school hiring. The long-term unemployed need to be supported through an extension of unemployment benefits — the congressional resistance to which is another artifact of the interests of the wealthy trumping those of the working class.

Improving social mobility for those at the bottom of the scale means improving early childhood education; the impoverishment of Head Start programs through the sequester is a shameful abdication of responsibility by a Congress that no longer hears the voices of the socially disadvantaged.

It means a concerted effort to make college more affordable to working- and middle-class students. Pell Grants, which provide college assistance for low-income families, face a funding gap of $50 billion over the next 10 years even if the program grows with inflation, according to the Center on Budget and Policy Priorities. If that's not made up, it means dropping thousands of students from the program. That's a huge threat to social mobility, says Smeeding, because "the road to the middle class is completely closed to kids with only a high school degree."

That so many pathways to the middle class are closed off by poor educational opportunities, poor health and poor job growth is a disgrace to the nation. "We are a better country than this," President Obama said. Let's hope so.

Michael Hiltzik's column appears Sundays and Wednesdays. Read his new blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at mhiltzik@latimes.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.