Obama's War on Inequality
How he's losing it.
Wasn't reversing the decades-long trend toward income inequality supposed to be the big theme of the Obama administration? The new president sounded it strongly in his inaugural address, stating that "a nation cannot prosper long when it favors only the prosperous." He followed up with a 2010 budget proposal that sought, in the words of the New York Times'David Leonhardt, "to reverse the rapid increase in economic inequality over the last 30 years." Obama has raised the issue at major occasions since, including his first State of the Union address in 2010, when he noted, "We cannot afford another so-called economic 'expansion' like the one from last decade … where the income of the average American household declined."
But if Obama has declared war on inequality, inequality seems to be winning. In the deal he just cut with congressional Republicans, the president not only agreed to extend the Bush tax cuts for the highest earners but also to eliminate the estate tax for all but the microscopic percentage of people passing down more than $5 million—causing inheritance tax proponent Ray Madoff to declare the battle lost for good.
And despite the role skewed financial rewards played in cratering the global economy, the Obama administration's policy response has failed to address outsized Wall Street and CEO compensation in any meaningful way. Bonus season is upon us, and with the big banks now liberated from their TARP obligations, the general attitude seems to be, "What financial crisis?" Class war, prosecuted from above, is depicted as a threat from below. A few months ago, billionaire private equity manager Steve Schwarzman had the gall to compare the Obama administration's attempt to tax "carried interest" at the same rate as other forms of income to "when Hitler invaded Poland in 1939."
When it comes to raising working-class incomes, Obama has been similarly ineffective. As it is implemented over time (and assuming it survives legal challenge), Obama's health care reform may become a significant factor both in reducing the burden of medical costs on middle-class families and in promoting social equality. From 2008 to 2009, however, the number of people without health insurance rose from 46.3 million to 50.7 million. In the longer term, the key to combating inequality is upgrading the education and skills of American workers. But with the Republicans now in charge of the House, Obama's hopes for major new investments in worker skills seem more elusive than ever. In particular, his goal of every American receiving some higher education is going nowhere. In the coming year, the president will be lucky to protect pro-egalitarian programs that already exist.
Statistics show the problem is getting worse. According to a study by Emmanuel Saez of Berkeley, the top 1 percent of earners captured two-thirds of all income growth between 2002 and 2007. The most recent census statistics show a continued march in the same unbalanced direction. The bottom 20 percent of the population—which earned 5.4 percent of national income in 1967—earned just 3.4 percent of it in 2009. The highest 20 percent went from 41.5 to 49.4 over the same period. The Gini Index—the standard measure of income inequality—ticked up again between 2008 and 2009, from .451 to .458. According to the CIA World Factbook, this figure puts the United States ahead of Russia and Turkey in inequality, and on par with Mexico and the Philippines.
Why is income inequality proving so intractable a problem? If you haven't already, you should read my colleague Tim Noah's excellent series exploring the reasons for the Great Divergence, which began sometime in the mid-'70s. It was around that time, as Malcolm Gladwell described in this New Yorker piece, that stars and professionals across a range of fields simply began to demand a bigger piece of the pie. How much you blame Obama for his lack of success in taking on this trend will depend on whether you see him as a victim of circumstances or of his own mistakes.
On one hand, Obama is up against macro forces like globalization and a system that has grown highly effective at transmuting economic privilege into political power. Somehow, wide majorities have come to support tax law changes that benefit only tiny minorities. While I was writing this column, a press release arrived in my inbox from a New York estate lawyer telling me about the goodies hidden in the new bill: "For the first time, wealthy individuals can make gifts of up to $5 million during their lifetime to anyone, including grandchildren, and pay no tax."
It's like the old Steve Martin routine about how to be a millionaire and never pay taxes—except that instead of "I forgot!" you now say, "I'm allowed!" It is an American peculiarity that rich people want to be thought of as middle class, while those in the middle class identify with the economic interests of an upper class they have only a remote chance of joining. The United States, the land of opportunity, now boasts the world's second-lowest level of intergenerational income mobility. Meanwhile, the people most alarmed about the rise of new economic dynasties seem to be the enlightened superrich themselves, people like Bill Gates and Warren Buffett.
Obama deserves fault for failing to articulate this abstract threat in a way ordinary people can appreciate. Like the deficit, income inequality never killed anybody—it merely has the potential to sap the entire country's health and spirit. Moving toward an income distribution like Brazil's threatens individual happiness, social peace, and American values. But so far, the president hasn't figured out how to get the public to relate to the issue. In April, Obama told a group of frowning bankers at Cooper Union, "There is no dividing line between Main Street and Wall Street." But there is, and it is growing deeper every year.
Video: Timothy Noah and Mickey Kaus Talk Income Inequality