Budget Fiasco Hurts Obama's Target: The Middle Class

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The Fiscal Times
By:  Josh Boak
February 20, 2013

No group gets as much lip service from President Obama and congressional Republicans than the middle class. They get treated reverentially much like the bald eagle did a few decades ago--a source of American pride on the verge of extinction.

Obama cited the middle class eight times in his Tuesday remarks about finding a substitute to the $85 billion in across-the-board spending cuts beginning on March 1. The president rejected the GOP plan to hang all the cuts on social programs, preferring that any alternative also include raising additional taxes on the wealthy. "It's wrong to ask the middle class to bear the full burden of deficit reduction," Obama said.  "And that's why I will not sign a plan that harms the middle class." But of course, the GOP counters that any tax increase eventually soaks the middle class, as money flows to the government instead of circulating through the private sector.

"The idea that more taxes and more government spending is the best way to help hardworking middle class taxpayers - that's an old idea that's failed every time it's been tried," Florida Sen. Marco Rubio said in last week's Republican rebuttal to the State of the Union.

So where does this partisan schism leave the middle class? Exhausted from having to tread water as politicians bicker about how to save them. Median incomes for men were slightly higher in 1968, according to inflation-adjusted Census Bureau figures. Women's salaries steadily improved as more of them became integrated into the workforce, but the benefits of this phenomenon appear to be nearing a plateau while the price of daycare, health care, and college continue to soar.

For the ongoing budget battle--of which the sequestration cuts are just one skirmish--few groups have as much to lose from the politics over how to best stabilize and (possibly) reduce the $16.4 trillion national debt. The automatic sequestration cuts would cost roughly 700,000 jobs--presumably few of them in the C-suite--and cause higher unemployment to "linger for several years," according to analysis released yesterday by the private forecaster Macroeconomic Advisers.

The ongoing wait for a fix creates a perverse cycle for the middle class, which because of their stagnant incomes depend more heavily on government programs such as Medicare and specialized tax breaks--making it harder for political leaders to reform either side of the federal ledger. 

The Urban Institute gathered four experts at a Tuesday forum to discuss how to restore the middle class, given the current fiscal constraints. Their conclusions were grim--as even modest economic fixes get twisted into knots by needless partisanship.

Norm Ornstein of the American Enterprise Institute has documented the increasingly hostile and self-flagellating Congress in two books, with a third on the way that he joking suggested would be titled "535 Shades of Gray." The legislative branch has adopted a "tribal" mentality in which who proposes an idea matters more than what the actual idea is.

"It's become tribal in nature," Ornstein said. "Tribalism means if you're for it, I'm against, even if I was for it yesterday."

The classic example of this is one of the more highly endorsed fixes for the middle class--infrastructure. Obama has repeatedly pushed to establish an infrastructure bank that could use government-backed loans to fund improvements in transportation, internet networks, and the power grid.

The bill enjoyed bipartisan sponsorship when it was first proposed in the Senate two years ago, but aides privately worried that strong support from Obama doomed it to failure. Their concerns proved correct, even though an infrastructure binge would support middle class jobs and ease commerce.

Georgetown University professor Judy Feder, a former official in a Bill Clinton-era Health and Human Services Department, gave a simple diagnosis for helping the middle class--control health care costs.

The surging price of health insurance has limited salaries for American workers, and unless it increases at a rate closer to inflation will consume a greater share of both compensation and federal spending. The rate of increase slowed after the 2008 financial crisis, with the Congressional Budget Office projecting this month that the less aggressive pace will trim projected deficits by $200 billion over the next decade.

Researchers are still determining whether the shift downwards predates the recession and could foretell a longer-term trend, as insurers, hospitals, and employers all try to reduce the runaway growth. Healthcare spending increased at 3.9 percent in 2011, 2010, and 2009, the Obama administration said last month. Those are the lowest rates in 52 years, but still almost double the inflation rate.

Much of the political debate--thus far--has not been about reducing medical costs. Republicans envision a "premium support" concept for Medicare in which the government would subsidize medical care for seniors and entrust the invisible hand of the market to curb prices--something it has yet to do in the health or education sectors. Obama wants government programs to spend less for prescription drugs, but it's unclear whether the removal of those subsidies could lead to higher charges for Americans with private insurance plans.

At the Urban Institute panel, Hedrick Smith, author of "Who Stole the American Dream?" endorsed the minimum wage increase that Obama proposed in his State of the Union address. He argued that it would elevate the lowest rung on the economic ladder, in turn bumping up wages in higher brackets.

But House Speaker John Boehner, R-Ohio, instantly ruled out a minimum wage increase as a government-imposed cost on business owners that would cause layoffs. So that idea is politically dead for the moment.

Overcoming the political friction requires voters to get more active on these issues, said Smith, noting that public apathy has allowed both the gridlock and decline of the middle class to fester.

"Unless we get reengaged again, it's not going to happen," Smith said. "The people in Washington who are running our political system ... like the system the way it is now. They're all doing very well, thank you very much."

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