A Budget Focus on Inequality

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The New York Times
By: Annie Lowrey
April 11, 2013

The great economic focus of the White House, the financial crisis and recession aside, has been inequality.

The hollowing out of the middle class, the yawning gap between rich and poor, and the problem of economic mobility were preoccupations of President Obama long before he set foot in the White House. His 2006 book, "The Audacity of Hope," for instance, contains a whole chapter dedicated to wage polarization, globalization and the plight of blue-collar workers.

The Obama budget proposal released Wednesday, like other White House budgets before it, also emphasizes the problem of inequality and the failure of the American economy to promote a thriving middle class.

"It is our generation's task to reignite the true engine of America's economic growth - a rising, thriving middle class," it says, calling support for the middle class the "North Star" of policy-making. "It is our unfinished task to restore the basic bargain that built this country - the idea that if you work hard and meet your responsibilities, you can get ahead."

The budget includes several proposals to tackle inequality and wage stagnation.

• Increasing the federal minimum wage to $9 an hour from its current rate of $7.25, and indexing it to inflation. The White House asserts that this would lift the wages of about 15 million low-wage workers.
• Creating a "Preschool for All" initiative to provide early childhood education to 4-year-olds from low- and middle-income families. The big idea is that this might improve economic mobility in the future.
• Increased taxes on wealthy Americans, including taxing carried interest as ordinary income. Hedge-fund managers and the like use the carried interest loophole to pay preferential rates on their earnings.
• Increased support for manufacturing, which the White House argues might be an important source of middle-class jobs.
• Making permanent the expansion of the earned income tax credit and child credit, which were due to expire in 2017. The proposal also makes permanent the American Opportunity Tax Credit, which helps families with students pay for college.

So far, the Obama administration has tackled the issue of inequality in two major ways. It has raised taxes on the wealthy, and it has expanded programs to aid lower-income Americans.

You might not think that the Affordable Care Act had much to do with inequality - it is a health care bill, after all - but it did. Rising insurance costs have eaten away at workers' wages; the law has a number of provisions to try to bend the cost curve. Medical bills are a primary driver of bankruptcy for middle-class families; the law removes the lifetime benefit limit, ends denial of coverage for pre-existing conditions and contains other rules that might help reduce the number of bankruptcies.

Moreover, the law provides free or low-cost access to health coverage to tens of millions of Americans, financed by the government. That might not address the problem of income inequality. But it does address the problem of consumption inequality and perhaps even economic mobility.

Mr. Obama has paid for the Affordable Care Act and other initiatives to push money to lower-income Americans - like an expansion of the earned income tax credit - with higher taxes on the wealthy. He has thus far raised the top marginal tax rate on income to 39.6 percent from 35 percent, reduced deductions for some families and raised taxes on investment income in the January deal to avoid the fiscal cliff, making the tax code more progressive.

But if anything, the plight of the middle class has gotten worse since Mr. Obama took office, a result of long-existing economic trends and the after-effects of the deep recession.

Real median income has continued to decline during the sluggish recovery. It is about 8 percent lower than it was when the recession hit in 2007, and 9 percent lower than it was at its peak in 1999, a period in which economic output has expanded about 24 percent. To translate: the country is getting richer, but the average worker is earning less, and that has been true for well over a decade.

On top of that, the recovery has seen middle-class jobs effectively replaced with low-income jobs. According to research by the National Employment Law Project, low-wage occupations account for 21 percent of job losses during the recession and 58 percent of job growth during the recovery. In contrast, middle-wage occupations account for 60 percent of recession losses and only 20 percent of recovery growth.

But - as always, perhaps - it is not a bad time to be rich. Job growth in high-wage professions has been decent, if not spectacular. And updated research by the economist Emmanuel Saez of the University of California, Berkeley, shows that the real income of the 99 percent has fallen during the recovery, but surged 11 percent for the top 1 percent of earners, led by a stock-market boom.

Thus, Mr. Obama's policies might not have reduced inequality before taxes and government transfers. But the White House has been aggressive in using taxes and transfers to try to blunt its effects.

http://economix.blogs.nytimes.com/2013/04/10/a-budget-focus-on-inequality/

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This page contains a single entry by CFED published on April 11, 2013 3:36 PM.

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