By: Ziyi Mai
November 13, 2013
October's unemployment rate showed no sign that an improved economy is on its way. The unemployment rate for October increased slightly from 7.2 percent in September to 7.3 percent. The average unemployment rate during the past 10 months is 7.5 percent, according to the Bureau of Labor Statistics. The economy does not keep a pace fast enough to strengthen the American people's well-being.
In July, President Barack Obama spoke in Galesburg, Ariz. about how he and his administration are working hard to provide middle-class Americans affordable housing and mortgages, which is an economic philosophy he has been talking about since his 2012 campaign. Obama refers to this as "middle-out" economics, meaning the stronger the middle class is, the stronger the economy is. There's plenty of evidence that supports the middle-out theory, but there is also skepticism. Economist Paul Krugman argued that there is no evidence that the middle-out economy is better than an economy that serves rich people.
The problem with a lot of people supporting the middle-out theory is that they blame the current slow recovery on the economic policy during Ronald Reagan's presidency. They accuse Reagan's tax cuts for the soaring gap of income inequality, weakening middle-class Americans' ability to recover after the recession because the rich have already controlled plenty of resources in the economy. They see his presidency as an era of widening income inequality, in which generous tax cuts were given to wealthy people. They also attribute today's slow recovery to the tax cuts and deregulations of the financial industry, which were later blamed for causing the 2008 recession.
Yet the data don't support them. The statistics of unemployment rates and inflation rates in 1980s and the early 1990s show that the periods during the Reagan and George H. W. Bush administrations had seen a declining trend in unemployment and inflation. Even for the periods after the recession of 1982, the stagnation of unemployment rate wasn't as long as today's.
The effect of the last administration's economic policy is definitely associated with the current economic performance. But the impact of the Jimmy Carter, Reagan and Bush administrations has very little or limited influence on today's slow recovery. Some of the policies during Reagan's administration were overhauled or abandoned during the Bill Clinton administration. For example, Reagan left a huge federal deficit when he left office whereas Clinton had a budget surplus at the end of his administration.
Advocates of the middle-out theory argue that middle- and lower-class American families save less than the wealthy because of the wider income gap, thus lowering the consumption demand and economic growth. But the average personal saving rate, which is 5.4 percent, as of mid-2009, is not high when compared to the 9.3 percent rate during recovery in early 1980s.
Looking only at cash income as a way to measure income inequality is incomplete because cash income doesn't accurately measure the standard of living. It makes more sense to put expenditure into the equation.
Economic data on household spending patterns show that the ratio of spending between households of the top and bottom 20 percent of the income distribution essentially remained the same between 1985 and 2010. In 1985 the spending of the top quintile was 2.5 times as that in the bottom quintile. By 2010, spending of the top was 2.4 times that of the bottom.
Instead of Reagan's policy, it's today's failing economic policy that explains the stagnation of economic recovery. It's not that wider income inequality causes slow economic growth. In fact, it's the other way around. Income inequality would not be a problem if incomes of all groups of people grew at the same fast pace. UC Berkeley's economist Emmanuel Saez estimated that real income growth was strong for both the bottom 10 percent and the top 10 percent, and that income distribution grew at the same rate after World War II until the 1960s. To use the past as a scapegoat for the current poor economic performance would end up failing to realize the root of the real causes of today's problems.