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Middle Class Series: President Obama’s Bridge to a Better Economy

Investing in the Middle Class and Other Key Economic Foundations

SOURCE: AP/Carolyn Kaster

President Barack Obama speaks about the economy, Tuesday, December 6, 2011, at Osawatomie High School in Osawatomie, Kansas.

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The state of our economy will be an important subject in next week’s State of the Union address by President Barack Obama. A recent set of speeches and announcements by the president and other senior administration officials mark out important new economic initiatives likely to underpin the president’s speech before Congress. These new initiatives build on the two threads that have run through the president’s economic policy since he first took office and began to bridge the abyss of the grim economy he inherited to get to the economy our nation desires.

The first thread of the administration’s economic policy has been an intense concentration on the immediate devastation wrought by the Great Recession: massive job loss, widespread home foreclosures and “underwater” mortgages, crushed industries, and vanished credit. While addressing that havoc was the front-and-center job as the president came into office, there was also a widespread recognition that the crash tumbled an economy already standing on a weakened and weakening foundation. Strengthening that foundation has been the second thread of the administration’s policy.

These two threads, although distinct in some ways, are closely linked both economically and politically. Economically, some of the best ways to immediately create jobs are to spend public resources on infrastructure, energy transformation, education, and other investments that are also part of building the nation’s economic fundamentals. The two threads are also linked economically because strong foundations can’t be successfully built on quicksand. With massive unemployment, too many Americans are losing job skills. With too many families facing huge debt overhangs and reduced incomes, weak demand in our economy eviscerates interest by businesses to invest. And with entire industries failing, we risk losing those industries forever. These are not just drags on our immediate economic situation but also problems that must be resolved for the sake of our long-term economic prospects.

Politically, too, the economic crisis and the possible bridges toward sustainable long-term prosperity are linked. One of the challenges in gaining support for the economic stimulus measures that have been needed over the past several years is the sense that they are just quick nitro-fueled boosts that, once the initial rush fades, leave us little farther down the road economically, but much more in debt. Notwithstanding the legitimate economic pedigree for such actions—the need to get out of the quicksand—this worry is understandable. Economic stimulus is meant to be a bridge over an economic valley to a brighter long-run future. But if there’s no description of what the other side of the valley looks like, it can feel like a bridge to nowhere—even when it isn’t.

President Obama has worked to address both the economic crisis and the problems with our economic foundations. A recent set of important speeches and announcements flesh out the approach he will take in 2012 to build up our economic fundamentals.

The first of these was the president’s speech in Osawatomie, Kansas, on December 6. In that speech the president articulated the debilitating strains that income and wealth inequality put on our economy and, notably, the importance of a strong middle class for economic growth. This was the clearest expression yet of a key piece of the philosophy that has implicitly underpinned much of what the administration has done to help the economy. It was also a clear signal of the president’s priorities going forward.

The importance of inequality and the middle class is twofold. First, there is the small matter of the continuing validity of the American Dream. Even in the decade before the Great Recession, it was becoming harder and harder for those who worked hard and played by the rules to get ahead. As the president said, “This kind of gaping inequality gives lie to the promise that’s at the very heart of America: that this is a place where you can make it if you try.”

The second broad point made by the president was that “when people are slipping out of the middle class, it drags down the entire economy from top to bottom.” Last week, the chairman of the president’s Council of Economic Advisers, the highly regarded economist Alan Krueger, gave a speech at the Center for American Progress where he further fleshed out how inequality is threatening our economy. Krueger stated that “the rise in inequality in the United States over the last three decades has reached the point that inequality in incomes is causing an unhealthy division in opportunities, and is a threat to economic growth.”

He went on to discuss more specifically how inequality and a weak middle class are standing in the way of progress. He discussed the “cost to the economy and society if children from low-income families do not have anything close to the opportunities to develop and use their talents as the more-fortunate kin from better-off families who can attend better schools, receive college prep tutoring, and draw on a network of family connections in the job market.” He pointed out that the huge shift in income from the 99 percent to the 1 percent amounted to $1.1 trillion in 2007 alone and described how, making some reasonable assumptions, the magnitude of that shift suggests downward pressure on aggregate consumption on the order of $440 billion, amounting to a 5 percent drop. Krueger’s conclusion: “These calculations make clear that the economy would be in better shape and aggregate demand would be stronger if the size of the middle class had not dwindled as a result of inequality.”

Krueger also noted other evidence of the negative consequences of inequality and a weakened middle class on the broader economy, including research showing:

  • The connection of “more equality in the income distribution … to more stable economic growth”
  • The adverse effect of greater concentrations of income on governmental economic decision making
  • The impact of greater inequality on worker productivity

Strengthening the middle class, however, is not the only focus of the Obama administration’s long-term economic vision. Earlier this month Secretary of Commerce John Bryson unveiled a report on the competitiveness of American businesses and workers that highlighted three pillars where federal government policy is key: basic research, education, and infrastructure. The administration has enhanced investments in all three of these areas and the report indicates that further policy proposals are forthcoming.

Then, last week the White House held a daylong forum on the phenomena of “insourcing” where more and more companies are moving jobs from overseas back to the United States. The president spoke at the forum with several corporate executives from companies such as The Masterlock Company, Siemens, and Lincolnton Furniture standing behind him. Insourcing is encouraged by broad economic growth policies including the focus on inequality and the middle class. But it is also a key, perhaps the key, objective of policies aimed specifically at improving our country’s global competitive posture.

Finally, this past Friday the president announced a “crucial step toward a thoughtful and far-reaching plan to reshape the federal government to more effectively focus on ensuring U.S. long-term economic competitiveness.” The plan addresses the problem that the organization of the federal government is an impediment to a coherent and coordinated long-term strategy for our economic competitiveness and to its implementation. Specifically, the plan takes the step of combining six federal departments and agencies focused on business and trade. The goal is to make the government’s business-focused policies more effective and to enable a long-term strategy for garnering investment in American businesses, greater exports, and more jobs.

This set of recent efforts builds on things the Obama administration has already done in support of long-term economic growth, among them:

  • Investments in building and repairing roads and bridges, clean energy, and other measures adopted to create jobs and address the recession that will also, as alluded to above, have a longer-range impact
  • Financial regulatory reform, including the creation of the Consumer Financial Protection Bureau, to put our financial markets on sound footing for providing the private capital required for growth
  • Enactment of the Affordable Care Act, which is not usually described as an economic initiative but is clearly intended to make one of the largest sectors of our economy much more efficient as well as address one of the greatest challenges facing the middle class
  • Education policy initiatives from the earliest grades through college, all of which boast an obvious economic import
  • The National Export Initiative and the Trans-Pacific Partnership, both of which are designed to improve the long-term trade posture of the United States

Additionally, there are other previously announced efforts, including tax and budget proposals, immigration reform, the transition away from fossil fuels, and a range of government-efficiency measures that are incomplete but are still part of the administration’s agenda.

All of these initiatives, then and now, are part of the two economic threads that define the Obama administration’s efforts to build a bridge to a better economy. At the start of the Obama presidency, the highest priority was dealing with a massive economic collapse. In the month the president took office, the economy lost more than 800,000 jobs. This called for a fast, big, aggressive, emergency intervention. That stopped the collapse: We’ve had 22 consecutive months of private-sector job creation and 2011 saw more job growth than any year since 2005. But there is much more to be done. With the addition of its most recent initiatives, the administration is offering us a clear vision of the economy that can be spotted on the other side of the valley—with a roadmap on how to get there by strengthening the middle class and supporting the competitiveness of American companies and workers.

Michael Ettlinger is Vice President for Economic Policy at the Center for American Progress.

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This is part of a special series: Middle Class Series

For more from this series, click here