Wall Street soars, Main Street hurts Obama poli­cies fail to turn trends dam­ag­ing mid­dle class

The Washington Times Weekly - - National - BY PA­TRICE HILL

De­spite his best ef­forts, the pres­i­dent who vowed to con­quer Wall Street and re­vive op­por­tu­nity for ev­ery­day Amer­i­cans on Main Street has this to show for his first five years in of­fice: U.S. stock mar­kets are in record ter­ri­tory, post­ing 30 per­cent gains just last year, and Wall Street is home once again to the big­gest con­cen­tra­tion of bil­lion­aires on earth, while wages for the mid­dle class have barely kept up with in­fla­tion.

As Pres­i­dent Obama pre­pares to lay out an eco­nomic agenda to ad­dress this dis­ap­point­ing state of af­fairs in his State of the Union ad­dress this month, his in­abil­ity to stem long-term trends to­ward in­equal­ity are giv­ing con­gres­sional Repub­li­cans lit­tle in­cen­tive to work with him as they push their re­cently de­vel­oped agenda against poverty.

Mr. Obama has ac­knowl­edged that the record gap be­tween the rich and ev­ery­one else has only grown on his watch, and has vowed to de­vote his fi­nal three years in of­fice to try­ing to rec­tify the sit­u­a­tion.

But suc­cess is far from guar­an­teed, eco­nomic an­a­lysts say trends con­tribut­ing to the ero­sion of mid­dle in­comes were in place for years be­fore he took of­fice and some steps he took early in his first term likely ac­cel­er­ated them, even while soft­en­ing an im­me­di­ate blow to mid­dle-class Amer­i­cans.

Tak­ing over where Pres­i­dent Ge­orge W. Bush left off, Mr. Obama propped up Wall Street’s big­gest banks through a se­ries of bailouts to end the cri­sis in the fi­nan­cial mar­kets and bring sta­bil­ity back to the econ­omy, but th­ese moves also left the banks larger and more prof­itable than ever.

Mr. Obama moved dur­ing the brief pe­riod the gov­ern­ment took own­er­ship of the banks in 2009 to curb bonuses and in­comes for Wall Street ex­ec­u­tives, but the banks quickly shook off those lim­its by us­ing re­newed prof­its to pay off tax­pay­ers and shed their gov­ern­ment bonds.

Dur­ing the cri­sis, the col­lec­tive in­comes of the wealthy took a rare but brief dip caused by the col­lapse of the stock mar­ket. But since that pe­riod, the top 1 per­cent of earn­ers have made more money than ever, reap­ing 90 per­cent of the in­come gains from the re­cov­ery of the econ­omy and stock mar­kets since 2009, ac­cord­ing to a study last month by re­searchers at the Univer­sity of Cal­i­for­nia at Berke­ley.

The stock mar­kets have more than re­couped a nearly 60 per­cent loss dur­ing the cri­sis, de­spite greatly in­creased fed­eral reg­u­la­tion of Wall Street un­der Mr. Obama’s bank­ing re­form law. They are back in record ter­ri­tory with spec­tac­u­lar gains in ma­jor stock in­dexes of 30 per­cent or more just last year.

Mid­dle-class wage earn­ers with pen­sion funds have pros­pered some from the stock bo­nanza, but the over­whelm­ing share of the ben­e­fit ac­crued to those who trade or own most of the stocks: the well-heeled bankers on Wall Street and their wealthy clients, as well as the elite corps of cor­po­rate ex­ec­u­tives who de­rive most of their in­come from stock grants and op­tions.

Bil­lion­aires pros­per

As a re­sult, Wall Street once again is in the midst of a ma­jor boom, with the big­gest con­cen­tra­tion of bil­lion­aires on earth. Mean­while, av­er­age wages for mid­dle-class work­ers have grown by 2 per­cent or less since the depths of the re­ces­sion in 2009, barely keep­ing up with in­fla­tion. The gap be­tween the rich and the mid­dle class has reached lev­els not seen since the Gilded Age of the late 19th cen­tury.

Mr. Obama re­cently called this grow­ing in­equal­ity the “defin­ing chal­lenge of our time” and vowed to rem­edy it through a raft of mea­sures such as rais­ing the min­i­mum wage, in­creas­ing worker train­ing, and fos­ter­ing good-pay­ing mid­dle-class jobs in in­fra­struc­ture and man­u­fac­tur­ing. He gained a par­tial vic­tory in his bat­tle to make the rich sac­ri­fice more with the end of some of Mr. Bush’s tax cuts a year ago.

But most of the pres­i­dent’s reme­dies face daunt­ing op­po­si­tion from Repub­li­cans in Congress. Even if Mr. Obama se­cures ap­proval, econ­o­mists say, his pro­pos­als would do lit­tle to over­come pow­er­ful mar­ket forces that en­able the af­flu­ent to reap most of the gains from fi­nan­cial mar­kets and from the mech­a­niza­tion and glob­al­iza­tion of the econ­omy that have shifted mil­lions of mid­dle-class jobs from the U.S. to the de­vel­op­ing world.

Repub­li­cans, an­tic­i­pat­ing an on­slaught from Mr. Obama and con­gres­sional Democrats on the eq­uity is­sue, have de­vel­oped their own agenda to boost the poor and mid­dle class.

House Bud­get Com­mit­tee Chair­man Paul Ryan of Wis­con­sin, the 2012 Repub­li­can vice pres­i­den­tial can­di­date and a likely 2016 pres­i­den­tial con­tender, was a keynote speaker at a Brook­ings In­sti­tu­tion “sum­mit” Mon­day on so­cial mo­bil­ity. Mr. Ryan ac­knowl­edged that gov­ern­ment has a role to play in lift­ing the for­tunes of the poor and mid­dle class, but said free-mar­ket so­lu­tions are the best way to at­tack wage stag­na­tion and in­come in­equal­ity.

Sen. Marco Ru­bio, Florida Repub­li­can and another po­ten­tial pres­i­den­tial can­di­date, gave a speech last week in the U.S. Capi­tol’s Lyn­don B. John­son Room to mark the 50th an­niver­sary of the war on poverty and to of­fer his take on ways to help the poor and raise mid­dle-class wages.

“The only so­lu­tion that will achieve mean­ing­ful and last­ing re­sults is to pro­vide those who are stuck in low-pay­ing jobs the real op­por­tu­nity to move up to bet­ter-pay­ing jobs. And to do this, we must fo­cus on poli­cies that help our econ­omy cre­ate those jobs and that help peo­ple over­come the ob­sta­cles be­tween them and bet­ter-pay­ing work,” said Mr. Ru­bio, who con­tended the gov­ern­ment’s anti-poverty pro­grams haven’t worked and should be turned over to the states.

What­ever the di­ag­no­sis, econ­o­mists say, the global trends ex­ac­er­bat­ing th­ese trends have been gath­er­ing strength for decades.

With mil­lions of mid­dle-class jobs mi­grat­ing over­seas and mil­lions more be­ing au­to­mated out of ex­is­tence at home, “the hol­low­ing-out in the mid­dle is real,” and “it is not unique to the post-cri­sis pe­riod,” re­searchers at Gold­man Sachs con­cluded in a re­cent study. “Each re­ces­sion has seen sharp drops in mid­dle-class jobs with no ac­com­pa­ny­ing sharp re­bound dur­ing the re­cov­ery.”

Joseph Stiglitz, a No­bel Prize-win­ning econ­o­mist and an ad­viser to Pres­i­dent Clin­ton, credited Mr. Obama with try­ing to bol­ster gov­ern­ment pro­grams that help the mid­dle class and poor in ar­eas such as in­fra­struc­ture, health care and ed­u­ca­tion.

“Amer­i­can in­equal­ity be­gan its up­swing 30 years ago, along with tax de­creases for the rich and the eas­ing of reg­u­la­tions on the fi­nan­cial sec­tor. That’s no co­in­ci­dence,” he said. “It has wors­ened as we have un­der­in­vested in our in­fra­struc­ture, ed­u­ca­tion and health care sys­tems, and so­cial safety nets.”

Dur­ing his first year in of­fice, Mr. Obama se­cured pas­sage of his uni­ver­sal health care law and beefed up spend­ing on in­fra­struc­ture and safety net pro­grams such as food stamps and un­em­ploy­ment ben­e­fits through a $800 bil­lion-plus eco­nomic stim­u­lus bill. But many of those pro­grams have ex­pired, and Obama’s more re­cent ini­tia­tives have been thwarted by Wash­ing­ton’s turn to­ward fis­cal aus­ter­ity af­ter the Repub­li­can takeover of the House in the 2010 elec­tions.

Fed tries ‘trickle down’

But Repub­li­cans, ques­tion­ing the long-term ben­e­fits of Mr. Obama’s stim­u­lus pro­gram, also forced Mr. Obama to ac­cept deep bud­get cuts since the GOP takeover of the House. Econ­o­mists say the aus­ter­ity bat­tles have ex­ac­er­bated in­equal­ity by prompt­ing Congress to keep a lid on spend­ing for in­fra­struc­ture, ed­u­ca­tion and other pro­grams that ben­e­fit the mid­dle class, and by leav­ing it en­tirely to the Fed­eral Re­serve to try to fos­ter stronger growth and a more sus­tain­able eco­nomic re­cov­ery.

Un­der Fed Chair­man Ben S. Ber­nanke, whom Mr. Obama reap­pointed in 2010, the cen­tral bank has done a great deal to im­prove the lot of the rich, us­ing mea­sures that can be de­scribed best as “trickle-down” eco­nom­ics. In part to com­pen­sate for tight fis­cal pol­icy, the Fed launched a se­ries of stim­u­lus pro­grams that in­jected $4 tril­lion into fi­nan­cial mar­kets by buy­ing an un­prece­dented amount of U.S. Trea­sury and mort­gage bonds.

The Fed’s ex­plicit goal has been to drive down in­ter­est rates and boost stock and hous­ing prices, with the hope of bol­ster­ing the hous­ing re­cov­ery and rais­ing con­fi­dence in a way that prompts con­sumers to spend and ul­ti­mately en­tices busi­nesses to ex­pand and cre­ate more jobs.

But the econ­omy has re­sponded only tepidly to this “trickle-down” ap­proach. The only clear win­ners have been stock and bond in­vestors and Wall Street.

“There is a lot of cash around” thanks to the Fed, said in­vest­ment an­a­lyst John M. Ma­son. “Right now, that cash is keep­ing the com­mer­cial bank­ing sys­tem afloat, help­ing to in­flate stock prices, and con­tribut­ing to a greater in­equal­ity of in­come and wealth dis­tri­bu­tion. In other words, the cash is al­low­ing the econ­omy to grow but, at present, it is not pro­duc­ing the kind of eco­nomic growth most of us would like to see.”

Only in the past few months has ev­i­dence emerged that the Fed’s pro­gram is start­ing to pro­duce a stronger flow of jobs for the mid­dle class. That has prompted the Fed to start par­ing back its bond pur­chases for fear that they even­tu­ally might ig­nite the kinds of mar­ket bub­bles that led to the 2008 fi­nan­cial cri­sis.

“The Fed’s re­cent hero­ics have worked won­ders for the stock mar­ket but have had done lit­tle to im­prove the out­look for jobs and wages,” said Sherle R. Sch­wen­ninger, di­rec­tor of the World Eco­nomic Roundtable.

“The cur­rent mix of [tight] fis­cal and [loose] mone­tary pol­icy has tended to re­in­force the struc­tural weak­nesses of the econ­omy that con­trib­uted to the fi­nan­cial cri­sis in the first place,” he said. “The econ­omy is again be­ing driven by hous­ing and con­sump­tion made pos­si­ble by a de­cline in sav­ings and by the ‘wealth ef­fect’ of ris­ing hous­ing and stock prices. This macroe­co­nomic mix has not sur­pris­ingly also ex­ac­er­bated in­come and wealth in­equal­ity.”

Stocks fa­vor Democrats?

Janet Yellen, re­cently con­firmed by the Se­nate to head the Fed­eral Re­serve on Feb. 1, de­fended the Fed’s ap­proach in a re­cent in­ter­view with Time mag­a­zine.

“You know, a lot of peo­ple say this is just help­ing rich peo­ple, but it’s not true,” she said. “Our pol­icy is aimed at hold­ing down long-term in­ter­est rates, which supports the re­cov­ery by en­cour­ag­ing spend­ing. And part of the [eco­nomic stim­u­lus] comes through higher house and stock prices, which causes peo­ple with homes and stocks to spend more, which causes jobs to be cre­ated through­out the econ­omy and in­come to go up through­out the econ­omy.”

What­ever the in­tent, Bob Deitrick, co-au­thor of “Bulls, Bears and the Bal­lot Box,” a book that chron­i­cles how the econ­omy per­formed un­der mod­ern pres­i­dents, said it’s no sur­prise that the stock mar­ket is do­ing so well un­der a Demo­cratic pres­i­dent, though most Amer­i­cans ex­pect oth­er­wise. In fact, since the Great De­pres­sion, the stock mar­ket and the econ­omy in gen­eral have per­formed bet­ter un­der Demo­cratic rather than Repub­li­can pres­i­dents, he said.

“Barack Obama sur­passes most of his pre­de­ces­sors, in­clud­ing Bill Clin­ton and Ron­ald Rea­gan, rel­a­tive to the stew­ard­ship of the fi­nan­cial mar­kets dur­ing his first term,” he said, cred­it­ing Mr. Obama with “stop­ping the pre­cip­i­tous and lethal de­cline of the stock mar­ket” and the hem­or­rhag­ing that was oc­cur­ring when he took of­fice.

Since then, the mar­ket’s per­for­mance has sur­passed that un­der any other mod­ern pres­i­dent, with an­nual re­turns av­er­ag­ing 17 per­cent to 31 per­cent on ma­jor stock in­dexes, he said.

But the job is far from fin­ished be­cause the mid­dle class has not en­joyed such pros­per­ity, he said.

“Al­though the econ­omy is trend­ing in a pos­i­tive di­rec­tion un­der Pres­i­dent Obama, more re­cov­ery needs to take hold be­fore the av­er­age Amer­i­can fam­ily will feel fi­nan­cially se­cure again,” he said.

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