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