President Obama: Wealth Inequality Is 'defining challenge of our time'

President Barack Obama delivers remarks on economic mobility during
an event hosted by the Center for American Progress at
Town Hall Education Arts Recreation Campus in Washington, D.C.,
Dec. 4, 2013. (Official White House Photo by Chuck Kennedy)

President Obama spoke against the widening gulf of wealth that has transformed the United States into a third-world nation in many parts of the country.

This development of vast wealth inequality is by design, with new mobilizations by a radicalized GOP, the Koch brothers and the politicized far-right that have seen the fruit of its long struggle seeking unresponsive rule of our democratic republic.

Can anyone even imagine a Republican speaking against wealth inequality or reckless Wall Street? How about quoting Abe Lincoln: "all that serves labor, serves the nation. All that harms labor is treason."

From Megan Slack at the White House

Today in Southeast Washington, DC, President Obama spoke about what he called the defining challenge of our time: reversing a decades-long slope toward growing inequality and a lack of upward mobility. It's a trend that has jeopardized middle-class America’s basic bargain, the idea that if you work hard, you have a chance to get ahead.

In the years after World War II, America built the largest middle class the world has ever known, President Obama said. 

[D]uring the post-World War II years, the economic ground felt stable and secure for most Americans, and the future looked brighter than the past.  And for some, that meant following in your old man’s footsteps at the local plant, and you knew that a blue-collar job would let you buy a home, and a car, maybe a vacation once in a while, health care, a reliable pension.  For others, it meant going to college -- in some cases, maybe the first in your family to go to college.  And it meant graduating without taking on loads of debt, and being able to count on advancement through a vibrant job market.

“Everyone’s wages and incomes were growing,” President Obama said “And because of upward mobility, the guy on the factory floor could picture his kid running the company some day.”
But by the late 1970s, this social compact began to unravel as jobs began to disappear and our economic foundation weakened. Inequality started to grow, and it got harder for children of lower-income families to move upward. Today, a family in the top 1 percent has a net worth 288 times higher than the typical family. And a child born in the top 20 percent has about a 2-in-3 chance of staying at or near the top, while a child born into the bottom 20 percent has a less than a 1-in-20 shot at making it to the top.
“The idea that so many children are born into poverty in the wealthiest nation on Earth is heartbreaking enough,” President Obama said.

But the idea that a child may never be able to escape that poverty because she lacks a decent education or health care, or a community that views her future as their own, that should offend all of us and it should compel us to action.  We are a better country than this.
So let me repeat:  The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.

“We can make a difference on this,” President Obama said. “In fact, that’s our generation’s task -- to rebuild America’s economic and civic foundation to continue the expansion of opportunity for this generation and the next generation.”
The President said that this is the reason he ran for office.

I take this personally. I’m only here because this country educated my grandfather on the GI Bill. When my father left and my mom hit hard times trying to raise my sister and me while she was going to school, this country helped make sure we didn’t go hungry.  When Michelle, the daughter of a shift worker at a water plant and a secretary, wanted to go to college, just like me, this country helped us afford it until we could pay it back.
So what drives me as a grandson, a son, a father -- as an American -- is to make sure that every striving, hardworking, optimistic kid in America has the same incredible chance that this country gave me. It has been the driving force between everything we’ve done these past five years.  And over the course of the next year, and for the rest of my presidency, that’s where you should expect my administration to focus all our efforts.

In his remarks, President Obama laid out a few key principles to help guide our efforts in expanding opportunity. Read them here, or watch the full speech below.

Krugman Prevails Again over Austerity

Thomas Herndon devastates
GOP fantasy economics

Updated - 'The really guilty parties here are all the people who seized on a disputed research result, knowing nothing about the research'

"(L)ast week, a startling discovery (by Thomas Herndon, a Ph.D student at the University of Massachusetts-Amherst) obliterated one of the key premises upon which the whole austerity movement was based. ... The discovery of (a) simple math error eliminated one of the key 'facts' upon which the austerity movement was based," notes Henry Blodget.

Economists, notably Paul Krugman, have been tearing out their hair for years trying to reason with Republicans and too many Democratic policymakers.

But facts, like evidence, logic, science and other liberal constructions mean nothing to many Republican policy makers, aka the austerians, no matter how badly Americans families suffer.

Don't look for this new development to change policy radically and immediately; Repubs such as Paul Ryan and company are not easily swayed.

Here's Krugman on the austerity agenda:

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

Does a continuing depression actually serve the interests of the wealthy? That’s doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

I hope not; I’d like to believe that ideas and evidence matter, at least a bit. Otherwise, what am I doing with my life? But I guess we’ll see just how much cynicism is justified.

As John Nichols notes: "Nobel Prize-winning economist Paul Krugman suggests that an essential underpinning of the 'the intellectual edifice of austerity economics' has been called into question. But, adds Krugman, 'the really guilty parties here are all the people who seized on a disputed research result, knowing nothing about the research, because it said what they wanted to hear.'"

See also UMass Econ in the News.

State employment numbers echo slow national growth for May

Downward Revisions to Real Potential Economic Output

GOP: 'Let's make the economy scream.'

"The continued erosion of public-sector employment highlights the extent to which policymakers at both the national and state levels have undermined economic recovery through shortsighted austerity measures. While teachers, police and firefighters have been bearing the brunt of these cuts, we all have suffered from the resulting drag on the economy."
- The Economic Policy Institute

By Dong Hall

"[The] Bureau of Labor Statistics release of state-level employment and unemployment data echoes the slow national employment growth in May, with 16 states experiencing job loss in the preceding three-month period (February 2012 to May 2012), twice as many as experienced three-month job loss in the April report."

Consider now the national commitment of Republicans to block any and all stimulus initiatives, a program that is nothing less than economic terrorism.

This one-two punch by the GOP on the state and national levels leaves economist such as Paul Krugman to state "we're doomed."

A longer treatment is pulbished today by Andrew Fieldhouse, Failure to stimulate recovery is costing trillions in lost national income.

By Andrew Fieldhouse

In a recent blog post on the (negligible, if not nonexistent) long-run economic cost of deficit-financed fiscal stimulus at present, I noted in passing that the Congressional Budget Office (CBO) has downwardly revised potential economic output for 2017 by 6.6 percent since the start of the recession. This may seem trivial, but for a $15 trillion economy, this dip reflects roughly $1.3 trillion in lost future income in a single year, on top of years of cumulative forgone income (already at roughly $3 trillion and counting). The level of potential output projected for 2017 before the recession is now expected to be reached between 2019 and 2020—representing roughly two-and-a-half years of forgone potential income. This represents a failure of economic policy and merits considerably more attention than received, especially when weighing the benefit of near-term fiscal stimulus versus deficit reduction.


Potential output is the estimated level of economic activity that would occur if the economy’s productive resources were fully utilized—in the case of labor, this means something like a 5 percent unemployment rate rather than today’s 8.2 percent. Potential output is not a pure ceiling for economic activity, but the level of economic activity above which resource scarcity is believed to build inflationary pressures. As of the first quarter of 2012, the U.S. economy was running $861 billion (or 5.3 percent) below potential output—the shortfall known as the “output gap.” This has a number of implications for federal fiscal policy:

1.Deficit-financed fiscal stimulus will have a very high bang-per-buck while large output gaps persist. The government spending multiplier is much larger in recessions than expansions (see Figure 3 of Auerbach and Gorodnichenko 2011) and the U.S. remains mired in recessionary conditions, where economic growth is insufficient to restore full employment.

2.Deficit-financed fiscal stimulus is largely self-financing because every dollar of increased output relative to potential output is associated with a cyclical $0.37 reduction in budget deficits, and this feedback effect is greatly amplified by the large government spending multiplier.

3.There is so much slack in the U.S. economy—i.e., supply of resources in excess of demand—that government borrowing will not “crowd-out” productive private investment; this can be seen in the near record-low 1.6 percent yield on 10-year U.S. Treasuries.

So deficit-financed fiscal stimulus is highly cost-effective, largely self-financing, has a very low opportunity cost, and poses no risk to inflation. But there is another potential benefit: closing today’s output gap can increase potential future output (thereby also increasing the ability to repay debt incurred). The reason is simple—if long bouts of inactivity leave permanent “scars” on the potentially productive resources (and they do), then the longer the economy operates below potential, the more future potential is damaged. Concretely, factories aren’t built because firms can’t even sell what existing factories are producing. Children’s educational outcomes are damaged as economic distress forces their families to move and as they lose access to decent nutrition and health. Desirable early-career jobs for recent graduates that could impart valuable skills throughout their working lives aren’t available to them, so lifetime earnings suffer. And so on.

The CBO certainly is worried about this scarring—look at the annual revisions to real potential GDP made by them since the onset of the recession: Estimates have consistently been revised downwards except between Jan. 2009 and Jan. 2010, when the deficit-financed $831 billion Recovery Act arrested economic contraction and began shrinking the output gap.

The Recovery Act, however, was nowhere near large enough to restore full employment and close the output gap—the 10-year cost of the stimulus, after all, was smaller than the annual output gaps that have persisted since 2009. As the economy has slowed as fiscal support waned, CBO’s potential output forecasts have withered as well. So why did Congress pivot from job creation (i.e., stimulus) to deficit reduction at the start of the 112th Congress?

The whole point of long-term deficit reduction, after all, is to raise future income. But failure to restore full employment decreases potential future income. Worse, while the economy remains depressed below potential output, near-term deficit reduction—particularly spending cuts—greatly exacerbate the output gap because the government spending multiplier is so high. (We’ve seen this play out across much of Europe, where government “austerity” programs have cut spending, pushed economies back into recession, pushed up unemployment, and cyclical deterioration in the budget deficit has rendered spending cuts entirely counterproductive.)

The downward revisions to potential output in CBO’s forecast reflect a failure of Congress to resuscitate the economy and restore full employment, but it’s a policy failure that can still be reversed. Fiscal stimulus can increase employment and industrial capacity utilization today and actually “crowd-in” private investment, thereby increasing today’s capital stock and future potential output. With respect to fiscal tradeoffs, cost effective deficit-financed fiscal stimulus will actually decrease the near-term debt-to-GDP ratio (the relevant metric for fiscal sustainability), whereas deficit reduction cannot raise future income until the output gap is closed and the private sector is competing with government for savings instead of plowing cash into Treasuries. The full cost of Congress’ misguided pivot from job creation to austerity is larger than even just today’s mass underemployment—trillions of dollars of potential future income will also be lost unless we pivot back to addressing the real crisis at hand.