Michael Maiello's picture

    Obama's Middle Class Legacy

    The early, very early, take on the Obama legacy is that it will be marred by the declining fortunes of America's middle class under his presidency.  This will be a tough narrative to counter.  But this is really not just Obama's fault.

    First, I'd say you have to lay this at the feet of every president since Nixon.  This is all a consequence of the ever accelerating rise of the the emerging market export nations, particularly from Asia.  In some ways, it has actually helped the middle class by helping to keep inflation low.  In other ways, it has hurt as jobs have been moved offshore.  As a free trade Democrat, Obama has certainly done his part here.  But he is just part of a bipartisan tradition that now spans the entire post Viet Nam era of American foreign economic policy.

    What has really hurt the middle class recently was the Financial Crisis, the Great Recession and the Slow Recovery.  Some of that can be lain at Obama' feet, but you'd have to be desperately partisan to take it too far.

    The Financial Crisis had, at its roots, regulatory reforms that also span numerous presidents as Wall Street remade itself through consolidations and the establishment of large financial warehouses beginning in the late 1980s.  The securitization of mortgages helped make real estate ownership a reasonable store for middle class wealth but the high cost of real estate relative to middle class earnings even in the best of times means that such an investment will always dominate the portfolio of any normal saver.  In other words, middle class savers are more vulnerable to a decline in real estate prices than anything.  That real estate is always a leveraged investment makes that vulnerability much worse.

    Wealthy people own smaller relative percentages of real estate in their portfolios.  They own larger shares of stocks, bonds, commodities and the like.  They are diversified.  They are also rich and can generally wait while a home owner with an underwater mortgage has no leeway. The rich waited out the worst of the Great Recession and were rewarded by a stock market that more than doubled.  Of course they gained serious ground since 2009.

    To deal with the Great Recession, the government had to respond with both fiscal and monetary policy.  Monetary policy comes from the Fed and I think that Ben Bernanke did everything he could.  The liquidity that the Fed pumped into the markets enabled the stock boom and extended the bull market in Treasury securities.  This benefited the rich more than anyone else because they own stocks and bonds.  The Fed also recapitalized the financial system by paying banks to keep money on deposit, leaving them with that and a risk free carry trade as easy ways to pad earnings.

    Well, the Fed oversees but also serves the financial system.  The government is supposed to look out for everybody else.  What we got was a stimulus plan that was about half the size it should have been (the rule of thumb is it should have been 5% of GDP over one year, we got 2.5% of GDP over a year for two years).  Obama can be criticized for asking for too little, but I think history has shown that the Republicans in Congress were never going to allow for more. That those same Republicans almost caused a new financial crisis by risking a debt default in 2011 is proof enough of their unwillingness to help.

    The result of the 2011 crisis was the spending sequester.  This reduced government spending when it was needed the most.  Because the economy had entered its cyclical recovery (which would have been faster with more government spending) the sequester actually brought the debt to GDP ratio quickly down to sustainable levels.

    We wound up with a robust Fed response and a weaker response from the government that turned into a counter-productive response.  The Fed actions structurally flow to the rich, so the middle class lost ground.  Within the context of what Congress allowed, it's hard to be too angry at Obama.  His biggest failure, I think, was that the Home Affordable Modification Program should have been used more aggressively to help borrowers and end the foreclosure crisis. 

    But, overall, it seems to me that the tale of the last 8 years has actually been one of conflict between the Fed trying to push the economy along with the Republicans in Congress standing in the way.  We should have had something more like what's going on in Japan now where the government and central bank are actually collaborating to stimulate the economy.  That we had the opposite is not Obama's fault.

    Presidents tend to get the credit and the blame for history.  But Congress, particularly the Tea Party members, wrecked the middle class recovery.

     

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    Comments

    It seems so obvious, doesn't it?  Never underestimate the Tea Party mentality.  We may be kowtowing to those folks if we can't beat some sense into the people who really want to believe they're populists.


    Would I be correct is saying the republicans' view on the stimulus was aimed specifically at business, thinking if business activity grew they would pull the public up as well ... like a rising tide thingy? So they focused only on stimulating one aspect of the economy believing the public would benefit without Congress having to allocate more funds to sate the public's financial,job and benefits loss issues cause by the over excesses of the financial markets?


    The stimulus package HR #1 passed in January, 2009 was for $819 billion,  a plan breathtaking in size and scope that President Obama hopes to make the cornerstone of his efforts to resuscitate the staggering economy.

    You would be correct in saying if you acknowledged that not one Republican voted for it.


    I don't think the Republicans care much for "business," at least at the level most people practice it.  Let's say I own a corner grocery store.  Don't I want food stamp benefits to be expanded? Isn't me getting paid that way better than me not getting paid at all?  Or if I own a paving a roadwork company, isn't public spending my bread and butter?  Shouldn't Republicans have been concerned about all the businesses taken out by the real estate bust?

    I can't say whether or not the Republican pivot towards dealing with the deficit was ignorance or something more sinister.  Probably both.


    Generally I agree with you and while Republicans deserve most of the blame this: "Obama can be criticized for asking for too little, but I think history has shown that the Republicans in Congress were never going to allow for more. That those same Republicans almost caused a new financial crisis by risking a debt default in 2011 is proof enough of their unwillingness to help" is just spin.

    The voters gave Democrats control of all three branches of government by substantial majorities. While some exaggerate the amount of time the senate Democrats had a super majority they did in fact have one for many months. Are you saying that we can only expect Democrats to solve problems if we constantly give them 60 votes? Or more to account for some conservative blue dogs? Obama and the Democrats have to take a big part of the blame for the failure of economic legislation in the first two years of Obama's reign.

    There were other options. Had the Democrats fought harder and eliminated the filibuster entirely not only might we have gotten more progressive legislation but we might not have lost the house and subsequently the senate. I've been against the filibuster since the gang of 14 stopped the Republicans in 2005. Democrats are simply more diverse and fractious so they rarely make good use of the filibuster. Democrats are also pay less attention to their left wing than Republicans do to their right. We lose more fights when Republicans use the filibuster than we win when we use it.  If we had let the Republicans begin the process of ending it it would have been a win mostly for Democrats, what ever small public discontent would have fallen on Republicans, and it would have paved the way for further reform later by Democrats.

    At any rate it's long past time for it to go.


    Well, the Blue Dogs were a problem as they all thought they were going to lose their seats over adequate stimulus.  Tim Geithner was also to blame, guided as he was by his blindspots.


    I wouldn't blame Obama for causing the decline of the middle class, but I would say that he made little effort to solve the problem. It did not seem to become an administration priority for about a year ago, years after more attuned progressives raised awareness about the problem and far too late in his presidency to make any impact.


    OT. Joey's project is done and turned in the first day back to school.  He found all your interviews on his google+ and thought you had sent them to him.  I didn't tell him different. You were the only thing on his google+.  He listened to them several times and we read the rest. He did find your e-mail last week on his phone. His work is on display in the school library. Report card comes home on Friday. He thanks you and thinks it is cool that his grandmother knows an author.   


    Thanks for the update, momoe. I was about to email you b/c I didn't hear back from him. I feel terrible that my response came so late. I was bleary from New Year's Eve revelry when I received his email, so I didn't respond immediately, and then it just slipped my mind. I'm glad that the published interviews worked out for Joey's project, but I still feel awful that I screwed up so badly. Anyway, thank you again for encouraging him to interview me and for reading my book with him. Sorry that I wasn't a better role model. ;)


    Aren't public figures such as yourself supposed to deny being role models?

    This is the coolest thing, Michael.  You're molding young minds with your work!


    Oop, I mistyped. I meant troll model. I mold young minds by relentlessly posting right-wing talking points on their instagram feeds.


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