July 30, 2013

Obama's Middle Class Malaise

Income redistribution and pro-union policies are hurting, not helping, the economy.

This past week in Galesburg, Illinois, President Obama gave his first speech on his plans to reinvigorate a still stalled economy at Knox College. The speech itself received little press coverage—so little, in fact, that the Sunday New York Times ran a puff-piece on it to build interest in his next speech—on a similar topic—scheduled for Tuesday, July 30 in Chattanooga, Tennessee. In these speeches, the president is using the bully pulpit to argue for redistributive, pro-regulatory, pro-union policies that he claims will serve the middle class.

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  Illustration by Barbara Kelley

But his all-too familiar remarks are likely to continue to fall on deaf ears, as the public imagination turns its attention to real events, including the Securities and Exchange Commission’s indictment of SAC Capital Advisors and the public fight over who will assume the chairmanship of the Federal Reserve at Ben Bernanke leaves. Will the President choose the oft-impolitic Lawrence Summers, who is suspicious of the stimulus, or the cautious Janet Yellen, who supports it?

Farewell to Supply and Demand

The President’s speech at Knox College needs some close deconstruction because it sheds harsh light on a problem that has dogged his domestic policy agenda from the beginning: intellectual rigidity. The President, who has never worked a day in the private sector, has no systematic view of the way in which businesses operate or economies grow. He never starts a discussion by asking how the basic laws of supply and demand operate, and shows no faith that markets are the best mechanism for bringing these two forces into equilibrium.

Because he does not understand rudimentary economics, he relies on anecdotes to make his argument. He notes, for example, that the Maytag plant that used to be in Galesburg is no longer in operation—it closed in 2004—but he never asks what set of forces made it untenable for the business to continue to operate there. He never mentions that Maytag’s relocation of its manufacturing operations to Mexico may have had something to do with a strong union presence or the dreadful economic climate in Illinois.

Unfortunately, our President rules out deregulation or lower taxes as a way to unleash productive forces in the country. Indeed, he is unable to grasp the simple point that the only engine of economic prosperity is an active market in which all parties benefit from voluntary exchange. Both taxes and regulation disrupt those exchanges, causing fewer exchanges to take place—and those which do occur have generated smaller gains than they should. The two-fold attraction of markets is that they foster better incentives for production as they lower administrative costs. Their comparative flexibility means that they have a capacity for self-correction that is lacking in a top-down regulatory framework that limits wages, prices, and the other conditions of voluntary exchange.

Deconstructing Obama

Instead of suggesting policies to reduce the impact of government on production, Obama reverts into a lament for the lost middle class. He notes that our economic engine has, over time, “began to stall”:

Technology made some jobs obsolete. Global competition sent others overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed—the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.

In the course of a single paragraph, he hits on so many issues—and so many mistakes—that his elegant prose conceals. Obama speaks first of how the economic engine began to stall, but he offers no timeline. His general statement may square with the economic malaise of the Carter years, but it hardly describes the solid growth during most of the Reagan and Clinton years, as both presidents grasped, however imperfectly, that any expansion of the government footprint on the economy could dull the incentives to production.

The situation turned south the past ten years. The second George Bush administrative gave us No Child Left Behind and Sarbanes-Oxley, while Obama followed with Obamacare and Dodd-Frank. Such legislation offsets the many of the benefits from the Bush tax cuts, which, of course, Obama has undone. But his use of the phrase—the engine “began to stall”—conceals that he has no explanation of the ebbs and fall of the overall system.

His next sentence about technological change is every bit as otiose. Of course, technology makes some jobs obsolete. That’s something we should celebrate. Technology led to the automobile, ensuring the end of the horse and buggy era. At the same time, technology led to both better products and better jobs, and more of both. Joseph Schumpeter’s cycle of creative destruction explains these forces beautifully. Even Obama would not favor clamping down on the digital world in order to preserve jobs in the print media. Focusing on the negative consequences of technology obscures its far greater positives from innovation. It could easily lead government regulators to take a dim view of innovation.
Next, he takes on global competition. Of course global competition sends some jobs overseas, but it also can increase jobs at home whenever we organize our own production to decrease domestic obstacles to sales abroad. But in a global economy, what we cannot do is to expect our trading partners to structure their businesses and laws to subsidize American production in their own economies.

We have learned the benefit of free trade across state lines in the United States. It is imperative that we not forget that this same logic applies to free trade across nations, where again the principle of comparative advantage—let each nation specialize in the work where it is most efficient—offers the securest route to global and domestic improvement. The effort to shield individual workers from foreign competition comes at a cost to the system as a whole.

Unfortunately, the President cannot be open to international competition because of its crippling impact on domestic unions that work best behind a tariff wall. We should greet what he writes with deep apprehension: “It became harder for unions to fight for the middle class.” But the union movement does not represent the middle class. It receives dues only from its members, and it is only union members that receive union largesse in return. Other members of the middle class receive no assistance from unions, or are hurt by union activities. The President notes with some pride that “Airbus will build new planes in Alabama.” He might have added that Airbus chose Alabama because of its strong anti-union policies, which open up jobs for both middle class and poor people seeking economic advancement. Boeing relocated much of its business to South Carolina for the same reasons.

Indeed, it is critical to remember that today the greatest threat that unions pose to the economy does not come at the bargaining table but in the legislative arena where they work nonstop to block non-union rivals. One recent example of their job-busting behavior is The Large Retailer Accountability Act that just past the D.C. City Council by an 8 to 5 vote. If signed by Mayor Vincent Gray, it would mandate a $12.50 “living wage” imposed solely on new retailers with 75,000 square feet in space and a billion dollars or more per year in sales. This ad hoc scheme exempted current unionized businesses. Indeed it is explicitly targeted at the Wal-Marts, which has announced that if the law goes into effect, it will cancel at least three of the six new stores that it has planned for Washington D.C. proper. That would cost D.C. some 1,800 new jobs.

Like clockwork, the AFL-CIO supports this legislation on the ground that the law “would lift thousands of working families in Washington, D.C., out of poverty and support decent wages across the retail industry.” Dream on. The unpleasant reality is that the disappearance of these jobs will hurt the same poor people whom the President wishes to help.

Yet his speech offers not one hint that he is aware of the deep conflict between his abject fealty to union objectives and the poor people he wants to lift up. Yes there is an increasing gap between the rich and poor, but that gap won’t narrow if the President keeps plumping for a higher minimum wage that will block poor individuals, many of whom are African-American, from getting a toehold in the economy. No jobs at artificially high wages—which is what will happen, per Wal Mart—is no improvement over plentiful jobs at market wages.

No Obama speech is complete without lashing out at the tax cuts that Washington has doled out to the “rich.” On this point, he substantially overstates the increase in the income gap. Unfortunately, he also misses the key point that the higher rate structures have reduced income at the top, and thus the ability to fund the ever more lavish transfer programs that Washington wants to put in place. The President of course thinks that the new dawn is just around the corner, so long as we keep to his general program.

Indeed he constantly thinks of his greatest regulatory failures as his great successes. No other president has “saved the auto industry,” albeit by a corrupt bankruptcy process, or “taken on a broken health care system,” only to introduce a set of unworkable mandates that are already falling apart, or “investing in new technologies,” which tries to pick winners and ends up with losers like Solyndra. The great advances in energy have come from private developments, most notably fracking, and not from the vagaries of wind and solar energy, which no one has yet figured out how to store for future use when needed.

The President seems utterly incapable of seeing the downside to any of his policy choices. They are announced from on-high as all gain and no pain. In the face of stagnant growth, weak corporate earnings, and continued high unemployment, he shows not the slightest recognition that some of his programs might have gone amiss.

It is easy to see, therefore, why people have tuned out the President’s recent remarks. They have heard it all countless times before. So long as the President is trapped in his intellectual wonderland that puts redistribution first and regards deregulation and lower taxation as off limits, we as a nation will be trapped in the uneasy recovery that will continue to dog us no matter who is chosen to head the Federal Reserve.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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