Thursday, 26 January 2012

Obama on Income Equality and Economic Recovery

Nat O'Connor: President Obama used his State of the Union address 2012 to highlight income inequality. His speech is only one of a number of examples of a growing international awareness that economic inequality is a core problem for developed economies and societies.

In addition, his speech echoed many progressive suggestions for how to achieve economic recovery in the current context.

President Obama was very clear on the issue of inequality. For example, saying, "We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot ..." He observed that "Folks at the top saw their incomes rise like never before, but most hardworking Americans struggled with costs that were growing, paychecks that weren’t, and personal debt that kept piling up."

In particular, President Obama focused on the tax breaks that Congress has given to the wealthiest Americans: "Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2 percent of Americans. Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. ... Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else – like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both."

Obama was also clear about the mathematics of tax breaks for wealthy individuals. "... when I get a tax break I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference — like a senior on a fixed income, or a student trying to get through school, or a family trying to make ends meet."

In terms of economic policy, President Obama is of course hugely restricted in what he can actually achieve if Congress disagrees. Also, the speech is a centrepiece of his re-election campaign, therefore some of the promises may be taken with a grain of salt. He nevertheless spelled out a clear critique of previous policy and a framework for a progressive economic recovery that would serve society.

Obama stated that "we will not go back to an economy weakened by outsourcing, bad debt, and phony financial profits."

He outlined some measures to help "responsible homeowners" caught in mortgage debt, such as "a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates." And it would be financed through "A small fee on the largest financial institutions [to] ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust."

Obama made a number of observations about the same rules applying equally to everyone, including the financial system: "we need smart regulations to prevent irresponsible behavior." ... "if you are a big bank or financial institution, you’re no longer allowed to make risky bets with your customers’ deposits. You’re required to write out a 'living will' that details exactly how you’ll pay the bills if you fail – because the rest of us are not bailing you out ever again." And significantly, Obama seeks to "establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments."

As he outlined his preferred economic policies, Obama's message on multinational corporations should not be ignored in Ireland: "no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas" ... "From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America."

He had a clear focus on supporting productive investment and job creation in the USA, especially good jobs in deprived areas: "if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers."

He also identified the important role of education in long-term sustainable growth: "Higher education can’t be a luxury - it is an economic imperative that every family in America should be able to afford."

He also had clear messages on gender equality and environmental sustainability: "women should earn equal pay for equal work" and "we don’t have to choose between our environment and our economy".

He clearly identified that productive investment by government can form part of productive investment to grow the economy, for example: "government support is critical in helping businesses get new energy ideas off the ground".

Furthermore he identified the need to repair national infrastructure: "So much of America needs to be rebuilt. We’ve got crumbling roads and bridges; a power grid that wastes too much energy; an incomplete high-speed broadband network that prevents a small business owner in rural America from selling her products all over the world."

In brief, Obama's desired economic policy is: smart regulation of financial institutions; ensure multinationals pay their taxes; support for manufacturing (especially high-tech and investments in deprived areas); affordable higher education for all; equal pay for women and men; environmentally sound investments in clean energy; government-funded research and development; and state-led action to repair and rebuild national infrastructure (from basics like roads, to new essentials like broadband).

All of these objectives are equally valid here and should form part of a Plan B alternative to current economic policies that are socially destructive and economically inefficient.

Of course, while supporting much that Obama proposes, one can still dislike a lot of the reality of US economic policy and accompanying ideology. The admiration of wealth gained by 'success' tends to underestimate the deep economic and social divides between different groups in the USA, and the reality that a family's wealth often allows their children to become wealthy in turn. Likewise, the narrow focus on equality of opportunity tends to ignore the evidence that a measure of equality of outcome is required before an economic system will actually reward merit rather than privilege. Nonetheless, there is much to agree with in the economic vision that Obama has outlined. Just as there is much to disagree with the lack of a similar vision for a change of direction in economic policy here.


Martin O'Dea said...

What you're forgetting here Nat, 'is that we in Ireland can't do any of this because the 3ks wont let us and will, in fact, start to bomb us if we do stuff'.....I can hear it already across the airwaves with ministers and backbenchers with what I used to call the priest's pause when answering a question on tv (you know that two seconds where you could see 'what would the bishop think' going through the mind, modification, then speak)'how will my answer make the government seem a) good or b) not bad'

What of a plan to use the notion of getting back into the market as a platform for a new Ireland. Bringing together many of the concepts outlined from that Obama delivery as well as other indigenous progressive participatory plans - and instead of saying we can't do this because of the troika, we can lay out a document 'Ireland 20-20' or something like that with a view to presenting it to the markets as a reason to invest in Ireland, and buy government bonds. This can be done then with funding requirements and returns etc. sensitivity analysis built in on levels of debts & even if we were to pay off all the banks debts (which my goodness we would hope to not do)

Peter said...

Income inequality is such a complicated issue. Sometimes when I am driving around Lawrence Park, one of Canada’s ten richest neighbourhoods and see local people with their children, I think to myself, “Man, these kids will never have to worry about money.” Their parents will do anything just to ensure an even better future for them. Rich people desperately want their kids to attend the right schools, have best jobs and earn even more than they do. That means taking a seat or an opportunity from a working class or low-income family. It is unfair, but that is how it goes.

Nat O`Connor said...

@ Peter

It is of course natural that parents would want the best for their children. The argument that progressives have to win is that the children of the wealthy would also benefit from a more socially just society.

For example, this TEDx talk is very cogent on the arguments for inheritance tax ('estate tax' in the USA) and how people can be pursuaded that they too benefit from everyone getting a good education, health care, etc. For example, wealthy company owners need a lot of well-educated employees. And that education comes from the public purse. Therefore the wealthy person is a stakeholder in public education too, even if his or her own kids go to a private school.

@ Martin

A positive 20-20 plan for Ireland would indeed be much more encouraging for those who buy Irish government bonds that we have a strategy for how to build ourselves a more prosperous future. How we plan to maintain and expand social investment - in education and health - should be part of such a strategy.

Martin O'Dea said...

Yes, Nat,
I meant a document that would be a vision and associated plan for Ireland 2020 as a forum for socially cohesive, progressive and wealth (not paper-only wealth) generating concepts that could be used by markets to justify their investments.

We should, of course, not fall into the trap of designing policy with markets in mind - again. Policy must be for the benefit of populations, not markets - the pursuant increase in productivity is what markets will naturally follow. So, we should not draw up a document for markets - as I said in error earlier - but one for Ireland