Obama Promise to Boost Middle Class Already in Peril

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Delegates hold signs during day two of the Democratic National Convention (DNC) in Charlotte, North Carolina, U.S., on Wednesday, Sept. 5, 2012. Close

Delegates hold signs during day two of the Democratic National Convention (DNC) in... Read More

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Photographer: Scott Eells/Bloomberg

Delegates hold signs during day two of the Democratic National Convention (DNC) in Charlotte, North Carolina, U.S., on Wednesday, Sept. 5, 2012.

President Barack Obama, who said his “one mandate” in a second term was to help middle class families, takes the oath of office with many barriers to raising most Americans’ living standards.

Most Americans started this year with a cut in take-home pay as Congress let a temporary 2-percentage-point reduction in payroll taxes expire. Workers’ own leverage to gain wage increases will be limited for years by competition from the swollen ranks of jobless Americans as forecasters expect the unemployment rate to remain at or above 7 percent through 2014.

Even with bright spots such as signs of strength in housing and an energy boom that’s lowering fuel costs for manufacturers, forecasters predict a slower expansion as federal tax increases and spending cuts crimp growth and demand for exports drops with a weakening global economy. While the U.S. economy advanced at a 3.1 percent rate in the third quarter, growth of just 2 percent is seen this year, according to the median estimate of economists surveyed by Bloomberg.

Obama at the same time faces united Republican opposition to his agenda and pressure to slash federal spending.

“The president is still fundamentally on the defensive,” said Damon Silvers, policy director for the AFL-CIO labor federation. “His fundamental task is to avoid being forced into austerity measures that will hurt the economic recovery or the capacity of our government to serve the people.”

Photographer: Mandel Ngan/AFP via Getty Images

President Barack Obama shows a copy of his jobs plan in Delray Beach, Florida. Close

President Barack Obama shows a copy of his jobs plan in Delray Beach, Florida.

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Photographer: Mandel Ngan/AFP via Getty Images

President Barack Obama shows a copy of his jobs plan in Delray Beach, Florida.

Falling Incomes

Obama was confronted in his first term with an inherited recession that drove down most Americans’ incomes. His second term starts with a fight to merely hold the line against the Republican House majority’s push to cut benefits in entitlement programs such as Medicare and Social Security that many Americans rely upon.

Looming battles over the budget, the legal debt limit and a round of automatic spending cuts scheduled for the end of February restrict Obama’s leeway for other priorities, such as boosting infrastructure spending to stimulate economic growth.

The pieces of his economic agenda most likely to raise middle-class living standards in the near term are “the parts that look like they’re not going anywhere,” said Larry Katz, a labor economics professor at Harvard University. These include plans for an infrastructure bank and tax breaks for new hires.

“Left by itself,” Katz said, the economic recovery is likely to continue generating “tepid, small improvements” in middle-income workers’ living standards “but not enough to really offset the poor performance since the late 1990s.”

Long Erosion

Middle-class U.S. workers -- defined by one measure as households with annual incomes within 50 percent of the national median, or between about $25,700 and $77,000 -- have faced a four-decade-long erosion of living standards. It was interrupted by a rare period of rising earning power during the fast-growing economy of President Bill Clinton’s second term, Katz said.

Real median household income soared to $54,932 in 1999 from $50,661 in 1996 based on constant 2011 dollars, an all-time high since the U.S. Census began reporting the data in 1967.

By contrast, median household income in November was $51,310 -- $3,850 lower than when Obama took office in January 2009, according to an analysis of census data by Sentier Research, an economic-consulting firm in Annapolis, Maryland.

In Clinton’s second term, gross domestic product grew at an average 4.3 percent rate and the unemployment rate averaged 4.4 percent. That created a tight labor market that provided workers leverage to press for higher wages.

Minimum Wage

Clinton also won congressional passage of a two-step increase in the minimum wage, which took effect in 1996 and 1997, creating additional upward pressure on pay; the federal minimum wage hasn’t gone up since 2009, when the final step of a wage increase signed by President George W. Bush took effect.

The gains of the late-1990s are eclipsed by decades of downward pressure on pay.

Median wages for men between 25 and 64 dropped 19 percent - - to $34,000 a year -- from 1971 to 2011, after accounting for inflation, according to an analysis by Michael Greenstone, a Massachusetts Institute of Technology economics professor and director of the Hamilton Project, a Washington research group affiliated with the Brookings Institution.

The impact of the decades-long slide in wages was initially cushioned in many families by the increasing number of women who went to work, and later by the home equity that families borrowed against during the run-up in housing prices before the real estate bubble burst.

Working Women

The portion of American women over 20 with jobs climbed to 58.7 percent in 1999 from 41 percent in 1970 and stood at 55 percent last month, according to the Bureau of Labor Statistics. Home mortgage debt surged to $10.6 trillion in the first quarter of 2008, from $4.5 trillion in the same period of 2000, and stood at $9.5 trillion in the third quarter of last year, according to the Federal Reserve.

Competition from lower-wage workers overseas, technological advances that allow factories and offices to produce more with less labor and declining union membership have all combined to squeeze the pay of the moderately skilled workers who are the backbone of the middle class.

Obama made the economic security of Americans at the middle of the income ladder the central theme of his re-election campaign. At a news conference after his re-election, he said his single mandate was “to help middle-class families and families that have been working hard to try to get into the middle class.”

Blaming Bush

The message echoed a theme of his 2008 presidential race, during which he assailed Bush for wage losses suffered by the middle class. Candidate Obama cited census figures showing the median income of working-age households -- those headed by someone younger than 65 -- had dropped more than $2,000 after inflation during the first seven years of Bush’s administration, before the recession began.

The worst economic slump since the 1930s and a recovery that has generated relatively few of the jobs that once supported the middle class have further tightened the financial pressure on many Americans.

Obama made up for part of the declining earning power by lowering the federal tax burden on middle-income families, with the typical family averaging a tax cut of slightly under $1,000 each year of his first term, according to Roberton Williams, a fellow at the Tax Policy Center in Washington. The bulk of those tax breaks have now expired, Williams said.

Deficit Spending

During the end-of-year political battle between the White House and congressional Republicans, the two sides extended expiring income-tax rate cuts passed under Bush for couples with income below $450,000 while raising rates on income above that.

Republicans blame Obama’s response to the weak economy, including a 2009 stimulus plan estimated at $833 billion, for depressing growth.

Douglas Holtz-Eakin, a former economist on Bush’s White House staff, said deficit spending under Obama will continue to raise fears of future tax increases among investors if government spending isn’t cut.

“Bad growth kills the middle class,” said Holtz-Eakin, now president of the American Action Forum. “They really need to get the debt trajectory trending down, so the private sector can go about its business.”

Greenstone, a former chief staff economist for Obama’s Council of Economic Advisers, said another measure by the president, his health-care law that will take full effect in 2014, will “have a huge impact on economic security.” Its insurance subsidies for lower-income families and access to coverage with no exclusion for pre-existing conditions will reduce the risk of financial ruin from health problems, he said.

Sharper Focus

The president’s second-term economic strategy will come into sharper focus in the next several months, said William Galston, a former domestic policy adviser to Clinton. Obama will signal his priorities at events such as his Jan. 21 inauguration speech and his State of the Union Address on Feb. 12 and then begin to demonstrate them in the fiscal talks with Republicans.

Amy Brundage, a White House spokeswoman, said Obama “will continue to fight to build on the economic progress we have made by investing in the things that spur growth” and protect the middle class.

The White House has let allies know that a deal on the U.S.’s long-term fiscal path and changes in immigration law to create a pathway to citizenship for undocumented aliens are priorities.

Simplifying Taxes

Obama has voiced support for a range of other goals: a simplified tax system with lower rates and fewer breaks for the wealthy; raising the number of college graduates; a major infrastructure program; an energy policy addressing climate change; expanded promotion of exports, and incentives favoring manufacturing.

“I know where their hearts are: They want to do all these things,” Galston said. Yet, he added, “There’s the real agenda and the notional, aspirational agenda.”

Second-term presidents typically have a window of 12-18 months to win passage of legislation before the midterm elections and the positioning for the next presidential election create political obstacles. Often, their successes have come from forging compromises.

Clinton negotiated a balanced-budget deal with the Republicans in 1997 that put the nation on a path to surpluses. That agreement included Democratic goals such as middle-class tax relief through a $500 per child credit, college tax credits and a children’s health-insurance plan.

President Ronald Reagan worked with Democratic congressional leaders to win passage of a 1986 tax law that lowered rates while reducing deductions and other breaks.

President Dwight Eisenhower negotiated second-term deals with Democratic congressional leaders, including a 1957 civil rights bill, the first such law since the Reconstruction era. The 1958 National Defense Education Act, passed after the Soviet Union launched the Sputnik satellite, expanded federal aid to schools at all levels.

Bush’s second term offers a more cautionary note: It foundered as his efforts to revamp immigration laws and move Social Security to privately directed accounts ran into congressional opposition.

To contact the reporter on this story: Mike Dorning in Washington D.C. at mdorning@bloomberg.net.

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net.

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