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Income inequality has been falling for a while now
Obama-Biden economics are accomplishing more than people realize
Inequality garnered a lot of political attention during Barack Obama’s first term as president for a bunch of pretty good reasons.
First and foremost, of course, was the huge financial crisis, followed by emergency rescue measures and a steep recession. And even though the economy recovered from the recession, the pace of recovery wasn’t symmetrical to the pace of the collapse. We got a slow, difficult labor market recovery — in stark contrast to a stock market that bottomed out a couple of weeks after Obama’s inauguration and rose rapidly from there.
This was a disquieting situation. I think the upshot is somewhat banal: the Obama administration should have been more willing to cut deals with Republicans to extend regressive tax cuts in exchange for more stimulus spending, and the Federal Reserve should have signaled more tolerance of mild inflation. But the administration didn’t take these steps, so the field was wide open for big ideas about what had gone wrong.
And one plausible culprit was inequality, which had risen a lot in the prior 30 years. It rose in particular on a Reaganite promise that making public policy less distributive would generate a “rising tide lifts all boats” dynamic. Instead, the Reagan administration’s policies led to stagnant average wages through the 1980s, with household incomes rising only because of women’s increased labor force participation. Despite some good years in the late 1990s, inequality still looked quite bad in the 21st century and by 2014, CPI-adjusted median household income was still lower than it had been 15 years earlier — a striking fact that generated a lot of commentary — even though the country had clearly experienced a lot of innovation and GDP growth during that period. This set the tone for the economic policy conversation toward the end of Obama’s presidency, during which time Bernie Sanders became an unexpectedly successful presidential primary candidate and Donald Trump got elected president on a more populist economic message than recent Republican candidates.
In 2017, though, updated economic data showed that by the end of Obama’s term, median wages and household income were at an all-time high.
But with the general tumult of Trump’s presidency, the pandemic, and January 6, the economy largely fell out of a busy news cycle, to the point where I find many people don’t realize that inequality has actually been declining since the Great Recession. Not by enough to undo the run-up in the 1980s and 1990s, but enough to alter our understanding of recent political economy and trends.
Obama’s policies reduced inequality
I often wish more people paid attention to the fact that government data is released with a lag and that those lags vary. Information about the stock market updates daily, information about unemployment updates with about a monthly lag, but information on median household income takes years to update, and so sometimes a narrative will get locked in, even though it’s already outdated on the merits.
I think that’s very much the case for the Obama years, where the correct observation that “the recovery from the Great Recession was too slow” curdled into a narrative of long-term economic decline.
Pulling back a little bit, we can see that median income was growing rapidly by the end of Obama’s term, and the overall growth record from 1990 to 2020 was quite good. In 2014, “we peaked in 1999” was true. But by Trump’s inauguration, it was true that “the average American family has never had it so good.” We had three good years of continuing growth under Trump, and although that was temporarily derailed by a pandemic, I think that unlike during the recovery from the financial crisis, the economic costs have largely not implicated economic policy.
So what happened to inequality during the Obama years? This past November we finally got the Congressional Budget Office’s report, “The Distribution of Household Income, 2019” which lets us assess economic conditions between the financial crisis and the onset of the Covid-19 pandemic.
The report finds three important things about inequality:
Taking the long view, the Gini coefficient (the most comprehensive summary measure of inequality) rose considerably between 1979 and 2019.
Over 100 percent of that increase took place between 1979 and 2007; between 2007 and 2019, the Gini coefficient fell five percent.
During this whole period, the tax and transfer system in the United States has become more egalitarian.
This last point is interesting and easy to lose track of amidst the back and forths of the political system. But in the United States (and every country, as far as I’m aware), the Gini coefficent is lower after taxes and transfers, and it’s possible to track how much lower inequality is after taxes and transfers and how much this changes over time. There, you can see that the system did get less redistributive under Ronald Reagan, but has been getting more redistributive since the big tax reform in 1986. And there was a particularly large increase in redistributiveness associated with the Obama administration raising taxes on the rich in order to expand the welfare state, mostly Medicaid expansion and ACA subsidies.
The Obama administration’s policymaking is not beyond criticism, but I do think the facts laid out in this report offer a considerably different context for assessing the administration’s economic track record. The left has often portrayed Trump’s win as, on some level, a punishment for the failures of neoliberalism with its endless inequality and stagnant wages. And a lot of elite-level thinking in progressive circles during the Trump years was driven by a determination to avoid the mistakes of Obamaism rather than to try to replicate its successes. It’s easy to forget now that he’s president, but Joe Biden received almost shockingly little elite support for a former vice president until very late in the cycle — he was seen as offering Obamaism 2.0 and was deemed unacceptable by people who saw Obama as a failure.
But if you understand the Obama record as successfully altering the inequality trajectory and bringing median income to an all-time high, that casts his other achievements (lower greenhouse gas emissions, marriage equality, etc.) in a different context and makes the idea of “let’s beat Trump and keep on keeping on” look more plausible.
Inequality reduction has continued under Biden
During a recession, incomes fall almost by definition. And the Covid-19 pandemic induced a doozy of a recession. From a policy perspective, compared to 2007-2009, the U.S. government chose on a number of levels to take the hit in the form of elevated inflation rather than elevated unemployment. In retrospect, we clearly erred too much on the side of inflation. But if we’d tried to navigate these choppy waters without ever going over two percent inflation, then unemployment would have been dramatically worse. Better policy could have improved outcomes somewhat, but the big problem is that the pandemic itself left us poorer.
That being said, ignoring the pandemic boom/bust, inflation-adjusted median earnings in the third quarter of 2022 were higher than they were in the third quarter of 2019 and less than two percent lower than in the pre-pandemic quarter. If we have “normal” economic growth this year, we’ll be at a new all-time high.
There’s more to life than the median, of course. But David Autor finds that we’ve actually seen much stronger-than-median wage performance among the lowest-wage workers.
Jeff Larrimore from the Federal Reserve and Jacob Mortenson and David Splinter from Congress’ Joint Committee on Taxation look at a slightly different set of data and find that for workers in the bottom 20 percent of the distribution, “median real earnings including fiscal relief increased 66 percent in 2020 and earnings increases offset relief decreases in the 2021 recovery.”
This good news for low-income workers is easy to miss. You’ve probably read stories like this one from Jeanna Smialek and Ben Casselman arguing that the poor are suffering the greatest hardship due to inflation. That framing in part reflects the generalized negativity bias of the media, but also note that it’s a subtly distinct claim. Aspects of the inflationary economy — especially higher prices for basic food commodities — are bad news for everyone, but richer people have an easier time riding out bad news than poorer people. That’s true even though incomes have risen for the poorest and fallen for the richest. To consider an extreme example, there’s been plenty of coverage of the large decline in Meta’s stock market valuation over the past year, but nobody is going to write a tear-jerker story about the personal economic hardship facing Mark Zuckerberg and his family. When you’re a mega-billionaire, even huge financial losses paired with rising grocery prices don’t make it hard for you to afford food.
But if we want to understand the Biden economy, we need to keep these things in mind:
A more egalitarian tax policy passed in 2022 and hasn’t taken effect yet.
The pre-tax wage distribution has gotten more equal.
Median outcomes have been bad due to inflation, but a lot of this is the illusion of enormous inflation-adjusted gains during the worst of the pandemic.
The upshot is that if we can avoid new rounds of commodity shocks, we’ll be able to pair the egalitarian growth trajectory with positive outcomes for the median and set all kinds of new high points for wellbeing.
Building on success
The upshot is that people who care about egalitarian economics should take a more positive view of recent trends and a more risk-averse attitude toward the future.
For example, one thing that could ruin this story of egalitarian progress would be if President Ron DeSantis sweeps into office in 2024 with a half dozen new Republican senators and enacts the kind of draconian Medicaid cuts he repeatedly voted for as a House member. If you think we are failing on broadly shared growth in the present, you may be inspired to neglect downside risks. But simply achieving zero change to the tax-and-transfer policy baseline (which has taxes on the rich set to go up, thanks to the IRA) would be a significant win.
That’s not to say that we shouldn’t seek continued policy changes. But rather than thinking in terms of “big structural change” or a “political revolution,” it makes more sense to look at the long list of potential pro-growth, pro-equality regulatory changes that could be enacted on a bipartisan basis. Ongoing efforts to improve the refundability of the Child Tax Credit would also do a lot to improve the economic outlook for the poorest. And Medicaid expansion was the biggest egalitarian triumph of the Obama years, but it still hasn’t reached Texas, Florida, and several other states. Democrats have managed to win successful pro-Medicaid electoral campaigns in places as red as Kansas and Kentucky, so it should be possible to achieve the same in Texas and Florida. Part of the difficulty, I think, is that Texas and Florida are purple enough that local Democrats haven’t run Kelly/Beshear-style campaigns and instead keep hoping you can win as a mainstream Democrat in states that Trump carried comfortably in 2020. There is a big opportunity to move policy left by moving issue-positioning right.
It would also, obviously, be ideal to avoid a new recession in 2023 or 2024. The Fed raised interest rates a lot this past year in an effort to fight inflation. And inflation, though still high, has been trending downward. I hope they’ll be a lot more measured in the pace of increases going forward and that as long as inflation continues to trend downward, there won’t be too much worry about accelerating that trend. Conversely, Congress and the White House need to do everything possible to enact supply-side reforms that will keep growth on track.
The overall point here, though, is that while I think everyone acknowledges that the years 2009-2022 saw a lot of progress on LGBT rights and clean energy, it’s widely held that the Obama-Biden approach failed on economic equality.
That just isn’t true.
The biggest bump in the road was that Donald Trump enacted a regressive tax cut and came very close to enacting big Medicaid cuts. The big risk to the project in the future is the risk of losing an election so badly that the welfare state rollback agenda gets a new lease on life. But Obama presided over a gently growing economy and the passage of big egalitarian tax and spending initiatives. Biden has made more modest pro-equality tax changes but is also running a full employment economy that is delivering large gains to the workers at the bottom of the distribution. Continued application of the spirit of political pragmatism and empirical rigor could easily lead to further gains. There’s no reason to risk everything on radical throws of the dice.