An annotated reading of Obama’s flawed framing of wage and income problems in the SOTU

Having closely followed all of President Obama’s speeches on income inequality, I’ve noticed a significant move forward, from an abstract discussion to one that focused on the key underlying issue—the need to generate robust, widespread wage growth. Unfortunately, this week’s State of the Union (SOTU) address was a huge step backward in how the president framed and discussed the issue. His policy agenda, which I view very favorably, has not shifted. President Obama actually has a wage growth agenda—he just does not highlight its elements as part of a coherent package. That’s unfortunate.

The president’s SOTU framed income inequality and the “strain” on working families as the result of ongoing technological disruption, a force widely considered to be something we cannot nor should not do something about. This is extremely disappointing, incorrect as a factual matter, and misdirects our policy focus and mis-educates the public. It is especially disappointing since the views of center-left economists have been converging on a recognition that technological change has not been a leading factor in our wage problems or inequality in the 2000s (see Mike Konzcal). One need only note the statements made by President Obama’s leading economic advisor in the first term, Larry Summers, last March at a Hamilton Project event on the role of robots:

“And I am concerned that if we allow the idea to take hold that all we need to do is there are all these jobs with skills and if we just can train people a bit then they will be able to get into them and the whole problem will go away. I think that is fundamentally an evasion of a profound social challenge… I think that the broad empowerment of labor in a world where an increasing part of the economy is generating income that has a kind of rent aspect to it, and the question of who is going to share in it becomes very large.”

In plainer terms, Summers is saying that economy’s winners at the top of the income scale have gotten more than their share gaining ‘rents’ (meaning they don’t reflect efficiency gains), and that giving working people the power to act collectively will be key to any rebalancing between the elites and the middle and working classes. He’s saying that any talk about “skill deficits” as the cause of wage problems—that is what the technology story is all about— is misguided, and evades the essential questions of power in the marketplace that drive inequality and wage stagnation.

In fact, wage stagnation and growing wage inequality are the consequences of policy decisions made over the last four decades that have undercut the ability of the vast majority to obtain rising inflation-adjusted wage growth. These policy decisions (or omissions) have favored those with the most income, wealth, and power: failed macroeconomic policies, including the Federal Reserve Board, that have kept unemployment too high; weakened labor standards (e.g. lowered minimum wage, weakened overtime, misclassification, wage theft); eroded collective bargaining; globalization; and executive pay and financial sector policies that fueled top one percent income growth. In contrast, technological change has been going on for a century and its impact on how we produce things and the skills employers need has not accelerated in the 2000s, nor has it particularly favored higher wage workers (see David Autor, Beaudry et al, and Mishel et al) in a way that can explain why high-wage workers have fared far better than those in the middle or the bottom. Technological change can certainly not explain the tremendous success of the top 1 percent.

So with that, here is an annotated discussion of the key excerpts from the SOTU. Obama sets the stage by focusing on technological disruption as the main factor—the big picture dynamic that is hurting working families.

President Obama: We live in a time of extraordinary change — change that’s reshaping the way we live, the way we work, our planet and our place in the world. It’s change that promises amazing medical breakthroughs, but also economic disruptions that strain working families. It promises education for girls in the most remote villages, but also connects terrorists plotting an ocean away. It’s change that can broaden opportunity, or widen inequality. And whether we like it or not, the pace of this change will only accelerate.

Obviously, this ignores that we have just come through the deepest recession since the 1930s, and are still slogging through a slow recovery. This deep recession was the result of a financial crisis (generated on his predecessor’s watch), caused by Wall Street’s greed and excesses and an inadequate—mostly due to GOP resistance to policy and state-level austerity—response to restore us more rapidly to full employment.

Unemployment has dropped from its height of 10 percent to the current 5 percent, but we still have a ways to go. Blacks are still living in a deep recession. Our continued economic weakness is best seen in the share of the prime-age (25–54) workforce that is employed: it dropped by 4.7 percentage points between December 2007 and the summer of 2010 and has recovered only half the drop since then. This is why many economists believe we still have a ways to go to get to full employment and that we still face inadequate demand.

Incomes have been depressed for fifteen years, but especially since the recession began in 2008, and are nowhere near recovery: between 2009 (the start of recovery) and 2014 (the latest year of data), the income of the median working-age household (those under 65) fell from $63,532 to $60,462 (all in 2014 dollars). That puts it 9.2 percent below 2007, the last year before the recession. That is a long time to be underwater. And this followed the earlier period from 2000-07 where income fell 3.4 percent. So, we’ve had 14-15 years of pitiful income growth. No wonder people are not feeling the recovery.

This is primarily the result of excessive unemployment on top of broad-based wage and benefit stagnation, affecting both white-collar and blue-collar workers, which has prevailed since 2002 (and for the typical worker for most of the last four decades). That’s not technological change straining working families, nor should Obama be blamed for this income decline.

President Obama: In fact, it’s that spirit that made the progress of these past seven years possible. It’s how we recovered from the worst economic crisis in generations. It’s how we reformed our health care system, and reinvented our energy sector; how we delivered more care and benefits to our troops and veterans, and how we secured the freedom in every state to marry the person we love. But such progress is not inevitable. It is the result of choices we make together. And we face such choices right now.

The president is correct to proclaim that we can make progress through the policies we choose. But, unfortunately, he ignores that when it comes to income and wage problems. He’s wrong to portray wage stagnation as the inevitable consequence of technological change. We can generate robust wage growth through policy actions.

President Obama: What is true — and the reason that a lot of Americans feel anxious — is that the economy has been changing in profound ways, changes that started long before the Great Recession hit and haven’t let up. Today, technology doesn’t just replace jobs on the assembly line, but any job where work can be automated. Companies in a global economy can locate anywhere, and face tougher competition. As a result, workers have less leverage for a raise. Companies have less loyalty to their communities. And more and more wealth and income is concentrated at the very top.

All these trends have squeezed workers, even when they have jobs; even when the economy is growing. It’s made it harder for a hardworking family to pull itself out of poverty, harder for young people to start on their careers, and tougher for workers to retire when they want to. And although none of these trends are unique to America, they do offend our uniquely American belief that everybody who works hard should get a fair shot.

Here Obama goes full-bore to argue that the squeeze on workers is due to technological change, a force that is beyond our control. He brings in globalization, but seems to suggest it is technology that facilitates companies’ offshoring their production. The fact is, there is no case whatsoever that technology has caused the wage problems since 2000, as has been increasingly accepted by center-left economists. Employment expansion has occurred almost solely among occupations in the bottom third of the occupational wage scale, so there’s no possibility that there’s a growing unmet demand for highly skilled, ”educated” workers being generated by technology that is bidding up wages at the top. Wages for college graduates have been flat since 2002 and many new college graduates have been shunted to jobs that do not require a college degree. The fact is, there’s no evidence that technological change has accelerated since 2000 or turned against middle-wage workers in a new way. Nor does Obama acknowledge that globalization, while surely facilitated by technology, has also been propelled by choices around exchange rates, trade treaties, and other policies.

Wage stagnation is a problem President Obama inherited, but it has continued under him. Laudably, the administration has taken actions that can help restore wage growth—new fair contracting rules, revised overtime rules, attacking employee misclassification, minimum wages for contractors, providing legal work status and eventual citizenship to exploited undocumented workers, NLRB policy changes to facilitate collective bargaining and more—and suggested others—raising the minimum wage, changes to labor laws, etc.—that require legislation. Unfortunately, rather than highlight what is essentially the “Obama wage agenda” that can help balance out power in the labor market, the president chose to blame wage problems on external technological forces.]

Obama shifts to “opportunity,” rather than income or wage trends. Opportunity surely needs to be improved in the United States, but doing so will do nothing to generate more inclusive economic growth over the next twenty years, since opportunity policies are mostly education-related policies aimed at the next generation.

President Obama: We agree that real opportunity requires every American to get the education and training they need to land a good-paying job. The bipartisan reform of No Child Left Behind was an important start, and together, we’ve increased early childhood education, lifted high school graduation rates to new highs, and boosted graduates in fields like engineering. In the coming years, we should build on that progress, by providing Pre-K for all, offering every student the hands-on computer science and math classes that make them job-ready on day one, and we should recruit and support more great teachers for our kids.

And we have to make college affordable for every American. Because no hardworking student should be stuck in the red. We’ve already reduced student loan payments to ten percent of a borrower’s income. Now, we’ve actually got to cut the cost of college. Providing two years of community college at no cost for every responsible student is one of the best ways to do that, and I’m going to keep fighting to get that started this year.

This section is focused on educational improvement and college access—an opportunity agenda These are important policies, but, again, these policies help the next generation obtain high-wage jobs (assuming they will be there) but do not affect how today’s vast majority will fare economically in the near future and, specifically, if the vast majority will see their wages and benefits grow along with rising productivity.

President Obama: Of course, a great education isn’t all we need in this new economy. We also need benefits and protections that provide a basic measure of security. After all, it’s not much of a stretch to say that some of the only people in America who are going to work the same job, in the same place, with a health and retirement package, for 30 years, are sitting in this chamber. For everyone else, especially folks in their forties and fifties, saving for retirement or bouncing back from job loss has gotten a lot tougher. Americans understand that at some point in their careers, they may have to retool and retrain. But they shouldn’t lose what they’ve already worked so hard to build.

Obama now discusses economic security as a topic, but the focus is on aiding people who are transitioning between jobs: unemployment insurance, retraining, and wage insurance. Frankly, retooling and retraining will not work unless we have bountiful decent-paying jobs for people to transition into. What is missing is an agenda to make sure jobs pay well and provide decent benefits and advancement. This would also have been a good place for the president to talk about infrastructure investments and other policies that might actually create jobs.

President Obama: Now, I’m guessing we won’t agree on health care anytime soon. But there should be other ways both parties can improve economic security. Say a hardworking American loses his job — we shouldn’t just make sure he can get unemployment insurance; we should make sure that program encourages him to retrain for a business that’s ready to hire him. If that new job doesn’t pay as much, there should be a system of wage insurance in place so that he can still pay his bills. And even if he’s going from job to job, he should still be able to save for retirement and take his savings with him. That’s the way we make the new economy work better for everyone.

When poverty comes up Obama understandably raises policies where there might be some agreement, like extending the Earned Income Tax Credit to another group. Still, this is pretty weak tea for addressing poverty.

President Obama: I also know Speaker Ryan has talked about his interest in tackling poverty. America is about giving everybody willing to work a hand up, and I’d welcome a serious discussion about strategies we can all support, like expanding tax cuts for low-income workers without kids.

The frustrating thing about the president’s rhetoric is that he has been pursuing a vigorous agenda in the second term that can help rebuild an economy that generates robust wage growth for the vast majority. It would have been helpful if he adequately explained the need for such an agenda to the public and explained what he is actually doing to lift wages.

  • C.B. Bird

    Larry, I wonder if in your paragraph 7 above, what Obama is referring to is globalization and the shift that the US (and European) economy is undergoing from manufacturing to services.