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Presidential economics

Posted By Russ Roberts On December 4, 2013 @ 9:42 pm In Inequality | Comments Disabled

Here is President Obama’s summary [1] of what happened to economic life in America after the late 1970′s:

As values of community broke down, and competitive pressure increased, businesses lobbied Washington to weaken unions and the value of the minimum wage.  As a trickle-down ideology became more prominent, taxes were slashed for the wealthiest, while investments in things that make us all richer, like schools and infrastructure, were allowed to wither.  And for a certain period of time, we could ignore this weakening economic foundation, in part because more families were relying on two earners as women entered the workforce.  We took on more debt financed by a juiced-up housing market.  But when the music stopped, and the crisis hit, millions of families were stripped of whatever cushion they had left.

And the result is an economy that’s become profoundly unequal, and families that are more insecure.

Let’s take it a sentence at a time:

As values of community broke down, and competitive pressure increased, businesses lobbied Washington to weaken unions and the value of the minimum wage.

I don’t know whether community values broke down, whatever that means but there was some competitive pressure on American companies from increased foreign trade. That was generally a good thing. But unions weakened because the economy was changing. Service jobs continued to grow and outside of the government, service jobs aren’t unionized. The President suggests that the whole thing was a nefarious plot by business to exploit workers. Is that true? Union workers as a percentage of the private sector work-force has fallen steadily since WWII. It did fall more quickly starting in the late 1970′s but it has continued to fall through Democratic and Republican Administrations. Is that all the power of lobbying?

Inflation eroded the value of the minimum wage. I assume the President means to say that businesses lobbied to keep the minimum wage from being increased to offset the erosion of inflation. That’s true. I think that was good or low-skilled workers, but let’s ignore that for now.

As a trickle-down ideology became more prominent, taxes were slashed for the wealthiest, while investments in things that make us all richer, like schools and infrastructure, were allowed to wither.

This is a combination of a deception and a lie. Tax rates were reduced for all Americans in the 1980′s. But of course the rich (and lots of non-rich) pay more in taxes today than in 1980. Confusing rates and amounts is convenient. But the next line is just wrong. Investments in schools and infrastructure were allowed to wither? Please. That’s just not true.

Capital outlays for education [2] were about $20 billion in 1980, measured in 2011-2012 dollars. In 2008 the number was $71 billion. A tripling is not withering. In 2010, the most recent data, the number is $58 billion showing the effects of the recession. But no withering.

But the infrastructure is really bizarre. Here’s one measure from the CBO:

Infrastructure [3]

 

Notice that withering? Yeah, I missed it, too.

And for a certain period of time, we could ignore this weakening economic foundation, in part because more families were relying on two earners as women entered the workforce.

I don’t know about the “ignoring” part, but women did start working more. They also got divorced a lot more so single women started working more. So the proportion of households with two earners is now LOWER than it was in 1980. Not a lot lower. But lower.

We took on more debt financed by a juiced-up housing market.

I think he has causation backward there or at least he’s ignoring some simultaneity.

But when the music stopped, and the crisis hit, millions of families were stripped of whatever cushion they had left.

And the result is an economy that’s become profoundly unequal, and families that are more insecure.

Yes, the distribution of earnings and wealth is less equal than it was in 1979 or 1980. But what’s the cause of it? Lots of things, but few that are mentioned by the President. Increasing the power of unions and the minimum wage are the wrong ways to make things better. How about improving our lousy school system in America’s inner cities?

 

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URLs in this post:

[1] Here is President Obama’s summary: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/04/the-best-speech-obama-has-given-on-the-economy/

[2] Capital outlays for education: http://nces.ed.gov/programs/digest/d12/tables/dt12_205.asp

[3] Image: http://cafehayek.com/wp-content/uploads/2013/12/Infrastructure.jpg

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