Will Obama’s Economic Policies Really Reduce Income Inequality?

One crystallizing theme of President Barack Obama’s re-election campaign is his pledge to stem the tide of income inequality. But although hardly any would disagree that he’d be better on the issue than the Republican candidates, experts say it’ll take quite a bit more action than he’s suggested to really reverse the trend. Some of them even caution that part of the phenomenon is beyond the realm of public policy.

To scale back the problem, Obama wants to raise taxes on high earners to Clinton-era levels, uphold the estate tax, implement health care reform to bolster low-income uninsured people, and implement Wall Street reform so as to limit excessive risk-taking in the financial sector.

But it’s far from clear whether these policies, even if fully implemented, will bring about a reversal of the three-decade trend. For instance, even though low- and middle-income Americans improved their standing during the Clinton administration, the gap between the rich and poor continued to grow.

“These trends do tend to be long term, they don’t turn on a dime,” said Heather Boushey, a senior economist at the liberal Center For American Progress. “If you put in place the right set of policies, you can move in the right direction. I’d like to see that experiment go on.”Frederick Lynch, an expert on income inequality at Claremont McKenna College, told TPM that if a second-term Obama follows through with those policies and additionally makes a “full-throttle defense of Medicare and Social Security” against the prospect of cuts, he’ll have a solid foundation for protecting the middle and working class.

“I don’t think there’s any doubt at all that he’d be better than someone like [GOP frontrunner Mitt] Romney at mitigating income inequality. But to an extent, the economic system has a life of its own,” Lynch cautioned. “It’s driven by globalization, technology, immigration — forces we do not fully understand. The situation in Europe will also have an impact. So the President has a limited ability, more so than most people realize, to shape those systems. He’s not a God, and there needs to be more of a recognition of that.”

Dean Baker, co-director of the Center for Economic and Policy Research and one of Obama’s most vocal progressive critics, told TPM that the President’s policies will have only a minimal impact on inequality, and argued that there’s more he could do to reverse the growing gap between the rich and poor.

“His policies are really trivial,” said Baker. “Yes, it would be good to maintain the estate tax and get the top tax rate to the Clinton era level, but the vast majority of the story was in before-tax income, not changes in tax rates. Here Obama has been as bad as [George W.] Bush.”

Baker proposed a financial speculation tax to limit high incomes resulting from “shuffling paper,” breaking up the largest banks and ending “too big to fail” subsidies, and reducing the value of the dollar to make U.S. exports more competitive.

Beyond that, he believes more economic stimulus and Federal Reserve action is urgently needed to reduce employment, limit housing foreclosures and return working class conditions to a “more normal level” — which he projects won’t happen otherwise until 2016 or 2017.

“Obama should at least be able to say this even if Congress may block the steps needed to get the economy back on its feet,” Baker said.

Boushey agreed that more economic stimulus would help get working people on better footing.

Conservatives mostly don’t see income inequality as a pressing issue — many dismiss it as an excuse to advance liberal policies. Romney recently decried it as reflective of the “politics of envy” and “class warfare,” saying it’s the kind of thing that should only be discussed in quiet rooms.

Boushey rejected that argument. “I have great concerns about [Romney’s] view, given the growing body of evidence that income inequality leads to economic instability and has a pernicious effect on long-term economic growth,” she told TPM.

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