Time seems to think we need another FDR, or maybe even Ronnie Raygun (not so much, and with another Paul Volker)... well, we're getting neither this cycle....
In the waning minutes of his only TV debate with Democratic incumbent Jimmy Carter in 1980, Ronald Reagan looked straight into the camera and asked, "Are you better off than you were four years ago?"
It was a defining question of the campaign — and of late 20th century American politics. It was also pretty easy to answer. The "misery index," a then popular measure that added the unemployment rate to the inflation rate, had skyrocketed during Carter's tenure. Taxes had risen sharply. There were other issues on voters' minds, like the Iranian hostage crisis and those dang cardigans Carter used to wear. But the economy was crucial to Reagan's victory. After taking office, he responded by ushering in a new era in economic policy — cutting tax rates, slashing regulation and tirelessly preaching the gospel that individual Americans were better suited to make economic decisions than bureaucrats in Washington were.
This election year, the economy is again at the forefront of voters' minds. The misery index is no longer the problem; at 9% and change, it's miles below the 20% of late 1980. But Americans have a new menu of economic woes — among them a real estate crash, a credit crisis, a broken health-care system and nagging job insecurity. Poll after poll shows a vast majority convinced that the economy and the country are headed in the wrong direction.
The first and most obvious thing to be said is that this represents a big stumbling block for Republican John McCain. He's not the incumbent, so the "four years ago" line doesn't apply directly to him. But history shows that slow economic growth is among the best predictors of a change in party control of the White House — and right now the economy is barely growing at all.
The bigger issue for voters to wrestle with, though, is not what the economy can do to the presidential race but what the next President can do to the economy. Usually it's not so much. But every once in a while, like when Franklin Delano Roosevelt was elected in 1932 and Reagan in 1980, the effect can be dramatic. Reagan's policies, together with some luck and the inflation-killing zeal of Federal Reserve Chairman Paul Volcker, helped the U.S. economy break out of its 1970s malaise into a new era of flexibility, innovation and growth. And this era didn't end when Reagan left office in 1989. Subsequent Presidents, even Democrat Bill Clinton, followed more or less in Reagan's footsteps.
Economic eras don't last forever, though, and there are signs that the current slowdown is a harbinger of something bigger: an end to America's 25-year love affair with tax cuts and deregulation. A lot of the cracks that have emerged during that time, because of global economic shifts or our own neglect, have become impossible to ignore — stagnant incomes, a federal budget gone way out of balance, soaring energy prices, a once-in-a-lifetime housing crash and growing financial risks in retirement and from health care.
What it adds up to is a generalized sense of economic insecurity that has dimmed many Americans' optimism about their future. So there's a chance that this election could turn out to be a major economic turning point, just like 1980's was. A significantly new direction in economic policy seems much more likely if Barack Obama (or Hillary Clinton, on the off chance that she returns from the political dead yet again) prevails in November. But throw John McCain together with a Democratic Congress, and who knows what might pop out? Economic trouble begets economic change. Here's what may be in the offing.
INCOME
-$991
THE OTHER 99% OF AMERICA COULD REALLY USE A RAISE
If you feel as if you've been going backward, you haven't been imagining it. According to the U.S. Census Bureau, the median American family made $58,407 in 2006. That's $991 less, when you adjust for inflation, than the median in 2000, and indications are that things haven't gotten any better in 2007 or this year.
Recessions — like the one in 2001 and the one we might be in now — always reduce incomes. The problem since 2000 is that even when the economy was growing, the fruits of that growth landed almost exclusively in the pockets of the wealthiest Americans. According to economists Thomas Piketty and Emanuel Saez, 75% of all income gains from 2002 to '06 went to the top 1% — households making more than $382,600 a year.
The gap between high and low earners has been growing since the late 1970s, and until recently, economists attributed virtually all of it to technological and demographic changes that increased the premium paid to those with advanced skills and education. If that were true, the only answer would lie along the arduous path of improving the education and skill levels of American workers. And you certainly wouldn't want to discourage people from getting an education by heavily taxing the rewards for it.
But according to Piketty and Saez, the really dramatic developments have all been at the very, very top — not the top 1% but the top 0.01%, who now control 5.46% of all income, their highest share on record. (The data go back to 1913.) Most of these people are well educated, but it's awfully hard to portray their riches purely as rewards for education or skill.
Many economists now believe at least two other factors have contributed to the growth in inequality: globalization and Reagan's big cuts in taxes on the rich. Even as it rewards those at the top of their fields worldwide with spectacular paydays, globalization holds down earnings for millions of Americans who compete with workers overseas — not only lower-skilled factory and phone-center workers but also engineers, lawyers and doctors. Public opinion has reacted to this with increasing distrust of free trade, a wariness that both Obama and Clinton have echoed in their campaigns. But this is touchy territory: trade may distort the income distribution, but economists remain almost unanimous in warning that restricting trade would slow overall growth. There are similar concerns about using the tax code to address inequality, although Princeton political scientist Larry Bartels demonstrates in his new book, Unequal Democracy: The Political Economy of the New Gilded Age, that the redistributive policies of Democratic administrations since World War II succeeded in delivering better income growth to low-income and middle-income Americans than Republican administrations did.
So what should be done about income disparity? In an April Gallup poll, 68% of respondents said wealth "should be more evenly distributed" in the U.S. — the highest percentage saying so since Gallup started asking the question in 1984. A smaller majority, 51%, agreed that "heavy taxes on the rich" were needed.
To the extent they talk about it at all, the two parties take different approaches to closing the income gap. Obama in particular has been explicit about wanting to shift more of the income-tax burden away from the middle class and onto those making more than $200,000 a year, while McCain has spoken mainly about creating better job-retraining programs for those displaced by globalization. Another potential path, although it hasn't been a theme in the campaign so far, would be a big effort to repair the country's crumbling infrastructure — which would create lots of jobs that couldn't be outsourced overseas and would also deliver long-term economic benefits. In any case, the income gap is an issue that's been danced around for too long. It's time to address it.
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