Policies of Obama and Bernanke Lead To An Uneven Recovery

President Obama has often made statements in support of income and wealth redistribution. He claims to believe that the country would be better off if we took money away from the rich and gave it to the poor. Many of his policies seem designed to accomplish this. Yet, according to a report from the Federal Reserve Bank of St. Louis, he has failed in reaching his goal. Instead, his presidency has seen a huge shift in wealth from average families to the rich.

First, let's look at what policies President Obama has pursued and their effects. Then we can see why President Obama is getting results opposite to what he wanted.

A signature policy was the stimulus spending that Obama pushed so hard for. A lot of money was spent (about $800 billion) with most of the money targeted to help Democratic constituencies such as union members. This turned out to produce little economic benefit but it did help run up the federal debt. Democrats also pushed for a temporary cut in social security taxes, with general tax revenue and borrowing used to make up the shortfall. This put a little more money in everybody's pockets for a while and ran up the debt even more.

The Obama administration has also worked very hard to provide more free lunches to the poor and middle class. We have record numbers of people receiving food stamps, disability payments, free cell phones, government medical care, and many other sorts of welfare program payments. If Obamacare is ever fully implemented, it will add more redistribution to this picture, potentially offering subsidized health insurance for families that make up to $90,000 per year.

In a deal with Congressional Republicans, Obama and the Democrats also pushed through an increase in income taxes on the rich in exchange for not raising taxes on 98% of Americans.

Taken together, it certainly seems as if the government is trying to redistribute wealth and income from the rich to the poor and the middle class. But as in so many other areas, the Obama administration does not appear to have succeeded in its goal of redistribution.

From 2007 to 2009 the fall in real estate values and the stock market led to a drop of $16 trillion in the aggregate net worth of American families (what we own minus what we owe). All this lost wealth has now been regained; in fact, total household net worth is now slightly higher than before the recession.

It sounds like a good news story with people having fully recovered from the recession. Unfortunately, a deeper look at the data reveals some bad news for those who believe in redistribution.

The report by the St. Louis Federal Reserve Bank showed that through the end of 2012 American families had recovered almost all lost wealth (and by now it has exceeded the previous high), but that huge discrepancies existed in how individual families had recovered. In fact, younger families, Hispanic families, and African-American families have recovered much less of their lost wealth than white, Asian, and older families. Some categories of families (younger, less-educated) have recovered none of their lost wealth.

The difference between the changes to the mean and the median family are large. At the mean (simple, arithmetic average), wealth has recovered. At the median (half above, half below), only 45% of the lost wealth has been recovered.

Most younger and many non-white families had the bulk of their net worth invested in housing, while older families were more likely to have non-real estate assets such as stocks and bonds. While both real estate and financial markets suffered large losses (in fact stock market losses were larger, on average, than real estate value declines), the stock and bond markets have recovered roughly all of their losses. Real estate values in many areas of the country are finally starting to recover, but price increases in the last year still leave values much lower than at the peak for most locations.

The Obama administration has tried many policies to intervene in the housing and mortgage markets. For the most part, they have all failed. Few mortgages have actually been modified and most of the ones that have been modified ended up in foreclosure anyway. The temporary tax credit to provide free government money for home down payments simply shifted the timing of some sales but failed to create a permanent boost in real estate demand. Things are getting better, but it appears to be more a case of a slow, steady return to normalcy as real estate markets adjust to the new equilibrium of supply and demand than any response to a government program.

However, in the case of the stock and bond markets, the picture is quite different. Thanks to the enormous debt run up by the federal government, we cannot afford to pay interest rates on the federal debt that even approximate the historical norm. The Fed's quantitative easing and interest rate policies have therefore been designed to hold interest rates artificially low. This policy has harmed millions of Americans who wish to invest their savings into reliable bank deposits or government bonds. It has become impossible to earn a decent return on money in a bank, especially considering inflation.

That has pushed people into the stock market in search of higher returns. And the stock market has rewarded them by recouping all its losses according to the major market indices. So people who are sophisticated investors, who were not scared out of the stock market for a long time, and who had wealth left at the bottom of the recession have prospered under President Obama and Fed Chairman Bernanke. The stock market recovery may have convinced some people that the economy was improving, but that was only true for people invested in the market.

Simple math requires that if total wealth has fully recovered while more than half of American families have recovered less than half of the wealth that they lost, those at the top have recovered more than what they lost.

The lesson here is that government policy has led to a very uneven recovery of wealth lost during the recession. Regardless of what the government says it desires or tries to achieve, the end result of its policies appears to be a widening of economic inequality. The rich are getting richer again, while most Americans are being left far behind.

This may be an unintended consequence of the government's fiscal and monetary policies, but nevertheless an administration claiming to be in favor of policies to promote equality is actually presiding over an enormous increase in economic inequality. The irony here is strong, but the reality is that the very families who cannot find jobs under this administration are also faring the worst at recovering lost wealth from the recession.

Interestingly, this has not received much press coverage. I suspect if a Republican president were in office while wealth inequality was increasing, it would be on the front page. Instead, it is just another of President Obama's failures to achieve his goals, one that is hurting millions of American families.