Is Obama Really a Middle Class Economic Hero?

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In his recent State of the Union speech, President Obama extolled the virtues of "middle class economics," as a means of spurring economic growth and creating a more inclusive economy. Just what this entails is unclear, but President Obama says this "means helping folks afford child care, college, health care, a home, retirement, and my budget will address each of these issues, lowering the taxes of working families and putting thousands of dollars back into their pockets each year." On closer examination, the policy agenda the president is laying out is a tired mix of class warfare, new taxes, and more government spending.

For the most part, the president painted a rosy economic picture, highlighting increased job growth and shrinking deficits. While these trends are signs of a strengthening economy, there is much more that could be done to spur economic growth. It is not unusual for presidents to take credit for good economic news, but their actual impact on the economy is much more difficult to discern. One could just as easily point to the spending restrictions in the Budget Control Act as driving the recovery, restoring a degree of fiscal discipline that has brought the deficit down under $500 billion. Rather than debate the sources of the recovery, it is important to identify opportunities to spur further growth in a recovery that has been tepid when compared to earlier recessions.

While employment has risen, the labor market remains weak. The labor force participation rate is hovering around 63 percent, a low that has not been seen since the 1970s. While an aging workforce explains a part of the reduction, the number also reflects a significant number of workers who have exited the labor force due to the inability to find work. Moreover, incomes have stalled, with median weekly earnings of full-time wage and salary workers hovering at $787 in the third quarter of 2014-scarcely higher than when the president took office.

The president's policy agenda is a combination of tax hikes and tax credits, raising taxes on the "super-rich" to provide new benefits for the middle class. In all, the president is seeking roughly $320 billion in taxes, much of it collected through an increased and modified capital gains tax. In turn, this will help fund tax credits that encourage the middle class to work more, such as a second earner tax credit and an expanded earned income tax credit for childless workers.
But there are better ways to put more money into the pockets of workers: fundamental tax reform, with a lower and flatter tax. This allows workers to keep more of their money in the first place, while removing the inequities that arise in a tax code written by special interests and tax lawyers. Federal revenues have been climbing throughout the Obama presidency and hit a record high of $3 trillion in 2014.

Washington has more of a spending problem than a tax problem. While revenue collections are at an all-time high, federal spending has continued to outpace tax collection, a problem that will only get worse as entitlement programs take up larger and larger portions of the budget. The federal debt, which is now more than $18 trillion, is the one issue President Obama did not address in the State of the Union. This looming debt is indicative of a much larger problem: the breakdown of fiscal discipline, with Congress ignoring its own budget process while engaging in brinksmanship with the debt ceiling, fiscal cliffs, and government shutdowns.

Today's budget process was established in Congressional Budget and Impoundment Control Act of 1974, with the goal of forcing Congress to take responsibility for spending. Like any business, Congress was required to develop a comprehensive budget that examined outlays and revenues in order to avoid spending what they could not afford. Yet this process has broken down; it appears that Congress has abandoned the notion of developing a budget. At the same time, Congress continues to fund authorizations that have actually expired: according to the Congressional Budget Office, for fiscal year 2015 Congress appropriated $294 billion for programs whose authorizations had expired.

President Obama's State of the Union ignored the breakdown of fiscal discipline that plagues Washington. If the new Republican Congress is serious about reform, it should takes steps to restore fiscal order, first by a return to regular order that requires a real budget document. Then Congress can focus on the true fiscal challenges facing the nation, such as the growing entitlement programs, a tax code that hampers innovation while driving employment offshore, and a regulatory burden that stifles entrepreneurship and economic growth.


Wayne Brough, Ph.D is Chief Economist and Vice President of Research at FreedomWorks.  

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