Twelve. THE NEW ECONOMIC DEBATE

CLINTON, BUSH, AND OBAMA

LINCOLN CONTINUES TO PLAY AN IMPORTANT ROLE in the thinking of our most recent presidents. They are all mindful of the place Lincoln has in the eyes of historians and voters as one of the three most revered presidents—considered the most revered of all by many citizens and historians. The Lincoln legacy is an even stronger touchstone for our most recent Democratic presidents than for Republican presidents.

When the Democrats captured the White House in 1992, President William Jefferson Clinton argued for a middle-ground approach to economic policy. Clinton did not directly challenge Reagan’s economic emphasis on the centrality of the market and the importance of investment to the growth of the economy. Nor did he reject Reagan’s emphasis on the importance of fiscal responsibility—especially by reducing government spending in an effort to balance the federal budget. At the same time, he supported legislation to eliminate government regulations that he considered to be counterproductive to economic growth. Clinton also supported reduced government regulation of Wall Street and the banking industry by signing the bill repealing the Glass-Steagall Act—the New Deal legislation that prevented commercial banks from risking their depositors’ funds by engaging in investment banking and trading directly in stocks and bonds.

Like many of the presidents before him, Clinton made it clear that he was hoping to follow in the footsteps of Abraham Lincoln. He kept a very visible Lincoln bust behind his Oval Office desk, where it was always prominent during televised White House addresses. On a nearby table stood a small statuette of Lincoln and Douglas in debate. A larger Lincoln bust dominated the walkway that leads to the Rose Garden.

The first thing Clinton installed in the Oval Office was a photo of Lincoln. And he said he “felt, as Abraham Lincoln did when he wrote as a young man, ‘I will study and get ready, and perhaps my chance will come.’” Clinton continued to express his admiration for Lincoln in speech after speech—long into his postpresidential life.

Clinton loved telling the story of one old lifelong southern Democrat he had invited to spend the night in the White House. Clinton’s guest shocked the president by telling him he would not sleep in Lincoln’s bed. Clinton told him it wasn’t really Lincoln’s bed, or even his bedroom, and besides, wasn’t Lincoln the greatest president in history? Yes, the old gentleman conceded, he certainly was—for a Republican. But he asked that Clinton put him up somewhere else all the same.

Clinton saw himself in the tradition of Lincoln as a proponent of “communitarian” objectives. He described his approach as a “third way” between the classic conservative and liberal approaches to public policy. He sought to balance the government’s commitment to sustain the individual rights of American citizens with the equally important responsibility to promote the general welfare. Clinton’s commitment to the “third way” was perhaps his most enduring contribution to America’s economic future.

In a clear shift from Reagan’s policies, Clinton insisted that government had a “critical” role to play in the economy. He took direct action to restore Lincoln’s and Roosevelt’s vision of positive government action in support of a middle-class society. Recognizing the new realities of a nation dominated by two-earner families, he initiated legislation spearheaded by the Family and Medical Leave Act of 1993, which “cleared the path” for women to participate more fully in the economy. He supported federal spending for education and training to encourage the growth of “human capital.” He strengthened regulations to provide cleaner air and water and safer food.

Clinton also rejected Reagan’s claim that lowering taxes on wealthy citizens would increase national economic growth. He acted directly to add two new high marginal income tax rates of 36 percent and 39.6 percent. After the marginal tax rates paid by the highest-income taxpayers were raised, the country experienced a period of rapid economic growth that would be seen as Clinton’s greatest achievement as president. Clinton’s tax reforms eliminated federal deficits for the first time in decades and generated large federal surpluses to support the government’s social welfare programs.

A pensive Bill Clinton strolls along the Rose Garden, past an 1860 Leonard W. Volk bust of Lincoln. Clinton also kept a smaller Lincoln bust on the table behind his Oval Office desk—as had many of his predecessors, including Richard M. Nixon.

WHITE HOUSE PHOTOGRAPH, COURTESY OF HAROLD HOLZER

Clinton made the case for his positive government initiatives in the State of the Union address on January 27, 1998.

These are good times for America. We have more than 14 million new jobs, the lowest unemployment in 24 years, the lowest core inflation in 30 years. Incomes are rising, and we have the highest home ownership in history. . . . We have moved past the sterile debate between those who say government is the enemy and those who say government is the answer. My fellow Americans, we have found a third way. We have the smallest government in 35 years, but a more progressive one. We have a smaller government, but a stronger nation. . . . Now if we balance the budget for next year, it is projected that we’ll then have a sizable surplus in the years that immediately follow. . . . What should we do with this projected surplus? . . . Save Social Security First. . . . Because these times are good, we can afford to . . . raise the minimum wage.

Clinton went on to focus on other communitarian objectives, including education, child care, and funding for medical research.

A month earlier, at a private meeting to discuss his forthcoming State of the Union address, Clinton had explained his successes in terms of Lincoln’s efforts on behalf of the nation. He said then, “Today the Republicans want to tear down government to liberate private power and private interest. Democrats . . . believe government can serve justice and remedy inequality. . . . What’s happened today is the reflection of a two-hundred-year-old struggle, starting with the Federalists and coursing down through Lincoln’s battle for Union. Yes, it’s this legacy of Lincoln the modern Republicans have betrayed.” Clinton viewed himself as a legitimate successor to Lincoln based on his commitment to positive policies to improve the economic conditions of all the people.

The Clinton presidency was characterized by accelerated economic growth and the eventual generation of substantial federal surpluses in contrast to the annual government deficits that were typical of the Republican and Democratic presidents who immediately preceded and succeeded Clinton. The substantial economic growth in the wake of Clinton’s increase in the top marginal tax rates posed a direct challenge to Reagan’s claim that tax cuts for wealthy “job providers” were the only way to produce significant economic growth. More than 23 million jobs were added to the American workforce during Clinton’s eight years in office, compared to fewer than 6 million during Reagan’s eight years and only 1.5 million during George W. Bush’s subsequent eight-year administration. Such growth undermined Republican supply siders’ claim that the best way to increase growth is to decrease taxes on wealthy Americans. Indeed, the Clinton economy presented new evidence to support Roosevelt’s demand-side view that a principal source of economic growth in the United States comes from public and private programs that generate rising middle-class and working-class incomes, which in turn increase American consumer demand for the products made by American companies. Clinton was fully prepared to use the expected government surpluses to support positive government action to fund the Social Security program and increase the minimum wage of American workers.

There is no leap of faith required here. Since the end of World War II, American consumer demand has consistently accounted for close to 70 percent of American gross domestic product. The data for the decades after World War II show clearly that positive changes in American employment and consumer demand are closely correlated with positive changes in total US GDP (see Appendix). Government programs to support employment are clearly consistent with Lincoln’s legacy of government action “for the people.” By contrast, there is no substantial evidence that low marginal income tax rates or low federal estate tax rates are correlated with high employment or high business investment or high GDP growth. Clearly, there is nothing in the Republican low-tax regime that is consistent with Lincoln’s legacy.

The explosive economic growth following the Clinton administration’s increase in the top marginal tax rates in 1993 might well have spelled the death knell of Republican supply-side economics focused on lowering taxes on corporations and wealthy individuals. But the economic successes of the Clinton years had a short life in political terms. Entering the White House in 2001, President George W. Bush began to see signs that the economy was edging into recession. Using the recession as a convenient rationale, President Bush aggressively propounded the Reagan Republican economic philosophy and pursued a major restructuring of the tax code based on supply-side ideas.

Bush engineered a cut in marginal income tax rates, as well as tax cuts on dividends and capital gains. Even the estate tax—a centerpiece of Progressive Era legislation—was repudiated as a “death tax.” By the beginning of Bush’s second term, the tax burden shouldered by the wealthiest households had significantly declined, even as these households absorbed an ever-increasing share of the nation’s total yearly income. Yet Bush argued that this was all for the common good. In terms reminiscent of the Gospel of Wealth, President Bush repeatedly cited the entrepreneur as the true engine of economic growth—the key to a vibrant economy. The goal, he argued, was to free this enterprising individual from the burdens of excessive taxes and government regulation and collective bargaining with unions. Indeed, Bush seemed to imagine that America—where the vast majority of citizens still labored for wages and salaries—had transformed itself overnight into a nation of independent entrepreneurs and business owners. He spoke repeatedly of an “ownership society.” But in truth the ownership society was one in which government policies increasingly favored wealthy business owners and investors over middle-income and low-income wage earners. This clearly reversed the priorities that Lincoln favored emphasizing government policies supporting the efforts of the “prudent, penniless beginner” to rise.

The increase in income inequality effected by the Bush tax cuts was more profound than it might have seemed at first glance. It was not simply that the rich received a larger tax cut than the middle class, though that was certainly the case. As the population aged, new crises were looming ahead in Social Security and Medicare. The Clinton-era federal surpluses might have gone a long way toward meeting the future liabilities of these programs, certainly of Social Security. But the Bush tax cuts had eliminated these surpluses and replaced them with sizable domestic deficits. Moreover, the enormous military costs of the wars in Afghanistan and Iraq, which were not even counted in the federal budget, multiplied the total federal government deficits exponentially.

The government had been drained of resources; taxes as a percentage of GDP were at their lowest level in a generation. At the beginning of his second term, Bush announced a “crisis” in Social Security. Under the Bush program, the wealthiest households were enjoying a windfall of billions in income and estate tax cuts, while future middle-class retirees could be subject to the prospect of substantial reductions in Social Security benefits. By 2007 the wealthiest 20 percent of the population had increased its share of the nation’s after-tax income to 53 percent at the expense of all other income groups. The lowest-income 20 percent declined in share to a mere 4 percent.

Source: Congressional Budget Office

        

Even more striking, between 1979 and 2007, the wealthiest 1 percent of American taxpayers had more than tripled their share of the nation’s after-tax income at the expense of the other 99 percent of Americans. The average after-tax income of the top 1 percent was well over $1,100,000, ten times larger than the average income of the next 19 percent and more than thirty times larger than the average income of all taxpayers.

Lincoln’s version of the American Dream had been betrayed. The new Republican conservative ethos under Reagan and Bush completely reversed the policies advocated by Lincoln and Roosevelt to use the government to build and sustain an American middle-class society. The continuing efforts by conservative politicians—supported by lobbyists for the business community—to reduce taxes on the wealthiest Americans was in sharp contrast to Lincoln’s Civil War initiative that established the first American income tax, one paid only by the wealthiest Americans.

President Bush’s conservative supporters could hardly have been more delighted. In 2003 Grover Norquist, probably the most important behind-the-scenes strategist of the Republican antitax program, candidly stated that the goal of the movement was to turn back the nation’s clock not only to the 1920s just before the New Deal, but to the period before the Progressive Era—to the Gospel of Wealth policies dominant during the Gilded Age.

In his First Inaugural Address in 1980, President Ronald Reagan had said, “The taxing power of the government must be used to provide revenues for legitimate government purposes.” But the major thrust of Reagan and his successors was to put increasingly sharp limits on the definition of “legitimate government purposes” in order to reduce taxes on the wealthy. Reagan and his successors were strikingly successful in their efforts. As this book goes to press, the highest marginal federal income tax rate is 39.6 percent, down from 70 percent when Reagan took office, and the highest federal estate tax rate is 40 percent, also down from 70 percent.

As Reagan and his Republican successors knew, the emphasis on cutting taxes of the wealthiest Americans was more than an economic policy. It was a political initiative to gain the continuing support of the richest members of American society and ensure a preponderant flow of political campaign funds to Republican political candidates. For the past forty years, Republican candidates and officeholders have emphasized their increasing commitment to low income and estate taxes. Politicians typically argue for reducing government expenditures in a low-tax environment based on the “commonsense” idea that the government budget should be treated like a household budget—it must be balanced. The argument is made that what were once considered normal demand-side counterrecession programs such as Social Security, unemployment insurance, food stamps, public health programs, and government investment in infrastructure need to be cut back in favor of reducing the tax burden on wealthy “job creators.” They have claimed that “there is a large body of data” to support their claim that low taxes on the wealthy support economic growth. But, in fact, there is little, if any, data to support this argument. The low-tax regime created and sustained by Republican officeholders has not been shown to increase investment in either physical capital or human capital. Rather, it leads to a government incapable of investing in infrastructure or education for the future.

Post-Reagan presidents—both Republicans and Democrats—have had less and less funds to perform essential government functions. Indeed, federal “government failure” is now built into the system. So long as the low-tax regime is maintained, the government will continue to have insufficient funds to perform its “legitimate government functions.” This runs counter to Lincoln’s ideas about the role of the federal government. Whereas Lincoln argued that the government should invest in infrastructure and support the poor, penniless beginners to rise, today supporters of the low-tax regime have redefined “legitimate government functions” to little more than military and homeland security activities.

As it turns out, reducing the size of government is not a panacea for full employment or economic stability. In the period from 1890 through 1940, when federal outlays averaged only 5 percent of GNP, average annual unemployment was unhappily 8.7 percent per year. By contrast, in the post–World War II period from 1949 through 1981, when federal outlays averaged 18.2 percent of GDP, average annual unemployment was only 5.3 percent.

The economic record for the most recent sixty-six years from 1949 through 2014 shows no support for the supply-side claim that reducing taxes on high-income individuals results in growth of GDP, business investment, or job creation (see Appendix). During the high-tax post-Roosevelt New Deal period from 1949 through 1981, when top marginal income tax rates averaged 79.7 percent and federal estate tax rates averaged 75.9 percent, the economy grew substantially—real GDP growth was above average at 3.7 percent, business investment growth was above average at 4.9 percent, and US employment growth was above average at 2.2 percent. During the low-tax Reagan and post-Reagan years from 1982 through 2014, when top marginal tax rates were reduced to an average of 38.1 percent and federal estate tax rates were reduced to an average of 51.8 percent, the economy was much weaker, with real GDP growth of only 2.7 percent, business investment growth of only 4.0 percent, and US employment growth of only 1.3 percent.

Sources: US Department of Commerce, Bureau of Economic Analysis; US Department of Labor, Bureau of Labor Statistics (see Appendix).

               

During the post–New Deal period, the United States changed from an economy benefiting all the people to an economy narrowly benefiting only the richest families. In the most recent period starting in 1982, the percent of income growth that went to the top 10 percent of earners in the United States increased to 80 percent and continued to increase to 116 percent in 2012.

Source: Pavlina R. Tcherneva, based on data from Thomas Piketty and Emmanuel Saez and NBER.

               

Not content with a low federal tax regime, conservative Republicans throughout the country also pushed successfully for state tax changes that would lower the level of taxation of the wealthiest Americans. They used “trickle-down” arguments supported by “supply-side” probusiness economic arguments to reduce state income, inheritance, and property taxes.

Conservative Republicans succeeded in substantially reducing federal taxes on capital gains and creating special categories of capital gains that deferred taxes on the management fees charged by millionaire and billionaire venture-capital and hedge-fund investment managers, who were suddenly able to pay income taxes at lower rates than the prevailing rates on the earnings of all other American wage earners.

To work toward their stated goal to balance government budgets, conservative Republicans increased sales and other consumption-related taxes, which have a greater percentage impact on the incomes of middle- and lower-income Americans than on the wealthiest Americans.

A study by the Institute on Taxation and Economic Policy issued in January 2015 concluded that in 2015, the poorest fifth of Americans would pay an average of 10.9 percent of their income in taxes, the middle fifth will pay 9.1 percent, and the top 1 percent will average only 5.4 percent. The report concluded, “Virtually every state’s tax system is unfair. Unfair tax systems not only exacerbate widening income inequality in the short term, but they also will leave states struggling to raise enough revenue to meet their needs in the long term.”

The conservative success in undermining the tax and regulatory policies of the New Deal was followed in the Reagan and post-Reagan years by an unrestrained return of the banks and other financial business organizations to the high-risk policies of the decade that led to the Great Depression. Almost predictably, the conservative antigovernment, low-tax, antiregulation regime under George W. Bush brought on an economic decline and the Great Recession starting in 2007—the worst economic conditions seen in the United States since the Great Depression of 1929–1932.

The most influential proponent of conservative free-market thinking during the Reagan and post-Reagan years was Alan Greenspan, chairman of the US Federal Reserve Board from 1987 until 2006. Greenspan, an acolyte of the libertarian thinker Ayn Rand, provided continued support for conservative economic thinking during the decades following Reagan’s administration, even under Democratic president Bill Clinton. It was only in 2008 that Greenspan admitted that he had put too much faith in the self-correcting power of free markets. He acknowledged that he had failed to anticipate the self-destructive power of the excessive risk taken by financial institutions. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief. . . . This modern risk management paradigm held sway for years. The whole intellectual edifice, however, collapsed in the summer of last year.”

The recovery period from 2009 to 2015 under President Obama did not erase the problems of the Great Recession. The only segment of the population that gained substantially from the recovery was the wealthiest 1 percent, who received 95 percent of the total increase in GDP from 2009 to 2012. The other 99 percent saw their real incomes and purchasing power go down. For the 99 percent, the decline in living standards continued for more than five years after the onset of the Great Recession.

The change in the benefits of the American capitalist economy in favor of the wealthiest citizens was recognized by prominent Republicans, Carly Fiorina, former CEO of Hewlett-Packard, and John Huntsman Jr., former Republican governor of Utah, and prominent Democrats, Laura Tyson, former chair of President Clinton’s Council of Economic Advisers, and Larry Summers, former chairman of President Obama’s National Economic Council. All four were members of the Henry Jackson Initiative for Inclusive Capitalism led by Dominic Barton, global managing director of McKinsey & Company, and Lady Lynn Forester de Rothschild, CEO of E. L. Rothschild. Their analysis, based on data compiled by the US Congressional Budget Office, was published on October 15, 2012:

In the U.S., between 1979 and 2007, according to an analysis from the Congressional Budget Office, the real after-tax household income of the top one percent grew 275 percent, and that of the next 19 percent grew 65 percent. The 60 percent in the middle grew just under 40 percent. The after-­tax income of the lowest 20 percent grew only 18 percent over this period. In the period 2005–2007, leading up to the financial crisis, the top 20 percent of U.S. income earners made more than the entire 80 percent of wage-earners below them. In 2007 alone, the top 10 percent earned 49.7 percent of total U.S. income, the greatest earning disparity since the 1930s.

The details are even more disturbing. In 2007, 23.5 percent of all American income flowed to the top one percent of earners. Staggeringly, the top 0.1 percent earned 12.2 percent of all income in the United States in 2007, up from an average of 3.5 percent in the 1960s. Sadly, the trend worsened after the Great Recession. From 2009 to 2010, the top one percent of incomes grew by 11.6 percent while the bottom 99 percent grew by only 0.2 percent, meaning that in the first year of the recovery 93 percent of income gains were captured by the top one percent of income earners.

Capitalism was not always like this. From 1943 to 1983, wealth was much more evenly spread. Between 1970 and 1979, CEOs earned approximately 40 times more than the average American worker. Today the average CEO earns 380 times more. The 1950s through the 1980s was the golden age of the American Dream: we all believed that America was a level playing field and if we worked hard and played by the rules, there was no limit to the success we could enjoy in a country of endless possibilities.

The Russell Sage Foundation focused on the same problem in its report on the economy issued in 2014. The New York Times summarized the Russell Sage report on July 26, 2014. “It’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too. The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline. . . . When only a few people are winning and more than half the population is losing, surely something is amiss.”

This was not the capitalist society envisioned by Adam Smith, the father of modern procapitalist economic theory. Smith understood that market participants should not be guided solely by individual self-interests. He argued that the market works to everyone’s advantage when and only when its participants are guided by a generally accepted “moral sympathy” that predisposes all members of society to do well by others, as well as by their individual self-interest.

Public confidence in the state of the nation and its institutions in the years since the onset of the Great Recession has not been encouraging. In March 2010 the Harris national public opinion poll found that fewer than 10 percent of Americans had “a great deal of confidence” in either “Wall Street” or “Congress,” while fewer than 30 percent were highly confident about law firms, the press, organized labor, major companies, television news, the public schools, organized religion, the White House, the courts, and the justice system. The “confidence gap” was grounded in the public feeling that the leaders of virtually all American institutions were using artificial, technical, or self-serving rationales for their decisions. A majority of Americans came to believe the leaders of American institutions were no longer being guided by what ordinary citizens viewed as moral and honorable behavior. More and more Americans saw their leaders as believing that anything that was “legal” was “morally legitimate.” This new cynicism was reinforced by an increasing awareness that Wall Street firms were being allowed to settle cases of illegal financial practices by paying substantial fines to the Securities and Exchange Commission without admitting that the actions of their leaders were illegal. Rather than feeling a positive connection between themselves and the institutions of their society, most Americans came to feel disappointed, distrustful, and disengaged.

Cartoon by Steve Sack—one of many uncannily similar images that appeared at the time of the Obama inauguration—all imagining the Lincoln of the Lincoln Memorial coming to life to welcome the first African American president in January 2009.

BY PERMISSION OF STEVE SACK AND CREATORS SYNDICATE, INC.

But public concerns did not inspire leaders to embrace the economic philosophy that had inspired Abraham Lincoln and Franklin Roosevelt. The Reagan rhetoric remains the dominant language of American politics. Republican politicians are unified in their support of low taxes, little regulation of business, and little, if any, government investment spending to support employment and economic growth. Their control over one branch of the national government after the midterm elections in 2012 gave Republicans the power to block positive initiatives to use the power of the federal government to rebuild America’s middle-class society. Their power increased after the election of 2014, when Republicans captured control of both houses of Congress. Democrats in Congress were divided. Some went along with the low-tax regime imposed by the Republicans. Others campaigned for programs consistent with Lincoln’s and Roosevelt’s belief in positive government programs to provide opportunity for lower-income people to improve their economic situation.

In his campaign for election as president in 2008, Barack Obama largely ignored partisan economic issues. When he announced his run for the presidency, he said, “In the shadow of the Old State Capitol, where Lincoln once called on a divided house to stand together, where common hopes and common dreams still live, I stand before you today to announce my candidacy for President of the United States.” But he did not focus in any particular way on the progressive tradition of government for the people established by Lincoln and Roosevelt. Rather, he presented himself as a postpartisan candidate. He was able to win the presidential election by running against the unpopular war policies of President George W. Bush and promising in particular to end the war in Iraq. He presented himself as a new kind of president who would govern above the fray in a new postpartisan tradition focused primarily on intelligent and efficient government.

But three years of extremely partisan politics in Washington led President Obama to a new focus in his campaign for reelection in 2012. Pointing to his major accomplishment in extending government-­sponsored medical care to all US citizens, he also put himself clearly in the Lincoln tradition of government for the people when he self-­consciously chose to open his campaign for reelection at Osawatomie, Kansas, on December 11, 2011.

Osawatomie was the site of John Brown’s raid in 1856, which many have described as the first battle of the Civil War. It was also the site chosen by Theodore Roosevelt to launch his Progressive Party campaign to regain the presidency in 1910. At Osawatomie Theodore Roosevelt had embraced the legacy of Abraham Lincoln. He said he relied on the wisdom of Abraham Lincoln to guide the nation in addressing the issues of the twentieth century, stressing that Lincoln was the father of the idea that property rights were secondary to the rights of the common welfare. He cited Lincoln as the original advocate of government support not for those who profit, but instead for those who produce.

Barack Obama chose Osawatomie to pursue the same theme in 2011:

My grandparents believed in an America where hard work paid off, and responsibility was rewarded, and anyone could make it if they tried. . . . And these values gave rise to the largest middle class and the strongest economy that the world has ever known. . . . Today . . . for most Americans, the basic bargain that made this country great has eroded. . . . Fewer and fewer of the folks who contributed to the success of our economy actually benefitted from that success. Those at the very top grew wealthier. . . . But everybody else struggled with costs that were growing and paychecks that weren’t. . . . This is the defining issue of our time. . . . There is a certain crowd in Washington who . . . have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything.” . . . We simply cannot return to this brand of “you’re on your own” economics if we’re serious about rebuilding the middle class in this country.

Obama cited Lincoln in a direct and unqualified way a few months later in a speech on June 14, 2012: “I do share the belief of . . . Abraham Lincoln—that through government, we should do together what we cannot do as well for ourselves. . . . That’s how we built this country—together. We constructed railroads and highways. . . . We haven’t done these things as Democrats or Republicans. We’ve done them as Americans. . . . In the last century, this consensus—this shared vision—led to the strongest economic growth and the largest middle class that the world has ever known.”

President Obama campaigned for reelection against the Republican trickle-down economic theory with a positive commitment to direct government action to rebuild the modern American middle-class society. For the first time in more than a decade, Lincoln’s emphasis on supporting a middle-class society was stated clearly and played a direct role in Obama’s success in the election.

In his Second Inaugural Address, on January 21, 2013, President Obama quoted from Lincoln’s famous fragment on government: “The legitimate object of government is to do for a community of people whatever they need to have done, but can not do at all, or can not so well do, for themselves—in their separate, and individual capacities.”

The reelected President Obama no longer felt the need to nod to his Republican opponents by accepting their claim to Lincoln’s heritage. A year earlier in his State of the Union address, Obama had misquoted Lincoln when he said: “I believe what Republican Abraham Lincoln believed: That Government should do for people only what they cannot do better by themselves, and no more.” Adding “only . . . and no more” to Lincoln’s commitment to government action “for the people” was at the time a tacit acceptance by Obama of Ronald Reagan’s claim to Lincoln’s philosophy. A year later, it was clear to Obama that the long rhetorical shadow of Reagan that had influenced Democratic as well as Republican presidents for thirty years was no longer compelling. This was a new day. The added words only and no more no longer had a place in Obama’s now correct quotation of Lincoln’s vision.

President Barack Obama shows a delegation of elderly African American Washingtonians a signed printed copy of the Emancipation Proclamation that went on loan to the Oval Office on January 8, 2010. The autographed printing—originally created in 1864 for sale at a Philadelphia war-charity fair—has since been moved to the Lincoln Bedroom, the room that once served as Lincoln’s office and where he signed the original proclamation on January 1, 1863.

WHITE HOUSE PHOTOGRAPH BY PETE SOUZA

Looking back to Lincoln’s vision, Obama said: The United States must be a “great nation” that “must care for the vulnerable, and protect its people from life’s worst hazards and misfortune . . . that preserving our individual freedoms ultimately requires collective action. . . . Now, more than ever, we must do these things together, as one nation and one people. . . . For we, the people, understand that our country cannot succeed when a shrinking few do very well and a growing many barely make it. We believe that America’s prosperity must rest upon the broad shoulders of a rising middle class.” A year later President Obama returned to this theme when he said, “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American dream, our way of life, and what we stand for around the globe.”

President Obama was not optimistic about overcoming the difficulties he faced in making progress toward the goals he believed he shared with Lincoln. In a conversation with the editor of the New Yorker at the end of his fifth year in office, Obama said, “I think America was very lucky that Abraham Lincoln was President when he was President. If he hadn’t been, the course of history would be very different. But I also think that, despite being the greatest President, in my mind, in our history, it took another hundred and fifty years before African Americans had anything approaching formal equality, much less real equality. I think that doesn’t diminish Lincoln’s achievements, but it acknowledges that at the end of the day we’re part of a long-running story. We just try to get our paragraph right.”

Obama had reason to be concerned about his ability to improve economic conditions. Facing a Congress unwilling to act on his proposals, Obama abandoned efforts in 2014 to gain acceptance of the new positive government programs he favored to improve the economic condition of Americans. The public, disheartened yet again, turned against the president in the 2014 midterm elections for what they felt was a lack of presidential leadership.

Voters gave a resounding victory to Republican candidates for the US Senate and House of Representatives in 2014. They also elected more Republican state governors, bringing the total number of Republican governors to thirty-one. The newly invigorated Republicans continue to claim the economy will automatically right itself for the benefit of poor as well as rich Americans if the country reduces individual and corporate taxes and balances the budget. They have proposed little else to improve the economic status of most Americans.

While US gross domestic product improved modestly in 2013 and 2014, the majority of Americans continued to react negatively to the lack of a substantial improvement in their economic conditions. Today politicians in Congress continue to engage in highly specific debates about how to reduce government deficits by reducing government spending. They focus on attempting to prove that government programs are inefficient rather than how to restore the Lincoln and Roosevelt visions of positive government action to reinvigorate America’s middle-class economy and society.

There is little opportunity today to gain the support of a majority in Congress for a positive economic program supported by an active federal government. The middle-class and working-class shares of national income continue to decline. Supply-side programs to provide direct financial support to financial and nonfinancial businesses and wealthy individuals continue to dominate government policy.

Corporations have substantial funds available for investment from their increased profits and their ability to borrow funds at low rates, but they have little incentive to increase production or employment because US consumer demand is constrained by the reduced growth in the real income of a majority of Americans.

A recent study by Nobel Prize–winning economist Joseph Stiglitz reminds us that current policies and practices have all been choices. We can choose to do things differently. To fix the economy for average Americans, he says, we need to change the rules and institutions that have generated low investment, sluggish growth, and runaway incomes and wealth for the wealthiest 1 percent. He emphasized that “Corporations have gone from serving all of their ­stakeholders—workers, shareholders, and management—to serving only top management.” Stiglitz’s approach to increase economic growth and fair treatment for all Americans centers on increasing private and public investment in our future and ensuring that everyone benefits from an economy that is working at full steam to provide genuine economic security and opportunity for all Americans. He also urges the Federal Reserve to fund a large infrastructure program to increase employment and to restore our roads, airports, and energy and telecommunication systems to a world-class level.

The American middle class—once protected and celebrated by presidents like Lincoln and Roosevelt—has been under threat. The share of middle-income jobs in the United States fell from 52 percent in 1980 to 42 percent in 2010. Middle-income jobs continue to be replaced by low-income jobs, which now make up 41 percent of total employment. The trend is not reversing. Absent a change in economic policy, as we look to the future, lower-wage jobs are predicted to make up 60 percent of the total American workforce. Replacing traditional middle-income jobs with low-wage jobs that lack benefits, stability, and family-sustaining wages is profoundly undermining American communities, contributing to a host of social and political problems, including unemployment, underemployment, poverty, inequality, political apathy, and political polarization.

With the defeat of the Democrats in the 2014 midterm elections, President Obama became “unbound,” in the words of one astute New York Times journalist. Since he now believed there was little certainty he could achieve his goals through legislation, he decided to use the power of the presidency to take direct action to address major issues—immigration, removing barriers to gender equality, opening the door to rapprochement with Cuba, and addressing the worldwide climate-­change issue by an agreement with China to reduce the annual increase in pollution of the atmosphere. Perhaps more important, the president was once again in a position to advocate the economic benefit and economic necessity to rebuild the nation’s infrastructure—an economic initiative consistent with Lincoln’s insight that infrastructure investment is the most direct and impactful economic program to build the nation’s middle-class economy and society.

On January 10, 2015, the US Department of Labor reported that 3.95 million new jobs had been created in 2014, the largest number since the expansive last years of the Clinton administration in the 1990s. The unemployment rate dropped from 6.4 percent to 5.6 percent, the largest one-year decline since 1984.

The economic news was greeted with little enthusiasm by the president’s critics. The American Action Forum said, “A strong labor market attracts people to participate and pays them higher wages. It is hard to say the labor market is strong despite the robust top line numbers. The U.S. economy is healing but not yet healthy.” Diane Swonk, the chief economist of a Wall Street investment company, pointed out, “This is still a buyer’s market, in terms of labor. . . . [E]mployers still have their pick.” Jason Furman, the chairman of the President’s Council of Economic Advisers agreed: “[T]here is more work to be done to raise wages and address longer standing challenges around family income.” Indeed, there was more work to be done. More than 8 million workers were still looking for full-time employment. Many others were working in part-time jobs. The number of people in their prime working years who had officially dropped out of the labor force had more than tripled since the 1960s.

The improving economic data in January 2015 raised President Obama’s spirits and led him to take the offensive in the economic debate in Washington. All was not yet well, he said, but it was time to take further steps to improve the economic condition of the underadvantaged segments of the population. “The rising tide of this economic wind at our backs has to lift more boats,” Obama’s secretary of labor said in a telephone interview on January 9, 2015. “The nation’s wage situation is a crucial part of the ‘unfinished business’ of the nation’s economic recovery.”

President Obama was finally girding his loins to follow in Lincoln’s footsteps and take new steps to use the power of the presidency to improve the status of middle-class and working-class members of the American community. The White House said, “President Obama will not be satisfied until every American who wants work can find a job. That’s why he is working to grow our economy, so middle class families feel confident in their futures and their children’s futures. . . . Getting back to pre-recession status is not enough; we’ve got to restore America’s middle class.”

On January 7, 2015, Obama announced “a major step” to increase home ownership by making mortgages more affordable to “creditworthy families who can afford—and want to purchase—a home.” They “are shut out of homeownership opportunities due to today’s tight lending market.”

He took another step forward in the continuing debate on raising the minimum wage for American workers. He reminded American business owners that he had required all government contractors to pay a minimum wage of $10.10 starting in 2014 and recommended that all states with a lower rate should increase their minimum wage up to $10.10. He also tackled the nation’s tangled immigration problem. “The American immigration system is broken,” he said, and he announced a plan “to help build a system that lives up to our heritage as a nation of laws and a nation of immigrants.” He said he would take executive action that “offers 4 million undocumented immigrants a path out of the shadows with no fear of deportation.”

President Obama surprised both Republicans and Democrats in Congress when he focused directly on taxes and spending in his State of the Union address on January 20, 2015. In a return to Lincoln’s vision of a just and generous nation, Obama said his central theme was “middle class economics.” He said the nation’s economy could not grow effectively if middle-class and working-class Americans’ income was declining. He said that government could not play its critical role in increasing jobs if the taxes paid by wealthy Americans were too low to provide adequate funding for rebuilding the nation’s roads, bridges, and airports and to provide funding of students’ higher education.

The president addressed these issues directly with specific proposals. In particular, he called for a substantial increase in the taxes paid by the wealthiest citizens to provide adequate funds for the nation’s infrastructure. At the same time, he proposed a program to use federal funds to pay for two years of community-college tuition to support young people seeking training to qualify for the middle-class jobs available in the nation’s new economy. Clearly, the president who had previously despaired of his opportunity to restore Lincoln’s ideal of a middle-class society was now actively engaged in an effort to achieve it.

History tells us to suspect the persistent claim that positive government action is inherently inefficient and ineffective. Presidents from Lincoln to Roosevelt have found effective and, in many cases, nonbureaucratic methods of accomplishing major economic and social objectives. Lincoln spearheaded incredibly innovative programs such as the Morrill Land Grant Act to establish colleges, the Homestead Act to provide land inexpensively to Americans migrating west, tariffs to encourage the development of domestic manufacturing, and land grants to provide the funding of the first transcontinental railway in the United States. In the twentieth century, Roosevelt established economic programs such as Social Security, unemployment insurance, and the GI Bill. Both presidents’ efforts show that the federal government can accomplish major positive economic and social objectives with a minimum of bureaucratic interference in the economy. And government can undertake nonbureaucratic programs to increase the incomes of lower- and middle-income families to provide the demand-side impetus to support economic growth.

There was no expectation in 2015 that the new Republican majorities in Congress would respond positively to all or any of President Obama’s economic policy proposals. They were determined to reject any proposals to increase income or estate taxes. They were even more resistant to providing new funding for the president’s new infrastructure and education initiatives. Gridlock was the most likely condition for the immediate future.

What seemed certain was the rhetorical and political battle to rebuild America’s middle-class economy and society had entered a new phase. The battle lines were now clearly drawn—to provide a clear framework for the debate on economic policy for the next two years. But there was little expectation of a substantial change in economic policy until after the presidential election two years away in 2016.

There is one bright spot on the horizon. Writing in 2014, John Micklethwait and Adrian Wooldridge, the editors of the Economist magazine, argued that the current dysfunction of our economic and political system is not the only way forward. They believe that the economic and political malaise in the United States and Europe can be overcome by a revival of the “third way” approach to government policy, the model championed by Bill Clinton during his presidency.

Micklethwait and Wooldridge suggested that the United States and its European cousins look to the Nordic states, Denmark, Norway, and Sweden, which, they wrote, “continue to pride themselves on the generosity of their welfare states” and continue to build prosperous, well-governed liberal democracies. They believe these countries have found the way to address the three major problems that modern democratic societies face:

• eliminating crony capitalism that has turned “public goods to private gains” by providing “subsidies to the rich and well connected”

• lightening the burden imposed by inefficient and burdensome overregulation of economic life by introducing more consumer choice in government-funded entitlement programs

• restoring the budgeting system “to solvency through implementing a relatively gentle set of taxing and spending reforms”

Micklethwait and Wooldridge reminded readers that Denmark, Norway, and Sweden dealt effectively in the past two decades with seemingly impossible economic conditions. They developed solutions that eliminated crony capitalism and, at the same time, reduced the cost burden of their welfare states by engaging their citizens in making cost-benefit economic choices. Using Sweden as an example of the Nordic solutions the United States might adopt, they wrote:

Sweden has reduced public spending as a proportion of GDP from 67 percent in 1993 to 49 percent today. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%. . . . Its public debt fell from 70 percent of GDP to 37 percent in 2010, and its budget moved from an 11 percent deficit to a surplus of 0.3 percent over the same period. This allowed a country with a small, open economy to recover quickly from the financial storm of 2007–8. . . . [I]ts public debt is still below 40% [of GDP]. . . . Indeed, Sweden has done most of the things that politicians know they ought to do but seldom have the courage to attempt. . . . They continue to believe in combining open economies with public investment in human capital. . . . The Nordics are important for three reasons. First, they are the part of the West that has hit the future first. . . . Second, they settled one of the central debates about Leviathan: whether it can be brought under control at all. . . . Third, they have only just started to exploit the powers of technology. . . . The Nordics reached the future first. They were forced to change because their old model went bust, and they kept on changing once they discovered that they could produce a better state.

Denmark is particularly notable in providing adequate tax revenue to sustain an efficient modern democratic society. It has the highest level of tax revenue as a percentage of GDP (48.2 percent) and the most income equality of any advanced Western country. By contrast, in the United States tax revenue as a percentage of GDP is only 24.8 percent.

Lincoln’s dream of a middle-class society is alive and well in the Nordic countries. But the United States today is not pursuing the Nordic approach, however effective it appears to be to astute observers. Congress is still engaged in efforts to reduce taxes of all kinds on the richest citizens, including estate taxes. In 2002 the tax rate for estates of $1 million or more was 50 percent. Now it is at the historically low rate of 35 percent, with a $10 million exemption for married couples. Even the renowned conservative prime minister of Britain Winston Churchill argued that an effective estate tax provides “a certain corrective against the development of a race of the idle rich.” At the turn of the twentieth century, the wealthiest self-made American, Andrew Carnegie, echoed this sentiment: “I say the community fails in its duty and our legislative fail in their duty, if they do not exact a tremendous share” when a wealthy citizen dies. Conservative prime minister of Great Britain David Cameron went even further when he said in January 2012, “Capitalism will never be genuinely popular unless there are genuine opportunities for everyone to participate and benefit.”

The majority of Americans are still searching for a return to Lincoln’s dream of a successful middle-class economy and society. Can the American political process find its way to a positive Lincolnian approach consistent with the positive “third way” solution pioneered by President Clinton in the United States in the decade before the turn of the new century? Only concerted efforts of concerned citizens can produce the desired future result.