President Obama's Speech: America's 'Basic Bargain' Is Broken—Now What?

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A reader's guide to the president's Tuesday speech on the economy

615 obama speech 1.jpgReuters

Combining the Occupy movement's rhetoric with a nod to American populism, President Obama's economic address Tuesday in Osawatomie, Kansas, reads like a history lesson, a campaign platform, and a policy primer all wrapped into one.

Better than most of his addresses to date, this speech drew a bright line between the White House and Republicans, including the GOP presidential nominees, and aligned the administration with the broader interests of the Occupy Wall Street movement by identifying income inequality as the economy's chief moral failure.

Consider this a reader's guide to the speech's biggest points, with analysis on how they stand up to facts, and where they fit in the landscape of the public debate.

The Fundamental Issue: A Broken Bargain

For most Americans, the basic bargain that made this country great has eroded.  Long before the recession hit, hard work stopped paying off for too many people.  Fewer and fewer of the folks who contributed to the success of our economy actually benefitted from that success.

The erosion of a "basic bargain" is an apt frame for seeing the motivations behind the both Tea Party and Occupy movement. These sweeping protests did not come out of nowhere. Middle class tensions have rumbled for years before the recession, as globalization and technology reduced opportunities for the middle class (especially for middle class men) and health care costs stripped more from our compensation, leaving workers with less to take home to their families. Each side has its own boogeyman. The Tea Party (largely) blames Washington and Obama. The Occupy protesters (largely) blame the 1 percent and the financial sector. I happen to think it's more complicated, and that there are in fact too many culprits to blame for us to march against them all at the same time. But my opinion doesn't really matter insofar as we're identifying the origins of American rage. The concept of a broken bargain hits it on the head.

Why the Economy Still Feels Broken

Everyone else struggled with costs that were growing and paychecks that weren't - and too many families found themselves racking up more and more debt just to keep up. For many years, credit cards and home equity loans papered over the harsh realities of this new economy.  But in 2008, the house of cards collapsed.

Another substantively correct section. Necessities like health care, college, housing, and energy did indeed get more expensive in the last decade and paychecks weren't keeping up. Household climbed above 120 percent of income. What Americans couldn't bring home from work, they borrowed. Credit made the 2000s feel better. The credit crunch has made the Obama years feel worse.

What We're Debating Now: Who Pays First?

Most immediately, we need to extend a payroll tax cut that's set to expire at the end of this month.  If we don't do that, 160 million Americans will see their taxes go up by an average of $1,000, and it would badly weaken our recovery.

But in the long term, we have to rethink our tax system more fundamentally.  We have to ask ourselves:  Do we want to make the investments we need in things like education, and research, and high-tech manufacturing?  Or do we want to keep in place the tax breaks for the wealthiest Americans in our country?  Because we can't afford to do both.  That's not politics.  That's just math.

"That's just math," is the president's new slogan for raising taxes on the wealthy. He's half right. In the long term, we have to raise taxes on more than the top two percent. Otherwise, sensible deficit reduction (in the rage of $4 trillion over ten years) will come down in draconian fashion on domestic investment and entitlements. That, too, is just math.

The unspoken trouble with tax hikes -- and this is a really big issue! -- is that most plans to increase taxes would begin after the election, in 2013. If the president signs a millionaire tax hike, Republicans can promise rich donors they'll repeal it in the first week of the new administration. If Republicans block a tax hike for the wealthy, Democrats will use it to drum up populist support in 2012.

So it's not just math. It's politics, too.

The Long-Term Solution: Education and Innovation

In this economy, a higher education is the surest route to the middle class.  The unemployment rate for Americans with a college degree or more is about half the national average.  Their income is twice as high as those who don't have a high school diploma.  We shouldn't be laying off good teachers right now - we should be hiring them.

There's really no debate that innovation is the surest way to growth, or that an educated workforce will have better ideas, stronger companies, and higher income. The trillion-dollar question is how do we improve education and innovation?

There are smart people on both sides of the issue. On the right, there's an argument to break away from teachers unions, pay fewer teachers higher salaries with fewer guaranteed benefits, throw open charter schools to create competition, reduce taxes to encourage start-up formation and pull back regulations. To the left, there's an argument to keep the unions, hire more teachers, raise taxes, increase research spending, and provide universal health care so that more wannabe entrepreneurs feel more secure about striking out on their own. And of course, millions of people agree with a blend of these ideas, and more (like immigration reform!). The bottom line is that announcing that you're pro-innovation is like saying you're pro-growth, or pro-children, or pro-bipeds. Like there's an alternative. The devil is in the details.

The Regulation Question: Does Big Business Deserve a Break?

But part of the deal was that we would not go back to business as usual.  That's why last year we put in place new rules of the road that refocus the financial sector on this core purpose:  getting capital to the entrepreneurs with the best ideas, and financing to millions of families who want to buy a home or send their kids to college.  We're not all the way there yet, and the banks are fighting us every inch of the way.  But already, some of these reforms are being implemented.  If you're a big bank or risky financial institution, you'll have to write out a "living will" that details exactly how you'll pay the bills if you fail, so that taxpayers are never again on the hook for Wall Street's mistakes.  There are also limits on the size of banks and new abilities for regulators to dismantle a firm that goes under.  The new law bans banks from making risky bets with their customers' deposits, and takes away big bonuses and paydays from failed CEOs, while giving shareholders a say on executive salaries.

Much of the president's speech beat back criticism that his regulations are hurting growth. While some medium-sized companies have balked at the health care law, poll after poll demonstrates that, when it comes to firms not hiring, sales and domestic labor costs far outweigh concerns about complying with new regulations. Similarly, if you're angry about the lay-offs on Wall Street that might be related to the rules in Dodd-Frank (as some of you really are, and some of you really are not), anger toward the White House should be weighed by the memory of 2008, when deregulation and poor regulation allowed the financial system to collapse -- save for a $7 trillion bailout from the Federal Reserve. If regulation has a cost, so does its absence.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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