Wherever I go these days, at home or abroad, people ask me the same question: what is happening in the U.S. political system? How has a country that has benefited — perhaps more than any other — from immigration, trade and technological innovation suddenly developed a strain of anti-immigrant, anti-innovation protectionism? Why have some on the far left and even more on the far right embraced a crude populism that promises a return to a past that is not possible to restore — and that, for most Americans, never existed at all?
It's true that a certain anxiety over the forces of globalization, immigration, technology, even change itself, has taken hold in the U.S. It's not new, nor is it dissimilar to a discontent spreading throughout the world, often manifested in skepticism toward international institutions, trade agreements and immigration. It can be seen in Britain's recent vote to leave the European Union and the rise of populist parties around the world.
Much of this discontent is driven by fears that are not fundamentally economic. The anti-immigrant, anti-Mexican, anti-Muslim and anti-refugee sentiment expressed by some Americans today echoes nativist lurches of the past — the Alien and Sedition Acts of 1798, the Know-Nothings of the mid-1800s, the anti-Asian sentiment in the late-19th and early-20th centuries, and any number of eras in which Americans were told they could restore past glory if they just got some group or idea that was threatening America under control. We overcame those fears and we will again.
But some of the discontent is rooted in legitimate concerns about long-term economic forces. Decades of declining productivity growth and rising inequality have resulted in slower income growth for low- and middle-income families. Globalization and automation have weakened the position of workers and their ability to secure a decent wage. Too many potential physicists and engineers spend their careers shifting money around in the financial sector, instead of applying their talents to innovating in the real economy. And the financial crisis of 2008 only seemed to increase the isolation of corporations and elites, who often seem to live by a different set of rules to ordinary citizens.
So it's no wonder that so many are receptive to the argument that the game is rigged. But amid this understandable frustration, much of it fanned by politicians who would actually make the problem worse rather than better, it is important to remember that capitalism has been the greatest driver of prosperity and opportunity the world has ever known.
Over the past 25 years, the proportion of people living in extreme poverty worldwide has fallen from nearly 40 percent to under 10 percent. Last year, U.S. households enjoyed the largest income gains on record and the poverty rate fell faster than at any point since the 1960s. Wages have risen faster in real terms during this business cycle than in any since the 1970s. These gains would have been impossible without the globalization and technological transformation that drives some of the anxiety behind our current political debate.
This is the paradox that defines our world today. The world is more prosperous than ever before and yet our societies are marked by uncertainty and unease. So we have a choice — retreat into old, closed-off economies or press forward, acknowledging the inequality that can come with globalization while committing ourselves to making the global economy work better for all people, not just those at the top.
A force for good
The profit motive can be a powerful force for the common good, driving businesses to create products that consumers rave about or motivating banks to lend to growing businesses. But, by itself, this will not lead to broadly shared prosperity and growth. Economists have long recognized that markets, left to their own devices, can fail. This can happen through the tendency toward monopoly and rent-seeking that [the Economist] has documented, the failure of businesses to take into account the impact of their decisions on others through pollution, the ways in which disparities of information can leave consumers vulnerable to dangerous products or overly expensive health insurance.
More fundamentally, a capitalism shaped by the few and unaccountable to the many is a threat to all. Economies are more successful when we close the gap between rich and poor and growth is broadly based. A world in which 1 percent of humanity controls as much wealth as the other 99 percent will never be stable. Gaps between rich and poor are not new but just as the child in a slum can see the skyscraper nearby, technology allows anyone with a smartphone to see how the most privileged live. Expectations rise faster than governments can deliver and a pervasive sense of injustice undermines peoples' faith in the system. Without trust, capitalism and markets cannot continue to deliver the gains they have delivered in the past centuries.
This paradox of progress and peril has been decades in the making. While I am proud of what my administration has accomplished these past eight years, I have always acknowledged that the work of perfecting our union would take far longer. The presidency is a relay race, requiring each of us to do our part to bring the country closer to its highest aspirations. So where does my successor go from here?
Further progress requires recognizing that America's economy is an enormously complicated mechanism. As appealing as some more radical reforms can sound in the abstract — breaking up all the biggest banks or erecting prohibitively steep tariffs on imports — the economy is not an abstraction. It cannot simply be redesigned wholesale and put back together again without real consequences for real people.
Instead, fully restoring faith in an economy where hardworking Americans can get ahead requires addressing four major structural challenges: boosting productivity growth, combating rising inequality, ensuring that everyone who wants a job can get one and building a resilient economy that's primed for future growth.
Economic dynamism
First, in recent years, we have seen incredible technological advances. … But while these innovations have changed lives, they have not yet substantially boosted measured productivity growth. …
A major source of the recent productivity slowdown has been a shortfall of public and private investment caused, in part, by a hangover from the financial crisis. But it has also been caused by self-imposed constraints: an anti-tax ideology that rejects virtually all sources of new public funding; a fixation on deficits at the expense of the deferred maintenance bills we are passing to our children, particularly for infrastructure; and a political system so partisan that previously bipartisan ideas like bridge and airport upgrades are nonstarters.
We could also help private investment and innovation with business-tax reform that lowers statutory rates and closes loopholes, and with public investments in basic research and development. …
Lifting productivity and wages also depends on creating a global race to the top in rules for trade. While some communities have suffered from foreign competition, trade has helped our economy much more than it has hurt. Exports helped lead us out of the recession. American firms that export pay their workers up to 18 percent more on average than companies that do not, according to a report by my Council of Economic Advisers. So, I will keep pushing for Congress to pass the Trans-Pacific Partnership and to conclude a Transatlantic Trade and Investment Partnership with the E.U. These agreements, and stepped-up trade enforcement, will level the playing field for workers and businesses alike.
Second, alongside slowing productivity, inequality has risen in most advanced economies, with that increase most pronounced in the United States. In 1979, the top 1 percent of American families received 7 percent of all after-tax income. By 2007, that share had more than doubled to 17 percent. This challenges the very essence of who Americans are as a people. We don't begrudge success, we aspire to it and admire those who achieve it. In fact, we've often accepted more inequality than many other nations because we are convinced that with hard work, we can improve our own station and watch our children do even better.
As Abraham Lincoln said, "while we do not propose any war upon capital, we do wish to allow the humblest man an equal chance to get rich with everybody else." That's the problem with increased inequality — it diminishes upward mobility. It makes the top and bottom rungs of the ladder "stickier" — harder to move up and harder to lose your place at the top. … Economies are more successful when we close the gap between rich and poor and growth is broadly based.
America has shown that progress is possible. Last year, income gains were larger for households at the bottom and middle of the income distribution than for those at the top. Under my administration, we will have boosted incomes for families in the bottom fifth of the income distribution by 18 percent by 2017, while raising the average tax rates on households projected to earn over $8 million per year — the top 0.1 percent — by nearly 7 percentage points, based on calculations by the Department of the Treasury. While the top 1 percent of households now pay more of their fair share, tax changes enacted during my administration have increased the share of income received by all other families by more than the tax changes in any previous administration since at least 1960.
Even these efforts fall well short. In the future, we need to be even more aggressive in enacting measures to reverse the decades-long rise in inequality. Unions should play a critical role. They help workers get a bigger slice of the pie but they need to be flexible enough to adapt to global competition. Raising the federal minimum wage, expanding the earned income tax credit for workers without dependent children, limiting tax breaks for high-income households, preventing colleges from pricing out hardworking students, and ensuring men and women get equal pay for equal work would help to move us in the right direction too.
Third, a successful economy also depends on meaningful opportunities for work for everyone who wants a job. However, America has faced a long-term decline in participation among prime-age workers. In 1953, just 3 percent of men between 25 and 54 years old were out of the labor force. Today, it is 12 percent. In 1999, 23 percent of prime-age women were out of the labor force. Today, it is 26 percent.
Involuntary joblessness takes a toll on life satisfaction, self-esteem, physical health and mortality. It is related to a devastating rise of opioid abuse and an associated increase in overdose deaths and suicides among non-college-educated Americans — the group where labor-force participation has fallen most precipitously.
There are many ways to keep more Americans in the labor market when they fall on hard times. These include providing wage insurance for workers who cannot get a new job that pays as much as their old one. Increasing access to high-quality community colleges, proven job-training models and help finding new jobs would assist. So would making unemployment insurance available to more workers. Paid leave and guaranteed sick days, as well as greater access to high-quality child care and early learning, would add flexibility for employees and employers. Reforms to our criminal-justice system and improvements to re-entry into the workforce that have won bipartisan support would also improve participation, if enacted.
Finally, the financial crisis painfully underscored the need for a more resilient economy, one that grows sustainably without plundering the future at the service of the present. There should no longer be any doubt that a free market only thrives when there are rules to guard against systemic failure and ensure fair competition.
Post-crisis reforms to Wall Street have made our financial system more stable and supportive of long-term growth.
Hope for the future
The U.S. political system can be frustrating. Believe me, I know. But it has been the source of more than two centuries of economic and social progress. The progress of the past eight years should also give the world some measure of hope. Despite all manner of division and discord, a second Great Depression was prevented. The financial system was stabilized without costing taxpayers a dime and the auto industry rescued. I enacted a larger and more front-loaded fiscal stimulus than even President Roosevelt's New Deal and oversaw the most comprehensive rewriting of the rules of the financial system since the 1930s, as well as reforming health care and introducing new rules cutting emissions from vehicles and power plants.
The results are clear: a more durable, growing economy; 15 million new private-sector jobs since early 2010; rising wages, falling poverty, and the beginnings of a reversal in inequality; 20 million more Americans with health insurance, while health care costs grow at the slowest rate in 50 years; annual deficits cut by nearly three-quarters; and declining carbon emissions.
For all the work that remains, a new foundation is laid. A new future is ours to write. It must be one of economic growth that's not only sustainable but shared. To achieve it America must stay committed to working with all nations to build stronger and more prosperous economies for all our citizens for generations to come.