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Obama thinks the economy is broken — and that redistribution is the only way to fix it

Bill Pugliano/Getty Images

The economic agenda President Barack Obama laid out in the run-up to his State of the Union speech is more than a tax plan. It draws the political battle lines for the final two years of his administration and the 2016 presidential race — targeting those who make money from their money and rewarding those who work for it.

Obama has proposed a tax hike on capital gains and dividends — the money the very wealthy earn from their investments, but not their paychecks. Meanwhile, he offered to give middle- and lower-income households a bigger earned income tax credit, a new tax credit to encourage both parents in a family to work, and new retirement plans. Add to that the other policy ideas he's plugged — a higher minimum wage, apprenticeships, and paid sick days — and you have a plan that embraces the quintessential American value that hard work pays off, but argues that the government is needed to make sure that pay is high enough.

Most of Obama's plan won't ever become law, but the proposal itself is a marker for where he and the Democratic Party stand in a post-Great Recession era, a recovery that has been great for stockholders, who rode the market to incredible highs last year, but not for regular workers, whose wages have remained stagnant. It's a rare moment when growth has failed to improve living standards.

Obama is making a case that the economy's distribution engine is broken, and that the recovery simply won't fix it. His solution is for government to approach redistribution as a positive good rather than a necessary evil. The irony is that the rhetoric he uses borrows from an old Republican line — work, not welfare — to sell the very redistribution model that conservatives have always loathed. And if Obama's message takes hold, it could leave Republicans vulnerable in 2016 as they try to craft their own response to the same issue of inequality.

"We need a tax code that truly helps working Americans trying to get a leg up in the new economy, and we can achieve that together," Obama said in his State of the Union last night.

Obama referenced "the millions who have worked hard, and scrimped, and sacrificed, and retooled." He continued, "You're the people I was thinking of six years ago today, in the darkest months of the crisis, when I stood on the steps of this Capitol and promised we would rebuild our economy on a new foundation."

The idea that hard work should pay off has remained a constant in an America in which work has grown less and less rewarding. At the Upshot, David Leonhardt frames this State of the Union as a reaction to stagnant wages. And indeed, in the last few years, median family income has fallen — despite a recovery that, according to the headline GDP and unemployment numbers, is speeding up. The stock market is hitting record after record, but 10 percent of Americans own around 80 percent of the stock in the nation.

The job market is finally looking stronger, but wages aren't rising, and while employers are posting more job openings, they are still taking their time in deciding whom to hire. Labor's share of income (as opposed to the share of income that goes to capital) has steadily eroded over the years, while capital's share of income (that is, income to investments like stock) has grown.

Workers feel this, and they want something to change. We saw a glimmer of that in November — even as voters handed Democrats a decisive defeat, they also passed a higher minimum wage in four (red) states.

Republicans see the same problems and are beginning to craft their own messaging. Mitt Romney, who once called protests against inequality "class warfare," is now saying poverty would be the centerpiece of a 2016 presidential bid. Jeb Bush's super PAC, Right to Rise, is all about social mobility, from its name to its logo to its messaging. And Republicans generally seem to have taken a page from Elizabeth Warren, as my colleague Matt Yglesias wrote last week.

Republicans have long argued that creating economic opportunity is a matter of letting business do its thing — cut taxes on job creators, and opportunity will follow. The problem for them is that the current job creators aren't exactly creating jobs that pay all that well. And when corporations do have cash, they have tended to sit on it, rather than expanding. That makes it harder to argue that easing regulations and taxes on businesses and investors will boost wages very much.

Republicans, for their part, have at times championed some parts of this redistributive framework — some Republicans advocate expanding the EITC, for example. But the part about taxing the rich more is a nonstarter among conservatives. They argue that taking from the rich in order to give to the poor punishes successful people and stops them from growing their businesses.

To be clear, Obama's policies wouldn't themselves change the decades-long pattern of decelerating income for American workers. And there are a whole host of other economic problems these proposals don't address, like long-term unemployment. But as Congress continues to not pass any meaningful legislation, the State of the Union and budgets have become, more than ever, a place to set the agenda.

Obama has put rewarding work in the center of that agenda. Expect it to stay there for two more years.