Yesterday, President Barack Obama delivered an address outlining economic challenges facing the middle class at Knox College in Galesburg, Illinois. His remarks echoed a populist economic address two years ago in Osawatomie, Kansas, in which he excoriated conservatives’ dominant economic agenda of recent decades—cutting taxes for the wealthy and regulations.

Obama’s remarks yesterday were largely refocused on conservatives’ more recent regressive economic agenda of zealously trying to slash government spending and repeal the Affordable Care Act. Without doubt, this age of austerity is impeding the president’s stated goals of “reducing poverty, reducing inequality, [and] growing opportunity.”

What’s Driving Inequality

First and foremost, the president hit on the key problem driving the growth of income inequality in the United States, notably that the longstanding link between rising productivity and rising middle class wages broke in the 1970s. Subsequently, the market distribution of gains from productivity growth started accruing overwhelmingly to the top 1 percent of earners, at the expense of stagnant incomes elsewhere. Today, inflation-adjusted income for households at the middle of the income distribution has fallen back below 1994 levels.

President Obama also argued that Washington has made things worse, and he’s absolutely right with respect to inequality. Tax and budget policy has objectively exacerbated growth in post-tax, post-transfer income inequality (see this paper). Less directly, a declining inflation-adjusted value of the minimum wage and declining support for unionization, among other policies, have hurt the middle class and those seeking to enter it. These latter two trends are especially important because they could be reversed without increasing government spending. The president deserves credit for spending political capital on raising the minimum wage in his latest State of the Union address. And last week’s Senate filibuster deal raised the hope that all five seats on the National Labor Relations Board will be filled (for the first time in a decade) and more sympathetic to labor.

But reducing income inequality and rebuilding the middle class are inherently difficult tasks, greatly complicated by GOP obstructionism of any progress on tax and budget policy. The speech came as many congressional Republicans are gearing up to leverage an expiring continuing resolution (appropriations keeping the government running through September 30) and a necessary increase in the statutory debt ceiling (expected between mid-October and mid-November) to extract additional spending cuts or even repeal of the ACA, just as similar budget fights in 2011 produced deep cuts to the discretionary budget.

How can the administration and Congress try to push back against income inequality growth in the context of budget gridlock?

Full Employment

At present, the most direct method for slowing income inequality growth would be rapidly restoring full employment, as underemployment exacerbates anemic wage growth. When there’s lots of slack in the labor market, workers can’t demand higher real wages, or, in many cases, even cost of living adjustments (i.e., raising wages to keep up with inflation). Indeed, lower-income households have seen the largest relative declines in households’ inflation-adjusted income since 2007.

Regrettably, the most effective policy lever for boosting employment and getting the economy back to full health is deficit-financed government spending, where Congress is at the reins of policy. But thanks to the austerity plan extracted by congressional Republicans and their opposition to the president’s job creation proposals—notably the American Jobs Act—the U.S. economy has been growing sluggishly without making nearly enough progress toward full recovery.

Public Investment

The president rightfully lambasted Congress’s recent spending cuts for undermining public investments in education, infrastructure, science, and medical research. Public investment, particularly in areas where the private sector is underinvesting (because of market failures), is a key driver of long-term growth. Public investment in human capital—particularly education, nutrition, and public health—is also critical for promoting economic opportunity and mobility. Regrettably, Obama’s priorities in his most recent budget proposal don’t match his rhetoric on public investment; in part, because of recent spending cuts he agreed to, his budget would see nondefense public investment fall to its lowest levels since 1947, as explained in this paper by Josh Bivens of the Economic Policy Institute.

Convincing Republicans to replace sequestration with better policy—perhaps by eliminating inefficient tax expenditures in the context of tax reform—would be an uphill battle, but could pay dividends for near- and long-term growth. Alternatively, more targeted political capital could be expended on the president’s proposal to substantially increase federal funding for early childhood education, a welcomed new proposal in his latest budget.

The Affordable Care Act

Central to yesterday’s speech was the broad importance to the middle class of adequate health care coverage and reining in health care costs, particularly as relates to health care reform. The ACA was only a first step in cost containment, but moving to near-universal coverage is a huge legislative achievement for the middle class that must be preserved at all costs. And the combination of federal funds to expand Medicaid coverage up to 138 percent of the poverty line (for states opting-in) and subsidies to help moderate income households purchase coverage on new insurance exchanges, partially financed with increased Medicare taxes on households making over $250,000 annually, will help push back against post-tax, post-transfer inequality.

The Bully Pulpit and Austerity

Economic recovery and public investment needs have already been undercut by austerity measures demanded by conservatives, and Obama’s speech is perhaps best understood as promoting the “first, do no harm” principal. Greg Sargent characterized the speech as an attempt to break the “austerity curse that has gripped Washington ever since the 2010 elections,” planting austerity where it is—counter to the economic interests of the middle class. And refusing to acquiesce to conservatives’ austerity agenda doesn’t cost budgetary resources—it would preserve them.

Doing no additional harm necessitates refusal to negotiate over the debt ceiling or threats of a government shutdown, particularly rejecting any additional near-term government spending cuts. This is a low bar indeed, but it’s one the administration absolutely must stick to this time around. Obama acquiesced to Speaker Boehner’s demand in 2011 that every dollar increase in the statutory debt ceiling be coupled with a dollar of government spending cuts—and the resulting debt ceiling deal explains much of the inadequate trajectories for the economy’s performance and public investment.

Encouragingly, the administration has pivoted from misidentifying budget deficits as the key economic challenge, to identifying income inequality and a struggling middle class as the challenges of the day. Now the negotiation stance must follow the rhetoric.