In his 2007 book The Audacity of Hope, then-Sen. Barack Obama laid out his theory of America's political and policy problems as it stood on the eve of his first presidential campaign. He worried, he said, about "the gap between the magnitude of our challenges and the smallness of our politics."

On January 23, 2015, he sat down with Vox for a wide-ranging interview about his theory of America's political and policy problems as it stands at the beginning of the seventh year of his presidency. What follows is a lightly edited transcript of the first part of the conversation, which focused on domestic policy and politics. You can find the second half, which focuses on America's role in the world, here.

Ezra Klein

The economy is growing. We have very high corporate profits. We have a record stock market. And yet for decades now, we've not been seeing significant wage increases for the American people. How have we gotten to a point where businesses can be doing so well but workers don't necessarily share in that prosperity? 1

1 Corporate profits and workers' wages

as a share of GDP Source: St. Louis Fed

Barack Obama

Well, this has been at least a three-decade-long trend. And this was a major topic in my State of the Union address. We obviously came in at a time of enormous crisis, and the first task was making sure we didn't have a complete global economic meltdown. The steps we took, whether making sure the financial system was functioning — saving the auto industry, encouraging state and local spending — all those things made a difference in buoying the economy. And then it's been a hard but steady slog to the point where now we're growing at a robust pace and unemployment has come down faster than any time in the last 30 years.

Obama on why income inequality has skyrocketed See more videos from the Obama interview

In some ways we're now back to the position where we can focus on what is this longer-term trend, and that is a larger and larger share of wealth and income going to the very top, and the middle class or folks trying to get into the middle class feeling increasingly squeezed because their wages have stagnated.

Now, there are a whole bunch of reasons for that. Some of it has to do with technology and entire job sectors being eliminated — travel agents, bank tellers, a lot of middle management — because of efficiencies with the internet and a paperless office. A lot of it has to do with globalization and the rest of the world catching up. Post-World War II, we just had some enormous structural advantages because our competitors had been devastated by war, and we had also made investments that put us ahead of the curve, whether in education or infrastructure or research and development.

And around the '70s and '80s and then accelerating beyond that, those advantages went away at the same time as, because of technology, companies are getting a lot more efficient. One last component of this is that workers increasingly had less leverage because of changes in labor laws and the ability for capital to move and labor not to move. 2 You combine all that stuff, and it's put workers in a tougher position. So our job now is to create additional tools that, number one, make sure that everybody's got a baseline of support to be able to succeed in a constantly moving economy. Whether it's health care that survives job loss. Whether it is making sure we have child care that allows a two-working-household family to prosper while still caring for their kids. Having a certain baseline in terms of wages, through the minimum wage. 3 So that's one set of issues.

2 Union membership, in millions Source: Pew Research Center

3 Because of inflation, today's federal minimum wage of $7.25 is worth significantly less than the minimum wage in the '70s. The Obama administration has proposed raising it to $10.10.

A second set of issues then becomes: how do we make sure that everybody has the tools to succeed in an economy where they constantly have to adapt? And how do they move up the value chain, essentially because they can work in higher-wage, higher-skill professions, and were able to compete for those jobs internationally?

Then the third thing is making sure that we have an economy that's productive. Now, if we do all those things, then what I'm confident about is that we can continue to lower the unemployment rate, increase the participation rate, and continue to grow and increase productivity. We're still going to have a broader, longer-term, global question, and that is: how do we make sure that the folks at the very top are doing enough of their fair share? The winner-take-all aspect of this modern economy means that you've got some people who just control enormous amounts of wealth. We don't really resent their success; on the other hand, just as a practical matter, if we're going to pay for schools, roads, et cetera, and you've got, you know, 50 people or 80 people having as much wealth as 3 billion, you know you're going to have problems making sure that we're investing enough in the common good to be able to move forward. 4 So that's a long-term question. But right now, there's some very specific things we can do that can make a difference and help middle-class families. And that's why I called it middle-class economics.

4 It's worth noting that this statistic is as much a reflection of global indebtedness as global wealth.

Ezra Klein

To focus a bit on that long-term question, does that put us in a place where redistribution becomes, in a sense, a positive good in and of itself? Do we need the government playing the role not of powering the growth engine — which is a lot of what had to be done after the financial crisis — but of making sure that while that growth engine is running, it is ensuring that enough of the gains and prosperity is shared so that the political support for that fundamental economic model remains strong?

Barack Obama

That's always been the case. I don't think that's entirely new. The fact of the matter is that relative to our post-war history, taxes now are not particularly high or particularly progressive compared to what they were, say, in the late '50s or the '60s. 5 And there's always been this notion that for a country to thrive there are some things, as Lincoln says, that we can do better together than we can do for ourselves. And whether that's building roads, or setting up effective power grids, or making sure that we've got high-quality public education — that teachers are paid enough — the market will not cover those things. And we've got to do them together. Basic research falls in that category. So that's always been true.

5 The history of effective federal tax rates in America Source: Quartz/The Tax Foundation

I think that part of what's changed is that a lot of that burden for making sure that the pie was broadly shared took place before government even got involved. 6 If you had stronger unions, you had higher wages. If you had a corporate culture that felt a sense of place and commitment so that the CEO was in Pittsburgh or was in Detroit and felt obliged, partly because of social pressure but partly because they felt a real affinity toward the community, to re-invest in that community and to be seen as a good corporate citizen. Today what you have is quarterly earning reports, compensation levels for CEOs that are tied directly to those quarterly earnings. You've got international capital that is demanding maximizing short-term profits. And so what happens is that a lot of the distributional questions that used to be handled in the marketplace through decent wages or health care or defined benefit pension plans — those things all are eliminated. And the average employee, the average worker, doesn't feel any benefit.

6 What Obama is talking about here is the difference between pre-tax and post-tax inequality. It's possible to have low inequality either because the market itself spreads gains widely, or because the government intervenes at tax time to spread gains widely. Germany and Britain have higher pre-tax inequality than the US, but lower actual inequality because the government does so much through taxes and transfers.

So part of our job is, what can government do directly through tax policy? What we've proposed, for example, in terms of capital gains — that would make a big difference in our capacity to give a tax break to a working mom for child care. And that's smart policy, and there's no evidence that would hurt the incentives of folks at Google or Microsoft or Uber not to invent what they invent or not to provide services they provide. It just means that instead of $20 billion, maybe they've got 18, right? But it does mean that Mom can go to work without worrying that her kid's not in a safe place.

We also still have to focus on the front end. Which is even before taxes are paid, are there ways that we can increase the bargaining power: making sure that an employee has some measurable increases in their incomes and their wealth and their security as a consequence of an economy that's improving. And that's where issues like labor laws make a difference. That's where say in shareholder meetings and trying to change the culture in terms of compensation at the corporate level could make a difference. And there's been some interesting conversations globally around issues like inclusive capitalism and how we can make it work for everybody.

Ezra Klein

When you drill into that pre-tax portion, one thing you can find in wages is health-care costs.

Barack Obama

Yeah.

Ezra Klein

And when you drill deeper into the health-care costs, one thing you find is that a major piece of why Americans pay so much more is that when we go to a hospital, an MRI, or an appendectomy, or even a bottle of cholesterol drugs just costs much more for an American to buy than it does in Germany, in Japan, in Canada, in Great Britain. Why do you think Americans pay so much higher health-care prices than folks in other countries? 7

7 The seminal paper on this is the wonderfully named "It's the Prices, Stupid: Why the United States Is So Different From Other Countries."

Barack Obama

Well, you know there are a lot of theories about this. But I think the evidence points to a couple of key factors. One is that we've got a third-party system. Mostly we've got a system where everybody gets their health insurance through their employers. Obviously the Affordable Care Act, Obamacare, helps to cover the gap for those who aren't in that system. But for those of us who have an insurer, we don't track it. And the market then becomes really opaque and really hard to penetrate. Health providers are able to, I think, charge without much fear that somebody's looking over their shoulders and asking, well, why does this cost that much?

That's one of the reasons [that with] the Affordable Care Act, a lot of the attention's been on making sure that the uninsured have peace of mind, and people who currently have insurance but at some point might lose it or have pre-existing conditions are going to have it. That's obviously the moral basis for what we did. But people haven't been paying as much attention to the delivery-system reforms that we're trying to institute through the Affordable Care Act as well.

I can't take credit for all four years of the lowest health-care inflation in the last 50 that we've seen since the Affordable Care Act passed. 8 Some of the trends, I think, were already on their way. But we are accelerating a lot of reforms. For example, what do we do to make sure that instead of paying a doctor in a hospital for just providing a service, let's make sure that they're being rewarded for a good outcome? Which may mean in some cases fewer tests or a less expensive generic drug, or just making sure that all your employees are washing your hands so that you're cutting the infection rate, or making sure that hospitals are reimbursed when there's a lower readmissions rate, as opposed to when they're doing more stuff. And using Medicare as a lever, I think, is creating an environment in the health-care field where we can start getting better outcomes and lower costs at the same time. 9 There are still going to be those who argue that unless you get a single-payer system, you're never going to get all the efficiencies. There's certain areas like drugs, where the fact that Congress — and the Republican Party in particular — has been resistant to letting drug makers and Medicare negotiate for the lowest price. It results in us paying a lot more than we should. But if we're paying 4, 5, 6, 8 percent more than other countries for the same outcomes, I'd be pretty happy where we're only paying 2 or 3 percent more. Because that represents hundreds of billions of dollars, and means we can do a lot with that money.

8 Annual growth in health-care spending Source: Centers for Medicare & Medicaid Services

9 The White House is proposing tying 85 percent of all Medicare payments to outcomes by the end of 2016 — rising to 90 percent by 2018.

Ezra Klein

When you talk about Medicare as a lever, Medicare tends to pay a lot less per service than private insurers by a margin. Before single-payer there's also this idea you hear occasionally of letting private insurers band together with Medicare, with Medicaid, to jointly negotiate prices. 10 Do you think that's a good idea?

10 The technical term for this is "all-payer rate setting."

Barack Obama

You know, I think that moving in the direction where consumers and others can have more power in the marketplace, particularly when it comes to drugs, makes a lot of sense. Now, you'll hear from the drug companies that part of the reason other countries pay less for drugs is they don't innovate; we, essentially through our system, subsidize the innovation, and other countries are free riders. There's probably a little bit of truth to that, but when you look at the number of breakthrough drugs and the amount of money that drug companies now are putting into research and where they're putting it, a whole lot of it is actually in redesigning, modestly, existing drugs so they can renew patents and maintain higher prices and higher profits. That's not entirely true, but there's some of that. So there is a lot of savings that could be achieved while still making sure that our drug industry is the best in the world, and will still be making a healthy profit.

Obama on why he’s such a polarizing president See more videos from the Obama interview

Ezra Klein

To turn a bit towards politics, at this point, according to the polls, you are the most polarizing president really since we began polling. 11 But before you, the record was set by George W. Bush, and before George W. Bush the record was set by Bill Clinton. It seems that there's something structural happening there in terms of party polarization and the way it affects approval ratings and cooperation with presidents. In your State of the Union, you struck back at critics who say that the idea of healing some of these divisions is naïve or impossible. So when you welcome your successor into office, what would you tell them is worth trying that you think can still work, that would reduce the polarization?

11 Presidents' popularity gaps Source: Gallup

Barack Obama

Well, there are a couple of things that in my mind, at least, contribute to our politics being more polarized than people actually are. And I think most people just sense this in their daily lives. Everybody's got a family member or a really good friend from high school who is on the complete opposite side of the political spectrum. And yet, we still love them, right? Everybody goes to a soccer game, or watching their kids, coaching, and they see parents who they think are wonderful people, and then if they made a comment about politics, suddenly they'd go, "I can't believe you think that!" But a lot of it has to do with the fact that a) the balkanization of the media means that we just don't have a common place where we get common facts and a common worldview the way we did 20, 30 years ago. And that just keeps on accelerating, you know. And I'm not the first to observe this, but you've got the Fox News/Rush Limbaugh folks and then you've got the MSNBC folks and the — I don't know where Vox falls into that, but you guys are, I guess, for the brainiac-nerd types. But the point is that technology which brings the world to us also allows us to narrow our point of view. That's contributed to it.

Gerrymandering contributes to it. 12 There's no incentive for most members of Congress, on the House side at least, in congressional districts, to even bother trying to appeal. And a lot of it has to do with just unlimited money. So people are absorbing an entirely different reality when it comes to politics, even though the way they're living their lives and interacting with each other isn't that polarizing. So my advice to a future president is increasingly try to bypass the traditional venues that create divisions and try to find new venues within this new media that are quirkier, less predictable.

12 For an interesting discussion of the evidence around gerrymandering and political polarization, see Vox's gerrymandering card stack.

You know, yesterday I did three interviews with YouTube stars that generally don't spend a lot of time talking about politics. And the reason we did it is because they're reaching viewers who don't want to be put in some particular camp. On the other hand, when you talk to them very specifically about college costs or about health care or about any of the other things that touch on their individual lives, it turns out that you can probably build a pretty good consensus.

Now, that doesn't ignore the fact that I would love to see some constitutional process that would allow us to actually regulate campaign spending the way we used to, and maybe even improve it. I'd love to see changes at the state level that reduce political gerrymandering. So there's all kinds of structural things that I'd like to see that I think would improve this but, you know, there've been periods in the past where we've been pretty polarized. I think there just wasn't polling around. As I recall, there was a whole civil war — that was a good example of polarization that took place.

Ezra Klein

Do you think if we don't get some of those structural reforms, and more to the point, if we continue along this path, in terms of where the parties are in Congress, are there ways to govern with polarization? It occurs to me that [this was] your argument when you came to office. But before you, Bush was a "uniter not a divider," and before him Clinton, who was going to moderate and change the Democratic party with his sort of Third Way approach. The last couple of presidents have come to office promising the way they would get things done is to reduce polarization. Is there an argument or an approach that can be made to govern amidst polarization?

Barack Obama

A couple observations. Number one is that in American history — even during the so-called golden age where, you know, you had liberal Republicans and conservative Democrats and there was deal-cutting going on in Congress — generally speaking, big stuff didn't get done unless there was a major crisis and/or you had big majorities of one party controlling the Congress and a president of the same party. I mean, that's just been the history. There have been exceptions, but that's often been the case in terms of big-muscle movements in the political system. And you know, my first two years in office when I had a Democratic majority and Democratic House and Democratic Senate, we were as productive as any time since Lyndon Johnson. And when the majority went away, stuff got blocked.

Probably the one thing that we could change without a constitutional amendment that would make a difference here would be the elimination of the routine use of the filibuster in the Senate. 13 Because I think that does, in an era in which the parties are more polarized, it almost ensures greater gridlock and less clarity in terms of the positions of the parties. There's nothing in the Constitution that requires it. The framers were pretty good about designing a House, a Senate, two years versus six-year terms, every state getting two senators. There were a whole bunch of things in there to assure that a majority didn't just run rampant. The filibuster in this modern age probably just torques it too far in the direction of a majority party not being able to govern effectively and move forward its platform. And I think that's an area where we can make some improvement.

13 For more on the filibuster, see Vox's card stack on Congressional dysfunction.

Ezra Klein

One of the powerful things that's happened as polarization has increased politically is it's begun structuring people's other identities. The one I'm particularly interested in here is race. If you look back at polling around the OJ Simpson verdict or the Bernhard Goetz shooting in New York, Republicans and Democrats — you basically couldn't tell them apart. Now you look at the Zimmerman verdict or you look at what's going on in Ferguson, and opinion on racial issues is very sharply split by party. 14 Do you worry about the merging of racial and partisan identity?

14 The growing partisan divide on racial issues Source: Gallup, Pew Research Center, via Michael Tesler

Barack Obama

I don't worry about that, because I don't think that's going to last. I worry very much about the immediate consequences of mistrust between police and minority communities. I think there are things we can do to train our police force and make sure that everybody is being treated fairly. And the task force that I assigned after the Ferguson and New York cases is intended to produce very specific tools for us to deal with it.

But over the long term, I'm pretty optimistic, and the reason is because this country just becomes more and more of a hodgepodge of folks. Again, this is an example where things seem very polarized at the national level and media spotlight, but you go into communities — you know, one of the great things about being president is you travel through the entire country, and you go to Tennessee and it turns out that you've got this huge Kurdish community. And you go to some little town in Iowa and you see some Hasidic Jewish community, and then you see a bunch of interracial black and white couples running around with their kids. 15 And this is in these little farm communities, and you've got Latinos in the classroom when you visit the schools there. So people are getting more and more comfortable with the diversity of this country, much more sophisticated about both the cultural differences but more importantly, the basic commonality that we have. And, you know, the key is to make sure that our politics and our politicians are tapping into that better set of impulses rather than our baser fears.

15 Specifically you see this in Postville, Iowa, where a Lubavitcher family's purchase of a meat-processing plant in the late 1980s has led to the migration of a small community of Hasidim to the area.

And my gut tells me, and I've seen it in my own career and you see it generally, a politician who plays on those fears in America, I don't think is going to over time get a lot of traction. Even, you know, it's not a perfect analogy, but if you think about how rapidly the whole issue of the LGBT community and discrimination against gays and lesbians has shifted. The Republican party, even the most conservative, they have much less ability, I think, to express discriminatory views than they did even 10 years ago. 16 And that's a source of optimism. It makes me hopeful.

16 Support for same-sex marriage Source: Pew Research Center

Ezra Klein

On Obamacare, something that members of your administration have always said, and I think you may have said: there's been a lot of language about it being a good start, a platform to begin building. It's full of experiments. The idea is that there will be learning, and there will be change. Now we're in the second year of open enrollment. What would you like to see, if Congress were able to take up a bill, to tweak, to improve, to change, to build on that platform? What specifically from what you wanted in there originally or what we've learned since it's actually been in operation? How would you like to see it improved?

Barack Obama

Well, I'm not sure, Ezra, that we've got enough years of it being in place to know perfectly what needs to be improved, where there's still gaps. It's been a year. So far the verdict is that this thing's working for a lot of people. You've got 10 million people who've been enrolled, you've got more folks who've been signed up for the expanded Medicaid coverage, you've seen health-care inflation stay low or actually be significantly lower than before the ACA was passed, satisfaction with the insurance seems to be high. We haven't seen major disruptions to the medical system that a lot of people had predicted. So, there's a lot of stuff that's working.

Over time, I think seeing if we can do more on delivery-system reform, making sure that we fill the gaps in those states that haven't expanded Medicaid. The big problem we have right now with Obamacare is that it was designed to make sure that some subset of people qualified for Medicaid, and that's how they were going to get coverage, and others were going to go into the exchanges because they had slightly higher incomes. And because of the decision of the Roberts court — that we couldn't incentivize states to expand Medicaid the way we had originally intended — you've got a lot of really big states, you've got tens of millions of people who aren't able to get their Medicaid coverage. And so there's this gap. And that's probably the biggest challenge for us.

The good news is in dribs and drabs. Much as was true with the original Medicaid program, you're starting to see Republican governors and Republican state legislatures realize that we're cutting off our nose to spite our face. We've got an ideological objection to us helping our own constituencies and our own health-care systems. And to their credit, you've got folks like John Kasich in Ohio and Snyder in Michigan and now, most recently the governor up in Alaska, and others who are saying, "You know what? This is the right thing to do. Let's go ahead and expand it." So until that kind of settles, I don't think we'll fully know where there's still gaps in coverage, what more we still need to do. But I think that so far, at least, the performance of the plan itself, not the website in the first three months but the performance of the actual plan, you know, has at least met and perhaps exceeded a lot of people's expectations. The website, by the way, works great now.