The White House

Obama's 'Middle Out' Argument Against Trickle-Down Economics


President Obama speaks at Knox College in Galesburg, Ill., on July 24

Photograph by Brendan Smialowski/AFP via Getty Images

President Obama speaks at Knox College in Galesburg, Ill., on July 24

(An earlier version of this story ran online.)

Stymied on his economic agenda by Republicans in Congress, President Obama went to his home state of Illinois on July 24 to deliver his first major economic speech since the State of the Union. The point wasn’t to convince GOP leaders that his ideas are better, but to make them fear the consequences at the polls if they continue to slash social spending and block his job-creation initiatives. The president mentioned the middle class 28 times and promised to fight for “an economy that grows from the middle out, not the top down.”

Obama’s lengthy sales pitch, kicking off a series of speeches on the economy, challenged the perception that Democrats are bleeding hearts who don’t care about growth. “This growing inequality isn’t just morally wrong, it’s bad economics,” Obama said, arguing that policies that help the middle class, such as bolstering manufacturing, rebuilding infrastructure, and making education affordable, simply work better than trickle-down ones like tax cuts.

The idea of branding traditional Democratic prescriptions as a “middle out” policy originated with the party’s liberal wing. Democrats must “propagate the one pivotal meme at the heart of this entire effort: that rich businesspeople don’t create jobs; middle-class customers do,” Eric Liu and Nick Hanauer write in the summer issue of Democracy, a liberal journal that proclaims the arrival of the “Middle-Out Moment.” “If we can target our ammunition to obliterate that single [trickle-down] claim, the entire Death Star of right-wing ideology will implode and disintegrate,” they write.

Going all in on “middle out” holds risks for Democrats. At least in Democracy’s formulation, it leans on the Keynesian theory that putting more money into consumers’ pockets is the way to promote growth, notes Luigi Zingales, a professor at the University of Chicago Booth School of Business. But even Keynes said that consumption isn’t always the problem; economies also need entrepreneurs with animal spirits. What’s more, some inequality is good for growth because it gives the poor and middle class something to strive for, Princeton University economist Angus Deaton argues in a forthcoming book, The Great Escape: Health, Wealth and the Origins of Inequality.

On the other hand, many economists would agree with the Democrats’ claim that too much inequality hurts growth. International Monetary Fund economists Andrew Berg and Jonathan Ostry concluded in 2011 that countries with less inequality experience longer “growth spells,” which “is critical to achieving income gains over the long term.” Daron Acemoglu of Massachusetts Institute of Technology writes in an e-mail that “a more unequal society creates inequality of opportunity,” which eventually saps growth because the poor can’t achieve their potential. And Zingales says that when voters lose faith in equality of opportunity, they turn against free markets.

Douglas Holtz-Eakin, a former economic adviser to President George W. Bush, describes Obama’s “middle out” rebranding as “sloganeering trumping policy.” But with Republicans blocking Obama at every turn, slogans might be the only weapon the president has left. Expect to hear more about the middle class and “middle out” as Beltway brinkmanship ratchets up again this fall.

The bottom line: Obama hopes to win support for his economic agenda by arguing that middle-class consumers are the key to growth.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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