Growth and the Middle Class
First Principles: Arguing the Economy
A strong middle class leads to higher levels of trust. When a society is largely middle class, strangers are more willing to try to work with one another in business and in life, and people are more likely to be optimistic and believe that they can control their circumstances. In addition, people feel they share a similar fate and form stronger social bonds. As Tocqueville observed in the early 1800s, Americans, because they were largely middle class and not aristocrats who could conscript others, needed to trust one another enough to work together to achieve common goals.
Studies across U.S. states, of the United States over time, and across countries all find that societies with a strong middle class and low levels of inequality have greater levels of trust of strangers. Trust is based upon the belief that we are all in this together, part of a “moral community,” according to University of Maryland Professor Eric Uslaner. It is difficult to convince people in a highly stratified society that the rich and the poor share common values, much less a common fate.
As John Stuart Mill argued, “The advantage to mankind of being able to trust one another, penetrates into every crevice and cranny of human life: the economical is perhaps the smallest part of it, yet even this is incalculable.” Mill may have thought the impact of trust on economic growth incalculable, but modern researchers have sought to quantify it. One study of U.S. states measured the percentage of state residents who think “most people can be trusted”—ranging from about 10 percent on the low end in Arkansas to more than 60 percent in New Hampshire—and then analyzed the long-term economic growth of those states, controlling for a host of economic and political factors such as initial levels of education and income. It found that “a 10 percentage-point increase in trust increases the growth rate of GDP by 0.5 percentage points” over five years.
Trust reduces transaction costs because less time and resources are spent verifying and policing. And trusting people see the world as full of opportunities. With higher levels of trust, people are more likely to innovate, seek out trade and new technologies, and generally take economically sound risks.
A strong middle class, as thinkers from Aristotle to James Madison to modern political scientists have noted, fosters better governance by helping ensure government is well-run, increasing citizen participation, minimizing factional fighting, and promoting policies for the benefit of all of society rather than special interests. In contrast, economic inequality and a weak middle class make the political system imbalanced and depress the political participation of the non-wealthy, reducing voting, discussion, and interest in public policy. Political scientist Frederick Solt’s 2008 study of advanced countries found that a rise in inequality from low to high levels reduces political discussion by 12 percentage points and voting by 13 percentage points. Since even in relatively equal societies the non-wealthy are less likely to participate in politics than those with greater economic resources, inequality and a weak middle class have a profound impact on who is politically engaged.
And the weakness and withdrawal of the middle class from public life doesn’t just change electoral politics and public policy. It also reduces the basic effectiveness of government. The quality and efficiency of government agencies and services is significantly diminished, studies show, by economic inequality and a weak middle class. In a 2007 article in The Review of Economics and Statistics, economists Alberto Chong and Mark Gradstein developed a theoretical model explaining the relationship between inequality and governance and then empirically tested it, finding that economic inequality has a harmful effect on bureaucratic quality, government stability, and democratic accountability. Moreover, actual corruption in government becomes much more common without a strong middle class. In short, a weak middle class hollows out governing practices and institutions, so that the bureaucracy no longer delivers for its citizens.
But the important connection, the one progressives rarely make, is that these changes in government have an impact on growth. The active engagement of the wealthy, with their disproportionate power to secure public policies to their liking—through lobbying, campaign expenditures, and other means of influence—is likely to cause taxpayer dollars to be wasted. Government money is misspent not just when the wealthy pursue rent-seeking activities—narrow tax breaks, special copyright terms, patent monopolies, giveaways of the broadcast spectrum, and mining and logging rights on public lands for below-market fees, among others—but also when the wealthy shift broad policy away from more efficient alternatives.
The foresighted and efficient government that comes from having a strong middle class creates favorable conditions for growth, while wasteful, corrupt, and unfair policies are a significant hindrance. A strong middle class helps ensure that government works well, fostering favorable conditions for the economy to prosper.
Being middle class in a middle-class society—where most people have adequate financial resources and stability, but not enough to allow for a life of leisure—fosters attitudes and behaviors that are essential to building a healthy capitalist system. Middle-class parents raise their children to value work and education because they understand their children will be dependent upon work, not capital, for most of their income. They convey to their children the principle that if you work hard within the system and follow the rules, you will get ahead. They pass down the patience necessary for children to pursue an education, career, or entrepreneurial activity, and they have the economic means to sustain that patience and plan for the long term.
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