The True Origins of Prosperity
Once upon a time, in the middle of the last century, America had a thriving economy in which the middle class was at the center and everyone—poor and rich alike—did better. But then, starting in the late 1970s, a group of self-serving rich people began to sell a promise that if we took better care of them, their wealth would trickle down, and that would help everyone else prosper. The country bought that line. And for three decades both parties yielded to it. The results were great for the very rich—and disastrous for everyone else. Wages stagnated. Inequality became extreme. Mobility slowed. By 2008, things were so upside down and we had so lost our way that the economy collapsed. Out of that ruin, many began to remember the old ways: the truth that lasting growth and shared prosperity come from the middle out and not the top down. Now we are joined in a battle of ideas to see whether middle-out economics can dethrone trickle-down.
This is the contest we are engaged in today. When President Obama frames the issue in this way, as he did down the homestretch of the 2012 campaign, progressives advance and his popularity soars. When he drifts from this narrative, as he has in the sequestration and debt debates of 2013, he gives ground unnecessarily. But make no mistake: The central debate in this country will continue to be about this choice and the true origins of prosperity.
In this symposium, others propose important policy ideas for this economic debate. We do not add to that good work. We offer instead a way to reset foundational assumptions about how the economy works and what prosperity is. And we assert that only by resetting these assumptions can progressives prevail in the coming debate. It is time to kill the myth of trickle-down economics—and to replace it with the true story of middle-out economics.
Middle-out economics argues that national prosperity does not trickle down from wealthy businesspeople or corporations; rather, it flows in a virtuous cycle that starts with a thriving middle class. Middle-out economics demands a systemic policy focus on the skills, capacities, and income of the middle class.
Economic policy choices may seem complex but they boil down to a simple question: whether what’s best for a capitalist economy is an ever-increasing concentration of wealth at the top or a thriving and growing middle class. That’s why arguments about the debt, sequestration, trade policy, tax reform, and fiscal stimulus must all be reframed relentlessly as arguments about whether and how best to grow from the middle out. To take each of those issues on its own technical terms is to ignore, and even concede defeat on, this larger frame. An argument over whether to have deficits is hard for our side to win. An argument over whether the middle class is the true origin of prosperity in a capitalist economy is hard to lose.
Why the Picture in Your Head Matters
The picture you have in your head about how the world works absolutely determines what you think is possible or beneficial.
For example, people equally committed to getting from Earth to Mars will have paralyzing differences about how to get there if one group believes the sun and Mars orbit the Earth while the other group believes that the Earth and Mars orbit the sun. People are entitled to differences of opinion. But only one cosmology gets you to Mars. And crucially, splitting the difference won’t get you there either.
Progressives are litigating the issues of the day as if Americans disagreed on where to go. It’s not true. All Americans want a prosperous and fair country and a better future for their children. The question is, what policies will get us there? That answer is different depending on the economic “cosmology” you accept.
Conservatives have a clear and simple explanatory cosmology called “trickle-down economics” in which the economy revolves around a small number of wealthy people who create jobs and are owed deference in tax and fiscal policy. It holds that if the rich get richer and businesses make more money, America will by definition prosper. That trickle-down cosmology dominates our politics and culture. The problem is that it is as mistaken as holding that the sun orbits the Earth. And it has been leading us as far astray as an astronomy based on this belief once did.
For decades, intellectuals on the left have contested trickle-down economics. Unfortunately, their ideas have not gained political purchase. That’s because almost all progressives of the political class have accepted and even internalized the right’s economic explanation. We have not contested its basic premises or even the core assertion that it works. We sometimes criticize the right’s explanation intensely, even stridently, but we fail repeatedly to provide a clear and compelling alternative picture of how America can prosper. We merely tout other soft priorities that never quite win the day. And then we are surprised when the right’s weak cosmology keeps winning hearts and minds.
In today’s economic debate, conservatives make practical-sounding arguments about promoting prosperity, while progressives answer with social-justice claims. They say the rich are job creators who should pay lower taxes than the middle class. We say that would be unfair. They say social programs destroy the economy. We call them “safety nets.” They want to promote business. We want to help the poor.
Voters do care about fairness. Many are compassionate too. But if the economic cosmology most Americans accept holds that fairness and prosperity are in zero-sum conflict, then progressive polices are intuitively and inherently unfriendly to economic growth. When they say prosperity and we say fairness, we are arguing from a position of weakness.
To be sure, progressives can take intellectual comfort that there is not a shred of factual evidence for the proposition that a program of enriching the wealthy and deregulating the economy ever brings general prosperity. But facts are secondary to intuitions—to the picture in people’s heads. And we are losing the intuition game.
It is impossible to effectively contest trickle-down economics and the tax policies it implies while simultaneously accepting its foundational premise—that rich businesspeople are the sole job creators in a capitalist economy. This is because if they are the job creators, then trickle-down economics is necessarily true. But if middle-class consumption is what creates jobs, then trickle-down economics is necessarily false.
What Progressives Need to Push
In order to go from defense to offense, we must offer a new explanation of where prosperity comes from called middle-out economics. A twenty-first century understanding of economics leads to the conclusion that prosperity in capitalist societies is a consequence of a “circle of life”-like feedback loop between consumers and businesses. Middle-out economics aims to supercharge this feedback loop by creating conditions that allow both middle-class consumers and the businesses that depend on them to thrive in a virtuous cycle of increasing prosperity for all.
This means that a prosperous economy revolves not around a tiny number of the very rich but around a great and growing number of middle-class consumers and small businesspeople. Middle-out economics is not just a catchy rhythmic contrast to trickle-down; it’s a strategy based on a set of facts about how the economy really works.
Here are the premises derived from those facts:
- Demand from the middle class—not tax cuts for the wealthy—is what drives a virtuous cycle of job growth and prosperity.
- Rich businesspeople are not the primary job creators; middle-class customers are. The more the middle class can buy, the more jobs we’ll create.
- America has the right and the responsibility to decide where the jobs created by our middle class will be located—here or in China.
- Trickle-down has given us deficits and a decimated middle class.
- Middle-out economics means investing in the health, education, infrastructure, and purchasing power of the middle class.
- Middle-out economics marks the difference between what is good for capitalism broadly versus what protects the vested interests of a select group of capitalists narrowly—and it invests in the former.
And here is the policy framework these premises demand:
- Create a truly progressive tax system. The richest citizens and the largest corporations pay a little more so that middle-class citizens and small businesses get the support they need to thrive. Loopholes are closed so wealthy individuals and the most profitable corporations actually pay more.
- Invest in the skills and health of the middle class. Continue investments in programs that help the middle class succeed, and convert poor families into middle-class families that can purchase goods from our nation’s businesses and drive our economy.
- Fight for American businesses and jobs. Pursue balanced trade and economic development policies that encourage companies to make things in America and discourage foreign companies from competing unfairly with American workers and businesses.
- Help workers help business. Push for a fairer and more equitable split between workers and owners of the value created by enterprises. This does not punish capitalists or ask for their charity: Higher wages for workers means more business for American companies. It’s Henry Ford’s long view.
- Make strategic investments in the next middle-class industries. Invest strategically in the industries of the future. Make big investments in R&D, and offer tax incentives for consumers as well as for companies and investors to use the power of the market to foster innovation.
- Emphasize entrepreneurship and innovation. Provide smart regulations and incentives to enable ever more Americans to start businesses and generate the economic activity that will sustain us in the future. This is rooted in the recognition that the way to help businesses, small and large, isn’t less regulation but more thriving customers.
Middle-out economics has several important advantages over trickle-down. One is reality: This is how complex, adaptive systems like economies in fact thrive. A second is politics: Middle-class voters will naturally prefer a story that puts them in the center as the prime actors, rather than at the margins as bit players. And the third is cultural intuition: We know in our gut that we’re all better off when we’re all better off. That was George Bailey’s message in It’s a Wonderful Life.
Middle-out also lays bare the two key assumptions Republicans make about economics that drives policy choices like Paul Ryan’s budget. First, that because prosperity trickles down from the top it’s the people at the top who matter. And second (and perhaps more importantly) because the people at the top matter, the people in the middle and bottom don’t matter. Which is why Republican policy always seeks to cut at the middle and the bottom rather than at the top. The Ryan budget is emblematic of this approach.
Framing Middle-Out vs. Trickle-Down as a Choice
With the election behind us, progressives must now reshape people’s deep intuitions about where prosperity originates. This means we have to frame the choice between trickle-down and middle-out as a choice. Perhaps this sounds obvious. And yet we progressives haven’t ever prosecuted the full case.
Here’s what we mean: Most progressive leaders, elected and otherwise, routinely excoriate trickle-down economics. Good. They reflexively say they are for “saving the middle class.” Okay. Some have even started talking about growing the economy “from the middle out.” Wonderful. In our view, however, this is just not enough.
It is also not enough to think that just saying “middle class” repeatedly drives home the point. It does not. Conventional progressive talk of “saving” the middle class puts it on par with saving baby seals. It expresses a sentiment but not an argument or a competing explanation of where prosperity originates. Simply saying the words “middle class” over and over again is not enough. That’s because no amount of “sentiment” will win the day. We need to convert our authentic desire to put ordinary people first into an argument and an explanation about why the middle class is where prosperity originates in capitalist economies. Contrasting the trickle-down explanation with the middle-out explanation clearly, sharply, and repeatedly moves us from defense to offense.
At the same time, too many progressives are reflexively hostile to capitalism itself. That is misguided and even dangerous. The strongest case for middle-out economics and for an economic agenda that deconcentrates wealth and unearned privilege is that such an agenda is great for business. We progressives need to remember and to believe that capitalism is the best social technology ever invented for creating widely shared opportunity and prosperity.
While capitalists cannot take sole credit for creating jobs, they can take credit for creating the ideas that solve many of society’s problems. Our country’s wealth is best measured by the rate at which we create ideas and solve problems. We need more Americans to have the wherewithal—purchasing power, education, health security, access to capital—to participate in economic life, whether as consumers or as idea creators (that is, small businesspeople). The more that happens, the better America does. Middle-out economics, in short, allows capitalism to operate at full capacity and full potential with our talent maximally deployed. Middle-out economics promotes the participation of everyone in a market economy rather than protecting only a privileged few.
That means, as Eric Beinhocker argues in this symposium, that middle-out economics is a truer form of capitalism: more competitive and dynamic by being fairer, and fairer by allowing more true competition. Trickle-down economics, properly understood, is socialism for a select group of capitalists. Middle-out economics isn’t an attack on capitalism; it is simply a more effective form of capitalism than the faux free-market ideology we currently embrace. Perhaps this is why a growing number of thinkers on the right are also coming to see the wisdom of this approach.
To be clear, this is not an argument to be joined and resolved over the coming weeks or months. We have 30 years of terrible policy to undo, and only by reframing the public’s understanding of the true source of shared prosperity in a capitalist economy can we do this. It will take patience and persistence—and a strategic sensibility.
How to Make Middle-Out Economics a Reality
For progressives to transform middle-out economics from an idea into a reality, we urge five approaches.
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