Issue #29, Summer 2013

The True Origins of Prosperity

To read the other essays in the “The Middle-Out Moment” symposium, click here.

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.

First, relentlessly frame the choice as a choice. It’s trickle-down and middle-out economics. Not “top-down.” Not “the old ways that got us into this mess.” Trickle-down vs. middle-out. If we don’t have the courage to name our alternative, and repeat it relentlessly, we haven’t given people a clear choice. We will never displace trickle-down ideas if we don’t provide a clear, concise, and compelling alternative. Neither term has inherent force; it’s only in the contrast that we win.

Second, propagate the one pivotal meme at the heart of this entire effort: that rich businesspeople don’t create jobs; middle-class customers do. To put it another way, the right’s claim that rich businesspeople are job creators is the critical vulnerability deep in the heart of the Death Star; if we can target our ammunition to obliterate that single claim, the entire Death Star of right-wing ideology will implode and disintegrate. Why? Because without that claim, there is no way for the trickle-down camp to justify the absurd preferential treatment in the tax code and the regulatory regime for the rich and for large corporations. Without that claim, trickle-down economics reduces nakedly to a rent-seeking, self-serving agenda by the very rich to extract wealth from the poor and middle class. In short, we need to pick a fight with the right about the origins of prosperity in a capitalist society. Middle-out economics will prevail.

Third, make every economic issue an example of middle-out economics. The Ryan budget fails not because it is unfair or heartless or draconian. It fails because it perpetuates trickle-down thinking and cripples the ability of the middle class to generate national prosperity. Entitlement reform is not about the virtue or vice of running deficits. It is about whether we create enough security for middle-class consumers and workers to participate in the economy. The Affordable Care Act is not about the byzantine bureaucracy of health-care delivery. It’s about whether the middle class can dedicate its purchasing power to productive economic activity instead. And so on with sequestration, fiscal stimulus, and tax reform.

Fourth, recommit to capitalism—in a truer and more effective form. Middle-out economic policies aren’t just good because they benefit the middle class or the poor in the near term. They are great for the United States as a whole in the long term because they drive prosperity for all, including the rich. Our agenda is to make capitalism be all it can be for all of us.

Fifth, take this case to the people in the form of story. The argument we make here is a conceptual one. But the delivery device for that argument has to be narrative. Perhaps unfortunately, the last 30 years provide a very simple narrative arc—the tale we told at the very start of this article. That kind of storytelling must become second nature to progressives. Indeed, on all these fronts, progressives need dozens of complementary and simultaneous efforts to turn middle-out economics and the job-creator meme into products—media stories, policies, bumper stickers, viral videos, school curricula.

If middle-class people do not begin to think of themselves as job creators, then they will never intuitively embrace the policy ideas that we support. Only when middle-class voters begin to see themselves as the center of the economic universe will they begin to mobilize against the various elements of trickle-down policy that dominate this country’s political and policy agendas. It’s time to activate that awareness and the agenda that flows from it by framing the choice between trickle-down and middle-out economics as a choice. It’s time to seize the middle-out moment.

 

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Issue #29, Summer 2013
 
Post a Comment

Elmer Reed:

A stronger argument can be made by emphasizing CONSUMPTION. Consumption creates demand which generates supply which requires work supplied by JOBS.
The idea of consumption should be at the heart of your argument.

Jun 11, 2013, 3:29 PM
Tom Davis:

Elmer, consumption is implied by the expanded and more prosperous middle class of a middle-out economy. And it's better that is remain implied rather than emphasized. Consumption for its own sake is unseemly.

As the authors suggest, this is a battle of ideas. How those ideas are framed is...everything.

Jun 11, 2013, 4:31 PM
Gjalt Huppes:

This development is mostly attributed to Thatcher & Reagonomists, the "Right". However, it also is the policy line opened by John Rawls in A Theory of Justice, embraced by a substantial part of progressive thinkers and parties. National inequality in the West has soared. The international consequence of globalization with growth are in line with Rawls: distributionally speaking the poorest on earth indeed have benefitted.

Jun 12, 2013, 7:14 AM
Lenny Dee:

Given climate change and declining environmental health doesn't any discussion about the economy have to move from more to enough?!

Jun 12, 2013, 4:20 PM
pls:

The concept makes sense, especially if investment as well as consumption is implied, but the term "middle-out" is a disaster. It sounds like "strike out." Not very inspiring.

Jun 12, 2013, 11:28 PM
Rob Burns:

The aims sought in this essay are indeed honorable. However, the means to those ends fail to grasp the lessons of political economy over the last several centuries that are vital to forge an economics for the twenty-first century. To achieve the aim of prosperity we need to end the undue and harmful privileges granted by government that both trickle-down and middle-out economics leave festering and undermining our prosperity. Instead of maintaining those undue and harmful privileges we should aim toward a peer-to-peer economy where we relate to one another as equals: equals in the market as buyers and sellers, and equals in the political agora as constituent electorate members, direct democracy participants, and the legislative representatives. Such a peer-to-peer approach is provided through the Twenty-Eighth Amendment to the US Constitution from Path To Prosperity for US All (p2p4USA). Therefore, p2p4USA replaces the prosperity of the privileged well-connected few with a prosperity for all (see also the capsule summary of p2p4USA).

When we relate to one another as peers, innovation can be duly rewarded. Within capitalism (where we are not at all peers), ideas are rewarded and punished in accordance to how well they serve the privileged capitalist who reign over the economy. So ideas do not come from capitalists but are co-opted by capitalists to serve capital (to serve the rent-seeking interests of capital which are the only interests capital ever has).

Peer-to-peer relations bring prosperity automatically. Such relations encourage small business, and encourage prosperity for all. Capitalism undermines the very aims Liu and Hanauer seek to achieve (including free and competitive markets).

The aims of trickle-down, on one hand, and middle-out and p2p4USA on the other hand are quite different, despite what Liu and Hanauer observe in theirr essay. Trickle-down is longing for a return to the feudal like institutions of the past. Under feudalism we enjoy prosperity to the extent we please the monarchy (or an oligarchy of nobles). Trickle-down economics seeks to return us to that paradigm where we first grant absolute power to an oligarchy (to the 1% or to the capitalist reigning class) and then we will enjoy prosperity to the extent we ingratiate ourselves to those who reign over us. As we ingratiate ourselves to the 1% we strengthen the 1%. As strengthen the power of that oligarchy we make them the sole power to create jobs for us (to graciously grant us access to the means of production). So trickle-down is not false. It is a self-fulliling prophecy. However, it is a self-fulfillling prophecy that rightly offends progressives and most everyone else in the United States as well (when understood for what it is: a political-economic revolution from a constitutional republic to a crony plutocracy).

A few other items. Being anti-capitalist is not the same as anti-business. It is the opposite. Capitalism is bad for business and all living things. So to eliminate capitalism is to allow business to thrive and prosper. Capitalism is destructive to everything it touches (except capital). It is not a tool but a weapon of mass destruction. Capitalism is to subordinate all social concerns to capital. When we do that—when we subordinate all our concerns to capital—capital thrives and voraciously destroys all else we care about as a society (whether justice, innovation, peer-to-peer market and democratic relations, religion, family, community, etc.).

There cannot be a socialism for the 1%ers only. So the essay profoundly misunderstands our situation when it claims the undue and harmful privilege of capitalism is somehow socialism. Socialism is always focused on equal application of the laws. So when some enjoy undue and harmful privileges it is by definition not socialism (even when those who enjoy undue and harmful privileges claim that it is socialism in a PR maneuver). As the lyrics of the Internationale, updated by Billy Bragg, go: “Freedom is merely privilege extended, unless enjoyed by one and all”

Jun 13, 2013, 1:46 AM
Laura Johnson:

Middle out should also focus on the small business builders that are locked out of tradition jobs due to education or are running a side business to make ends meet. These are the businesses that hire locally and sell locally. All over America you can find little businesses cobbled together that build family income and community strength. The are out middle out consumers!

Jun 17, 2013, 10:11 AM
charles broming:

The writers recognize that demand for products and services creates opportunities for jobs and that consumer demand is the ultimate demand in the value-added chain. An important point in this article is the need for a simple, unifying narrative to give the progressive world view coherence, impact and to make it easy to retain. Unfortunately, I just don't see "middle-out!" as a rallying cry.

I agree with LJ, the core of a "Middle-out" economy is the small business owned by its operators, but, the ranks of middle management and white collar laborers are critical to this economy too. Contrary to the general belief of advocates of neo-classical economics (trickle-down) and monetarists, the US isn't the only country in the developed world with many such businesses. The so-called socialist countries have small business sectors that are as large the US's, relative to the total economy.

RB's solution, peer-to-peer economies, in any way that I can envision them, is not just unrealistic, it's based on a model that has no application. "Perfectly competitive" markets require all participants to have the same information and the same capacities to evaluate it and use it. We could try to legislate this disclosure level, but, enforcement would fail (for many reasons, consider the doctor and his patients).

We do, however, need a strong government with the capacity to make and enforce laws and regulations and to operate services in areas where markets fail to operate efficiently or effectively, overall (health care and labor, for example).

Jun 17, 2013, 9:26 PM
LaurenD:

In future, it would be better to avoid the metaphor of cosmology in relation to space travel. In fact, one could just as easily travel to mars using Geocentric mappings (the Ptolmaic approach). Motion is relative, ultimately, and which frame of reference is preferred is not at issue in plotting a course. There are many, many, better metaphors available.

Jun 18, 2013, 4:41 PM
Tony B:

The "Single Tax" (tax assets, NOT INCOME) is just that idea. It would divide conservatives for a decade. Imagine progressives calling for an end to the income taxes...and therefore, the IRS. That would bring a progressive Democratic majority into Congress for a long time.

It's easy to explain. Taxing income chases away business. Taxing assets causes the asset hoarders to use their property or lose it through continuous taxation.

If they rent an asset, tax the rental value. No one has the right to control the nation's wealth producing assets and do nothing for society with them. Naturally, there would be ONE homestead exemption.

If they build a factory on their land, they can enjoy tax free income. If they sit on their property, they will be taxed for ALL revenue needed to run government as there would be no other taxes, not income, nor school nor sales...just the single tax on assets OR the rental value thereof.

Jun 19, 2013, 10:15 PM
Plato:

This entire conversation is garbage. It begins with completely undefined concepts with no concept of history and with no idea about economic genesis. From there it wanders into a desert.

Jul 25, 2013, 12:43 PM
conscience of the society:

Rob Burns makes sense. Peer-to-peer kind of social and economic exchange is the ultimate ideal of every enlightened society. Every one has equal status in society.Jobs are true exchange of skill for an almost equal price. The difference between the highest and the lowest salary should not be more than 20 or 30 %, depending upon the quantum of responsibility. There should be a govt.ministry to check prices. Every price increase has to be substantiated with valid cost-calculation.

Our (conscience of the society- a philosophic non-profit) blogs offer few fit posts that depict the above ideal elaborately at links: http://influxofcapitalisticvalues.blogspot.in/, http://newphilosophyoflife.blogspot.in/

Jul 26, 2013, 2:35 AM
Dave Glaser:

There's a lot that's correct here. But the authors ignore the issue of power to achieve their aims. And, therefore, ignore the central role of labor unions in successfully addressing these questions.

Jul 28, 2013, 1:39 PM
Red Baker:

In 1900 government (federal, state, local) spending plus regulation costs were 10% of GDP. In 1950 they were 30% of GDP. Today they are 60% of GDP. Almost as bad as Europe. That dictates the current relative stagnation.

Jul 29, 2013, 3:37 PM
Victor Arnold:

During the last 35 years the top 12,000 richest families in the U.S. have pulled away from the top 1.2 million households (the top one percent), while the top one percent have left the bottom 80 percent in the dust -- median U.S. household income hovering around $52,000 in 2013. (Even at the 90th percentile, annual household income remained under $150,000 in 2012.) Theoretically and rhetorically, democratic capitalism is not supposed to produce this effect. The core political idea in democratic republicanism is that the vast majority have sufficient political wherewithal to hold their own in competition for resources, opportunities, and prosperity. Unfortunately, the public's shrinking share of the American apply pie contradicts this expectation. Accredited Online Universities

Oct 23, 2014, 2:25 AM

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