What We Mean When We Talk About Middle-Out Economics

Paul Krugman and Mark Thoma have been discussing (see here and here) the views of the (increasingly influential) very rich on this fall’s fiscal debate. They hypothesize that rising inequality has led to exorbitantly large incomes for a select few, and that these select few don’t understand the value of social insurance because they reap little-to-no benefits from programs like Medicaid, and SNAP, for example. The top 1 percent, after all, rarely realize the benefits of social insurance, since the likelihood that they experience unexpected income losses to the extent that they fall below the middle class living standards is slim. More often, social insurance benefits those who may be in the middle and lower classes, and experience unexpected income losses (like a lay off). Complaining about insurance simply because you don’t think you will need it is a pretty pithy argument, but let’s ignore that for now.

Thoma and Krugman go further, noting that rising inequality seems to have confirmed the top one percent’s notion that they are the indispensable economic engine of the U.S. economy, who take risks and work the hardest and should justly reap the benefits. They push for lower taxes (even though their current tax rate is one of the lowest in history) because they don’t think anything should impede their productivity, and they demand respect for being the “job creators” in society. In the context of this fall’s showdowns over the federal budget and the debt ceiling, not only is this take wrong, but it is totally divorced from the reality the broad middle-class faces—a reality of high joblessness from an anemic recovery, and meager wage growth over the last 30 years.

President Obama and others like to frame economic policy as growing the economy from the ‘middle-out.’ Last week, my colleague, Josh Bivens and I published a paper arguing that the fiscal policy debate this fall needs go beyond rhetoric and put actually improving middle-class living standards front-and-center. We attempted to explore what, if taken seriously, a ‘middle-out’ approach would look like.

A ‘middle out’ approach to fiscal policy would first and foremost focus on creating jobs and ensuring a full recovery from the Great Recession. Relative to other recessions, government spending in recent years has been steeply contractionary. Four years into the current recovery, government spending is still 15 percent below what it would have been had it just matched typical growth during previous recoveries. Further, had the historical average of public spending been replicated in the current recovery, roughly 90 percent today’s output gap would be closed and there would be 5 million additional jobs. Given that share of “prime-age workers” employed remains 4 percentage points below the 2007average, and is still no higher than it was in June 2009, the official beginning of the recovery from the Great Recession, ending austerity should be the number 1 priority of policymakers this fall. At the very least, fiscal policymakers should repeal “sequestration”—the automatic spending cuts negotiated in 2011 that nearly everybody now realizes are unnecessarily dragging on growth. Research has shown that repealing the $91 billion in scheduled cuts necessitated by sequestration for 2014 would generate between 900,000 and 995,000 jobs.

After addressing the jobs crisis, a ‘middle out’ approach would then work to reverse the rise of inequality that has been a primary impediment to the improvement of middle-class living standards. To investigate the drivers of the middle-class income growth over the last 30 years, we examined the contributions from each source of growth. Between 1979 and 2007 wages and salaries accounted for just 10.1 percent of overall income growth for these households, even as households significantly increased annual hours of work. Conversely, half of the income growth for these households was driven by government transfers (dominated by Social Security and Medicare). These findings tell us something very important about the social insurance programs so many of the very rich despise: these programs (particularly Social Security and Medicare) have been among the only sources of real strength for middle-class Americans in recent years and hence should not be on the chopping block in this fall’s fiscal showdowns. Middle-out economics should focus on preserving key areas of strength for middle-class living standards, and these social insurance programs are one such area.