In his first State of the Union speech, delivered in March 2022, President Joe Biden summed up his approach to the economy: “Build the economy from the bottom up and the middle out, not the top down.” The idea of building the economy from the “middle out” has been a Biden theme from early in his campaign to his first major speech to Congress after his inauguration, where he declared a decisive break with four decades of economic thinking that has dominated U.S. policymaking since the Reagan revolution of the 1980s: “Trickle-down economics has never worked. It’s time to grow the economy from the bottom up and the middle-out.”
This “middle-out” language is no mere soundbite. If Biden is successful in enacting major parts of his economic agenda—a big “if” given the Build Back Better bill is currently stalled in the U.S. Senate—it has the potential to be as transformative as Roosevelt’s New Deal was. This is because middle-out is not just a slogan, or even a collection of policy proposals, it is a fundamentally different way of thinking about the economy that has emerged from decades of research, evidence, and theory. “The economic theory underlying President Biden’s American Jobs Plan and American Families Plan is different,” the Council of Economic Advisers stated in a May 2021 issue brief. “These proposed policies reflect the empirical evidence that a strong economy depends on a solid foundation of public investment, and that investments in workers, families, and communities can pay off for decades to come.”
Republicans might try to paint the Biden agenda as old-fashioned tax and spend liberalism, warmed-over Keynesianism, or even that dreaded word, “socialism.” But as the originators of the “middle-out” narrative, we can say that it is none of these things. Nick first introduced the term in his 2011 book with Eric Liu, The Gardens of Democracy, and we and others, including current members of the Biden administration, have developed the ideas since. Middle-out is something different. It repudiates not just the trickle-down economics of conservatives, but also challenges orthodoxies that have guided Democratic policy-making from the Clinton through Obama years. Middle-out breaks from many traditional assumptions in economic theory about how the economy works and is instead built on modern, empirical research on what actually creates growth and prosperity.
When Biden speaks of middle-out versus trickle-down he is doing more than drawing a political contrast. He is making a highly consequential argument about economic cause and effect, how prosperity is created, and the role of government. And we’ll give you a hint about what he means: The answer is not tax cuts for the rich.
The Rise and Fall of Trickle-Down Economics
From the 1930s through the 1970s, U.S. economic policy was heavily influenced by the ideas of British economist John Maynard Keynes and others who advocated an activist role for government in the economy. This was a bipartisan consensus, stretching from Roosevelt’s New Deal to Nixon famously declaring that he was “a Keynesian in economics.” This consensus resulted in major government investments in infrastructure and education, strengthening the social safety net, regulation of powerful interests, and policies to promote full employment and rising wages. But Nixon’s Keynesian responses to the toxic combination of high inflation and low growth (or stagflation) in the 1970s were seen as ineffective. This paved the way for the Reagan Revolution of the 1980s, which was underpinned by what are often called “neoliberal” economic ideas, most famously promulgated by Milton Friedman and his colleagues at the University of Chicago.
The core ideas are familiar: Free markets are inherently efficient, self-regulating, and self-optimizing, while government “interference” in the form of taxes, regulation, and public investment distort the market and reduce societal welfare. Government action may sometimes be necessary to address “market failures” or politically justified in pursuit of “social justice” goals, but the inevitable price of government actions to increase social justice is less market efficiency. Neoliberalism is grounded in the belief that there is always a “Big Tradeoff” between growth and equity—that we can have a big economic pie or a more equal pie, but not both (the phrase “Big Tradeoff” comes from the title of a highly influential economics text from the 1970s). Inequality, in this view, is the price we must pay to create incentives for innovation and growth. And government efforts to support those lower down the economic ladder or pursue other societal goals such as better health or a clean environment, almost always ends up “hurting the people we’re trying to help” by reducing market efficiency. For example, according to this argument, government cannot raise the minimum wage without reducing the number of low wage jobs, or invest in public goods without “crowding out” private investment, or tackle climate change without killing jobs and growth (each of these statements, by the way, has proven to be empirically false).
The best thing for everyone, according to the neoliberals, was to “get government out of the way,” maximize market efficiency, grow the economic pie, and eventually the benefits of faster growth would “trickle down” to average Americans. Republicans wielded this argument to slash taxes on wealthy “job creators,” deregulate corporations, disinvest from public infrastructure, weaken the social safety net, erode the minimum wage and the overtime threshold, and bargaining power of labor. Democrats initially resisted, casting themselves as champions of equity and justice; but lacking a coherent alternative theory of growth, they quickly found themselves at a narrative (and thus political) disadvantage. After three disastrous elections (Carter, Mondale, Dukakis), establishment Democrats embraced neoliberal economics too. They followed Bill Clinton’s lead in arguing for a kinder, gentler version of trickle-down in which markets would be set free and the gains from growth would be used to help compensate the “losers” from free market competition. Clinton declared “the era of big government is over,” deregulated Wall Street, struck corporate-friendly trade deals, and rolled back the welfare state.
But a rising tide did not lift all boats and prosperity never managed to trickle down. In fact, the reverse happened: massive trickle-up. From 1935 through 1973 the bottom 90 percent of workers had seen their incomes rise on average over 4 percent per year as wages across the income scale largely tracked increases in productivity growth. But from the mid-1970s onwards—from the collapse of Keynesianism and through the rise of neoliberalism under Reagan and Clinton—the fortunes of the rich and everyone else dramatically diverged. Incomes for the bottom 90 percent stagnated or declined—in real terms, most families had lower incomes in 2015 than in 1973, despite the economy tripling in size. During this period, nearly all the gains of growth were captured by the top 1 percent of earners—essentially the owners of capital. While the 90 percent stagnated, the top 1 percent saw their incomes take off into the stratosphere, rising 450 percent between 1973 and 2015. In the mid-1970s, CEOs on average earned about 20 times what their workers earned; by the 2010s that had rocketed to 300 times. According to a study by the RAND Corporation, over the past 45 years, $50 trillion was redistributed upward from the bottom 90 percent of earners to the top 1 percent.
And the neoliberal agenda didn’t even deliver on its promise of supercharged growth. With consumer spending accounting for 70 percent of GDP, the hollowing out of the American middle class inevitably resulted in a slowing of consumer demand, leading to an era of “secular stagnation.” Investment in the economy slowed as corporations funneled the bulk of their profits (and tax cuts) into dividends and stock buybacks rather than growth-producing reinvestment such as R&D or higher wages for workers. A 2014 report from the OECD estimated that rising inequality knocked as much as 9 points off U.S. GDP growth over the previous two decades alone. That’s more than $2 trillion a year in lost economic activity.
So, what caused this fracturing of the U.S. growth model and hollowing out of the middle class? How did we go from a postwar economy that was highly inclusive, where gains were broadly shared, to a post-1970s economy that was highly exclusive, where only the richest 1 percent benefitted?
Bad Theory Leads to Bad Policy, and Bad Policy Leads to Bad Results
Trickle-down economics failed because the economic ideas that underpin it failed. They are grounded in models of human behavior and of markets that are both empirically wrong and economically harmful. In the neoliberal worldview, people selfishly and rationally pursue their individual self-interest—owners of capital try to maximize the return on their investments while workers try to maximize their wages. Then, by the magic of competitive, free markets, this pursuit of self-interest efficiently and mechanically results in the best possible allocation of resources for society. In this mythical efficient market, the price system pays everyone exactly what they are worth. If hedge fund managers and CEOs are getting rich it must be because they are doing something useful for society (“God’s work,” as Goldman Sachs Chair Lloyd Blankfein self-servingly put it). And if low-wage or middle-income workers are seeing their wages stagnate or decline, well then, they must be contributing less to society. From a neoliberal perspective, radical inequality is a natural and necessary consequence of an efficient market. In the immortal words of Gordon Gekko in the 1980s film Wall Street, “Greed is good.” And any interference in this idealized world can only make things worse.
The problem is, it’s nonsense. This fictitious “efficient market” exists only in economics textbooks and in the self-rationalizations of the superrich.
Cooperation Not Selfishness Creates Prosperity
Over the past several decades, economists and other social scientists have accumulated a mountain of evidence revealing how real-world people, markets, and economies actually behave. And they look little like the neoliberal, trickle-down theory.
First, real people behave nothing like the hyper-rational, selfish, asocial, Spock-like creatures of neoliberal economic theory. The reality is that humans are among the most social and cooperative species on the planet. We can be selfish, yes—even cruel. But it is our highly evolved prosocial nature—our innate facility for cooperation—that has enabled our species to build our massively complex, global civilization. Our instincts for reciprocity, our capacities to be generous and altruistic, and our moral norms enable large groups of unrelated people to cooperate to do amazing things like build cities, create the Internet, organize global supply chains, and fight pandemics.
We can be competitive too, and competition is absolutely crucial to a functional market economy—but the market is largely a competition between highly cooperative groups. The smartphone market, for example, isn’t a personal battle between Tim Cook of Apple and Jong Hee Han, CEO of Samsung; it’s a competition between the hundreds of thousands of people working together both inside Apple itself and in Apple’s wider global supply chain, versus those working together in Samsung’s—a scenario further complicated by the fact that, in addition to being Apple’s largest smartphone rival, Samsung is also one of Apple’s largest component suppliers. Our modern market economy is an intricate interplay of cooperation and competition. Biologists refer to this kind of dynamic as “multilevel selection” where evolution selects for groups that can out-cooperate other groups. In such a system, individuals may be selfish, cheat, or free ride, but such behaviors erode cooperation (and thus the competitiveness of the group) and so groups that create cultures, moral codes, and institutions that can restrain, minimize, and weed out such behaviors will do better than groups that don’t.
Greed is not good; cooperation is good. Most business leaders know this, and the most successful companies promote cultures of cooperation and build institutional structures to support it. Similarly, successful societies and economies aren’t built from greed-is-good hyper-individualism, they are built by institutions and cultures that harness our prosocial cooperative instincts while constraining our anti-social behaviors. And societies that do promote greed and hyper-individualism over cooperation—as neoliberalism has done—inevitably fracture, become dysfunctional, and lose their ability to innovate, build, and compete. Decades of neoliberalism has sapped the cooperative dynamism that used to characterize the U.S. economy and society.
From Big Tradeoff to Big Win-Win
A further implication is that there is no Big Tradeoff between fairness and growth—instead fairness causes growth. Growth ultimately comes from expanding the circle of cooperation—more people with both the skills and economic wherewithal to innovate, make, and buy things—and cooperation in turn is built on foundations of fairness. Cooperation happens when our prosocial instincts for generosity and reciprocity can flourish, when we can share knowledge and resources, when we can trust each other; and when the jerks are isolated, cheating is punished, power relations are just, and everyone must play by the same rules. Cooperation is built on what we refer to as “fair social contracts.” Instead of a Big Tradeoff, there is a Big Win-Win; when social contracts are fair, cooperation flourishes, and so does innovation and growth.
An easy way to see this is to think of the opposite: Highly unequal societies where a small elite exploits the masses are never dynamic, innovative places, no matter how free their markets are. Instead, such societies are rife with cheating and corruption as unconstrained elites fight with each other for power and wealth while the rest just try to survive. When social contracts are unfair, trust and cooperation are low—and so is innovation and prosperity. Fair social contracts are not a state of nature, they are active constructions. And because creating fair social contracts inevitably involves balancing lots of competing interests, democratically elected governments are the only institution with the legitimacy and power to build them.
Decades of neoliberalism have broken the American social contract and weakened our democracy, funneling wealth and power to the richest, and allowing them to play by a different set of rules. Perhaps the one truthful statement Donald Trump has ever made was saying “it’s a rigged game”—millions of working-class Americans know the game is rigged and that is a major reason they voted for him. But sadly, it was people like Trump who did the rigging. Powerful interests have used the ideas of neoliberalism as intellectual cover for self-serving tax cuts, deregulation, reducing the power of workers, increasing the power of capital, degrading our environment, and letting our common infrastructure crumble.
Real World Monopoly
A further pillar of neoliberalism is that high levels of inequality are justified because markets are efficient allocation machines that always reward participants with exactly what they deserve and whose outcomes can never be improved by government “interference.” But the reality is that markets left to their own devices don’t produce efficiency, they produce oligarchy, undermining the very basis of cooperation that our prosperity depends on.
As an allocation mechanism, a market economy works much like the board game Monopoly, a game that highlights three critical features missing from the analyses of most neoliberal economists: luck, compounding, and path dependence.
First, while there is certainly skill in the game, luck plays a big role too, with one’s path around the board determined by random rolls of the dice. In real life, luck likewise plays a major role in shaping the paths people take, starting with the lottery of where you were born and who your parents are, but continuing, for example, through the good luck of having a caring teacher or the bad luck of living in poverty, and on through the chance encounter that leads to a job opportunity, or health problems that lead to a downward spiral of debt and despair. Everyone’s life is full of twists and turns that have more to do with luck than with skill or determination or any other inherent virtue.
Second, those twists and turns of luck tend to compound. In Monopoly, a chance landing on a valuable property early in the game can lead to collecting rents that provide the capital to build houses and hotels that lead to even higher rents and so on, thus compounding that early advantage. The economy is likewise full of compounding factors—wealth itself compounds through interest and investment returns, but so too does education (the lucky break of a good teacher leading to a good college), social networks (a powerful friend introducing you to more powerful friends), and jobs (a good job leading to a better job). But disadvantage also compounds—a painful workplace injury results in an opioid prescription that leads to a downward spiral of addiction, homelessness, and despair. Imagine two equally intelligent, hardworking people: One gets a lucky break early-on that compounds, the other doesn’t; their paths quickly diverge through no inherent fault or quality of their own.
Third, and finally, Monopoly demonstrates path dependence—where you are this period depends on where you were in all of the previous periods. In a path dependent system, doors of opportunity open and close depending on what path you are on—for example, you can’t build a hotel on Park Place if you don’t already own it. Bizarrely, most standard economic models assume the opposite, that the system isn’t path dependent—in other words, whether a bright, young person succeeds or not depends on their skills, resources, and behaviors in the moment, not on whether they’ve been on a path to Harvard or a minimum wage job.
Together, these three features—luck, compounding, and path dependence—are the reason why Monopoly is always true to its name: If played for long enough, one player runs off with almost all the money while everyone else goes bankrupt. Once the twists and turns of luck, compounding, and path dependence take hold, the players’ paths quickly diverge, with some headed to Boardwalk luxury and others to the slums of Baltic Avenue or even Jail. Again, there is skill involved; some players will take better advantage than others of whatever luck dishes out. But as much as the winner might want to believe otherwise, Monopoly is not meritocratic. Instead, it is the structure of the game that determines the highly unequal outcome—one fat cat and the rest poor or broke.
The real economy shares these same structural features of Monopoly. But the real economy is in fact even less meritocratic. This is because Monopoly at least guarantees equality of opportunity—every player starts at the same position with the same amount of money. In the real economy, we each start at birth in sometimes dramatically different social and economic circumstances. And again, path dependence and compounding mean that even very small differences in starting position can lead to very large differences in outcomes. Furthermore, in Monopoly, everyone plays by the same rules and rolls the same dice. In contrast, in the real economy the richest and most powerful get to write the rules and load the dice—whether it is lobbying to get a trade agreement tilted their way or hiring that tutor to get their kid into Yale. And in the real world, the rules are often applied unevenly depending on race, gender, wealth, and other power disparities.
None of this denies that rags to riches stories can and do happen—but they are rarer than we might intuitively think (and have been getting rarer as U.S. social mobility has declined). Likewise, there are certainly rich people who deserve their wealth because of their skill and contributions to the society. But if one looks more closely, those stories too are full of luck, compounding, and path dependence.
Properly understood, free markets are not machines that efficiently and meritocratically allocate resources; they are a game that compounds advantage and disadvantage over time, pulling the tails of the distribution apart, leading to a few Monopoly-like winners at the top as everyone else struggles to hang on. This is simply how free markets work. And as the economy grows more unequal, extractive, and exclusive, it inevitably undermines the economic inclusion and fair social contracts on which our shared prosperity and democracy depends.
The only institution powerful enough to push back on this tendency is government. Only governments can set and enforce the rules of the game and ensure that the winnings get recirculated back into the game through taxes, public investments, public services, and other measures. A broad, prosperous, and inclusive middle class does not pop naturally out of the economic game—a plutocracy does. And with plutocracy comes the threat of authoritarianism. Creating, supporting, and sustaining the middle class must thus be at the center of policy, both for our economy’s sake and for our democracy. This is the focus of middle-out.
Prosperity Grows from the Middle-Out
Prosperity is always created from the middle-out, by growing the circle of inclusion in the economy; by including as many people as possible as workers, consumers, innovators, and citizens. It does not trickle-down from the top, from the Monopoly winners.
To borrow a phrase from Abraham Lincoln, the economy is a system “of the people, by the people, for the people.” It is an economy “of the people,” in that our most valuable economic resource is the knowledge and knowhow embodied in human minds and cooperatively distributed across vastly complex social and economic networks. It is an economy made “by the people,” in that by cooperating we turn that distributed knowledge into the products and services that give us material prosperity. And it is an economy made “for the people,” in that the sole purpose of this positive-sum game we call “the economy” is to broadly improve our collective lives.
This perspective inverts the prevailing neoliberal orthodoxy where workers and consumers (i.e., people) exist to serve the economy—to maximize GDP growth, returns on capital, shareholder value, or other metrics. Instead, middle-out argues that we collectively create the economy to serve our interests, and as such in a democratic society, we have both the right and the obligation to manage the economy to better serve the wants and needs of the people—be that through cleaner energy, better schools, fairer treatment by employers, or a more equitable distribution of income and wealth. Neoliberal trickle-down economics has made us surrender these and other crucial decisions to the “invisible hand” of the market come what may. But middle-out understands that an inclusive economy of the people, by the people, for the people is predicated on maintaining the guiding hand of an inclusive and resilient democracy—an ever-expanding circle of political and economic inclusion that is the hallmark of a large, prosperous, and growing middle class. We thus truly grow prosperity from the middle-out—by making the lives of most people better—not from the top-down.
Neoliberals are not wrong to sing the praises of markets. Markets are an essential social technology for organizing economic activity. Societies that have tried to replace markets with other mechanisms (e.g., central planning) or let politicians corrupt them (e.g., Venezuela, Zimbabwe) have failed. But neoliberal economic theory has badly misunderstood why markets succeed, what they are actually good at, and their proper role in society. As we’ve discussed, they are not the efficient, meritocratic, allocation machines of Econ 101 textbooks. Instead, we would argue that markets properly understood are mechanisms for economic evolution that produce new and better “solutions to human problems” over time.
What Makes Market Economies Successful
Economic value is created when people solve problems for each other—when we create products and services that meet peoples’ needs. Food is a solution to the problem of hunger, a house to the problem of shelter, a bike to the problem of transport, and so on. Solving complex problems is by nature a cooperative activity; on our own, we can only solve simple problems. You might be able to solve the problem of shelter on your own by gathering rocks, branches, and leaves in the woods to make a simple hovel; but if you want to build a modern house you need a team of carpenters, electricians, plumbers, architects and so on, all working together, each with specialized knowledge and skills, as well as a global supply chain of building materials, tools, and equipment. What markets are good at is creating incentives for people to come together to solve problems, and then they create an evolutionary competition amongst those competing teams to see who has the best solutions.
The neoliberal economist Friedrich Hayek had a deep insight when he identified “the knowledge problem” as the reason why central planning can never succeed—it is impossible to know in advance with certainty what the best solutions to peoples’ problems will be. Will people want skinny or flared jeans next season? What do people want in their next smartphone? Which electric car will sell best? Entrepreneurs and businesses will have their best guesses, their candidate solutions, but the world is too complex to know for sure. But the reason markets are the answer to the knowledge problem is not their efficiency in allocating resources, it is rather their effectiveness in evolving new and better solutions over time. The only way to find out is to experiment, to try lots of stuff, see what works, what people want, do more of that, and less of the stuff that doesn’t work. Markets create experiments—lots of people trying different solutions to different problems—and then channel resources to the experiments that succeed and away from those that don’t. It isn’t efficient; in fact like all evolutionary processes it is highly inefficient—most experiments fail. But it is highly effective.
And the secret to market success is not selfish, hyper-individualism, it is fairness and inclusion. The more people we include in an economy, the better markets work. There are three reasons: First, the more people we include in the economy, the bigger the networks of cooperation are, the more complex the problems we can solve, and the more value we can create. Second, we get more innovative and better solutions to our problems when there is a diversity of thinking, of perspectives, experiences, wants, needs, and desires. Groupthink is anathema to market evolution; it is like in-breeding in biological evolution. And third, markets thrive on a virtuous circle of innovation and demand. The more people there are with money in their pockets demanding new and better solutions to their problems, the more innovation there will be. Just as Hayek was not wrong about the knowledge problem, his archrival Keynes was not wrong that an economy can only succeed if workers earn enough to buy the stuff the economy makes.
We think of inclusion as the Golden Rule of economics: The more people contributing to the economy and benefitting from it, in fair social contracts, the more prosperous we all are. And research shows that peoples’ perception of what “fair” is, what maximizes buy-in to the system and cooperation, is far more than just a market wage. It also includes factors like being treated with dignity, provided with some basic security if bad luck strikes, and help in acquiring the capabilities needed to maximize your potential. It does not mean getting so low a wage that you depend on food stamps, being forced to relieve yourself in a bottle because your employer doesn’t give you breaks, worrying about destitution if you get ill, leaving your children in unsafe childcare, or many of the other injustices low-wage workers face. And it isn’t just low wage workers—for decades many middle-class families have struggled with growing economic insecurity and a feeling that the system isn’t working for them either.
Maximizing cooperation, trust, fairness, and inclusion—that is what makes market economies succeed. In a forthcoming book we call this way of thinking about the economy “Market Humanism” because it puts human beings back at the center of the economy. People don’t live their lives to serve markets, markets exist to serve people. Neoliberals like to portray markets as something separate from the rest of society—like a force of nature whose rules we must obey. But markets are a human creation whose purpose is to serve human welfare, and the rules of markets are not like the laws of physics, fixed and immutable. They are written by humans. In a democratic society we can and should shape those rules to serve all of society.
From Theory to Policy Reality
We do not know if Biden or his advisors subscribe to all of the middle-out theory laid out above. And there are always many gaps between theory, policy, and political reality. But it is clear that they fully understand the deep danger of maintaining the economic status quo. Radical inequality is helping to undermine the social cohesion on which our economic and democratic institutions rely. Indeed, no incoming President has faced a greater crisis since Franklin Roosevelt took the reins at the height of the Great Depression, and while Roosevelt did not enter the White House knowing exactly what to do, he knew that doing nothing was not an option:
“The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation,” Roosevelt said during the 1932 campaign. “It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.”
Roosevelt tried many things. Some succeeded, some failed. The result, eventually, was the New Deal and the large and prosperous middle class it helped create.
Biden is trying middle-out. From the $1.9 trillion Covid recovery bill to the $1 trillion infrastructure bill, the America COMPETES Act, the Build Back Better bill, and a raft of executive orders and actions, the Biden team is trying to reinvigorate the middle class, reinvest in America’s intellectual capital and infrastructure, and rebuild our torn social contract. And the fight for democracy and inclusion—for greater racial and gender justice, for voting rights—is just as integral to the middle-out agenda as the economic bills.
Whether Biden succeeds or not, only time will tell, and the political challenges are immense. But his administration does not lack for ambition, and if they succeed in getting their middle-out agenda enacted, it has the potential to be transformative. Progressives have long suffered politically because they did not have a story of growth and opportunity that provided an alternative to trickle-down. With middle-out they do now.
Trickle-down is dead; it is time to rebuild the economy from the middle-out.