How to Rebuild the Middle Class

Bruce Bartlett argues that redistribution is the key to fighting inequality. It’s part of the solution—but only a part. A response to Bartlett.

Tagged EconomicsMiddle Class

The spark for my book Hollowed Out: Why the Economy Doesn’t Work Without a Strong Middle Class came more than two decades ago when I was a student coaching baseball at a summer camp that moved throughout the San Francisco Bay Area. In some towns, the job was a pain because I constantly had to supervise almost everything the kids did—forcing them to share the ball, let someone else use the bat, or give up their turn as pitcher. But in other towns—towns that were more middle-class—the job was great because the kids could go to the equipment bag, get what they needed, and play catch, start a drill, or even play a game with very little need for me to manage behavior. Those kids could self-organize, which enabled me to teach them baseball skills and have fun doing it.

Many years later, I would come to understand that what I was witnessing in those middle-class towns was trust, which is the foundation of a functioning economy and democracy because it enables people to work together. But in those days, I had only a vague understanding that a strong middle class led to good things—which was the exact opposite of what I was learning in school and hearing from politicians.

At the time, and still to this day, too many politicians—especially Republicans, but also a fair number of Democrats—bought into trickle-down economics. According to trickle-down, tax cuts for the rich provide incentives for the job creators to work hard and invest and grow the economy, which in turn will be good for the middle class. In this view, a healthy middle class is merely the result of a good economy that is created by the successes of the rich, not the actual source of economic growth.

In school, my economics teachers were making similar arguments. Most economists at the time—even the liberal ones—felt there was a tension between equity and growth, and thus believed that higher inequality was good for the economy. Their training led them to see the world in a very narrow way and so they ignored the good things the middle class did for the economy—like promote trust, help government function properly, stabilize consumer demand, and foster the development of the talents of people from all economic classes. As a result of their narrow view of the world, academic economists provided cover and support for elected officials who promoted trickle-down economics.

This symbiotic relationship between academic economists and politicians helped trickle-down dominate economic policymaking for more than three decades. But as I explain in Hollowed Out, over the past few years there has been a revolution in academic thinking about the harm caused by extreme levels of inequality. This research can be used to mount a direct challenge to trickle-down, which could lead to a transformation in economic policymaking—akin to the way Keynesian ideas guided policymakers from World War II until the mid-1970s.

Before my book came out, this research and the growing critique of trickle-down had not been brought together into a comprehensive whole. So it was gratifying to read that Bruce Bartlett—one of the original architects of trickle-down economics in the Reagan White House—has “no objection” to my analysis. Bartlett even thinks that my discussion of trust—which as he notes is “the kind of issue economists generally ignore”—is “most interesting and persuasive,” a compliment I can return to Bartlett for his writings on his evolution away from trickle-down and toward Keynes.    

Unfortunately, Bartlett’s review doesn’t deeply engage with the arguments in my book or really consider why they are important. Instead, he moves quickly to discuss the politics of the term “middle class” and the specific policies liberals should be pursuing to reduce inequality—subjects he wants to write about, but which are not the focus of my book. As I wrote, “[t]he point of this book is not to describe a policy agenda,” but rather to show all the ways that extreme levels of inequality have harmed our economy, in order to “replace the trickle-down mindset that infects the thinking of too many elected officials with the more accurate understanding that the economy grows from the middle out.” Because Bartlett wants to focus on policies and politics, he misses some key points about the significance of Hollowed Out.

Bartlett thinks a precise definition of the middle class, such as those with an income between a certain dollar range, is important so that policies and rhetoric can be directed at this group; otherwise, conservatives can co-opt the term. But the problems with our economy stem from the fact that it has been working only for the rich, and not for everyone else—whether you want to call the vast majority of Americans middle class or not.

Incomes for most people have stagnated. The costs of basics like health care, housing, and higher education have skyrocketed. Debt has risen sharply. And the rich, especially the very rich, have pulled far away from everyone else. Thus, a narrow definition misses out on the fundamental economic problems our country faces. Furthermore, as I wrote, “Stagnant incomes, rising debt, and record levels of inequality all impact growth and none can be ignored.” High levels of debt have reduced consumer demand; the lack of assets among the middle class has hindered entrepreneurship; and the rise of the rich far above everyone else has contributed to weakened, more polarized government and inequality that has undermined trust. It is good policy and good politics to focus on making the economy work for everyone, not just the rich—and to do so through direct measures, rather than trickle-down logic.

But Bartlett’s main gripe seems to be that progressives need to “think bigger,” which to him means getting behind a large redistribution program financed by heavy taxes on the rich. He thinks that progressives have been too timid to say that there should be a big stimulus program as well as a new government program that takes money from the rich and gives it back to the poor and middle class. While I clearly support increased government spending, greater progressivity in that spending, and higher taxes on the ultra-wealthy, I think focusing on a new redistribution program would be misguided.

Though specific policy reforms are not the focus of my book, those that I do discuss aim to make the market work for far more people than it currently does, not merely to redistribute gains after the fact. Redistribution is an important supplemental strategy, but not the main event. Fixing a rigged market that has prevented wages from rising for the vast majority of the public is the better choice. Even with the challenges posed by globalization and technology, Australia, Canada, and Sweden have found a way to deliver increases in market incomes to the vast majority of their populations over the past several decades, and so can we.

A structured market with, for example, laws more favorable to workers wanting to join a union—a policy I support, and one that Canada, Australia, and Sweden have pursued, but one that Bartlett indicates he doesn’t like—can be economically efficient and politically sustainable in a way that pure redistribution is not. Without organized workers, who is going to turn out a base of middle-class voters or fight the behind-the-scenes battles that often shape much of policy? Nobody. Which is why ignoring power and the structure of the market is folly.

Furthermore, a stronger labor movement would make a big dent in the economic problems we face. Research by Bruce Western of Harvard and Jake Rosenfeld of Washington University in St. Louis indicates that up to one-third of the rise in wage inequality over recent decades has been due to the decline of unions. In addition, research I conducted with Harvard’s Richard Freeman and others in a report for the Center for American Progress shows that unions help boost economic mobility in the next generation—even for those who are not unionized, but who simply live in areas with greater union density.

I also think most people would prefer the sense of agency that comes with earning more through a paycheck rather than continuing to toil in an economy that offers few direct rewards and requires that government help them make ends meet.

While I disagree with Bartlett over the specific policies progressives should emphasize, I think he does a service to the left in urging us to think big. According to Bartlett, some of the policies I support and that other progressives champion are too “small-bore.” But I would argue that his desire for a “Big Idea” has blinded him to the bigness of the ideas I explain in Hollowed Out.

A strong middle class and low levels of inequality provide the foundations for economic success: trust that enables people to do business together; a well-functioning government that invests in public goods like education and infrastructure; stable and growing consumer demand that provides an incentive for firms to invest; and the development of the human capital of people from all walks of life so that our country can have higher levels of education, better health outcomes, and more entrepreneurs.

One telling fact that drives home this academic research is that the United States is producing far fewer entrepreneurs than it used to—about half as many as we had in the 1970s, when measured by new businesses with at least one employee. People need money to start a business and, unfortunately, most people don’t have much. Because most Americans are struggling financially, too many people are prevented from fulfilling their dreams of becoming an entrepreneur, which reduces the dynamism of our economy and ultimately stymies growth. At the same time, the huge gains going to those at the top apparently sap the motivation of the super-rich to take the risks inherent in starting a business. A solid middle-class level of wealth is the sweet spot for entrepreneurship. The decline of entrepreneurship and the reasons behind this decline illustrate how wrong trickle-down has been about the role the middle class plays in the economy.

By aiming to help politicians and the public understand that a strong middle class is a source of growth, not merely a result of growth, Hollowed Out seeks to provide a big idea that can change our political debate. Understanding that policies to help strengthen the middle class are by and large good for the economy and not job-killers is potentially revolutionary—not because it leads directly to a particular policy victory, but rather because it provides a framework that can lead to the success of a broad progressive agenda.

Trickle-down was a big idea not because of any particular tax cut or deregulatory act, but because it knit together a set of ideas that gave politicians a (false, in this case) sense that the broad set of policies they were pursuing was good for the economy. Indeed, Bartlett acknowledges this point, writing that the most important thing about the creation of trickle-down economics was that it “had the potential to fundamentally change the terms of the debate and was something around which many different policies and coalitions could be built.”

Whether or not Hollowed Out presents an idea of the scale and quality necessary to supplant trickle-down, readers will have to decide for themselves. But if you understand the research demonstrating that the source of a strong economy is a healthy and growing middle class, then you know that the political debate and agenda must fundamentally change, and that we must organize in new ways to see that they do.

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