Miliband, Obama & "middle-out economics"

The Labour leader follows the President in growing the economy from the middle classes.

Yesterday, Ed Miliband laid out his cards on his economic vision. He argued that to get to the kind of strong and steady economic growth that will lower unemployment and support deficit reduction: “the starting point is that the recovery will be made by the many not just by a few at the top,” he said.

One reading of this speech is that he is talking about economic growth only to cover for a concern over fairness. Thus, the mansion tax can be interpreted as a way to make sure that the rich pay their fair share, but this really may have nothing to do with growth. But, another reading of the speech is that he — like President Obama — is pushing for a debate about economics that is based on facts, not fiction. Middle out economics or an economics that begins with the many, not the few may sound like good old-fashioned political pandering, but, in fact, there is solid economic evidence for this perspective.

Both Miliband and Obama are pushing against a story of what makes the economy grow that goes like this: Cut taxes or reduce “red tape” or regulation on those who are the “job creators” and they will invest more and hire more employees and the economy will grow. For decades, this trickle-down logic has been an unvarying constant in the political discourse in both the US and the UK. Yet, this model has failed both nations repeatedly and most colossally over the past few years of deep recession and sputtering recovery.

It’s not just that the trickle-down model isn’t fair and that progressive leaders don’t like the idea of giving tax cuts to millionaires while too many struggle to make ends meet, although that may be true. The deeper problem is that this model isn’t consistent with the evidence on what makes an economy grow.

If you ask any group of economists - left, right, center - what drives economic growth, they will give you a list of ideas that will fall into a few categories: the level of demand for goods and services, the skills and educational level of the potential workforce, the quality of the infrastructure, the potential for innovators to bring ideas to market, the quality of governance in both public and private institutions, and access to financial capital, including access to debt and savings.

That’s a long and complex list. The trickle-down story certainly plays a role in how much individuals can save — higher taxes means less savings. But, that’s clearly only one small piece of the puzzle. And, it’s a piece that may stand in opposition to the others: cutting taxes for millionaires may give them each a little more money to invest, but that means less money for schools to educate the next generation of employees, less investments in updated infrastructure that will improve the productivity of private investment, or less funding to support innovation.

The fact is that it is the business owners job to always focus on the bottom line. It’s their job to boost their productivity or sales to add profits to their bottom line. A tax cut helps them do that in the short-run. But, even the best businesses cannot on their own address the gaps in educational attainment, make sure that high finance doesn’t become too big to fail, or address climate change.

Focusing on growing the economy from the middle out is a better reflection of what economists know about what makes an economy grow and thrive. Over the past couple of years, my colleagues and I have been sifting through economics papers and talking to leading economists around the world about this question. We have found that there is a growing body of research pointing to the conclusion that high inequality hinders economic growth and stability through a variety of mechanisms. While there isn’t one perfect, econometrically unimpeachable paper that proves that the economy grows from the middle out, there’s a lot out of research out there - from top tier institutions - pointing to the conclusion that the strength and size of the middle has a strong effect on the all the key factors that propel the economy forward.

For both Britain and the US, the best bet for the economy is on the middle. Both nations have won before on building an economy from the middle out and by developing and investing in the skills and infrastructure necessary to support broad-based growth. That's the winning hand.

Photograph: Getty Images

Heather Boushey is a Visiting Fellow at IPPR and senior economist at the Centre for American Progress in Washington DC

European People's Party via Creative Commons
Show Hide image

Ansbach puts Europe's bravest politician under pressure

Angela Merkel must respond to a series of tragedies and criticisms of her refugee policy. 

Angela Merkel, the Chancellor of Germany, is supposed to be on holiday. Two separate attacks have put an end to that. The first, a mass shooting in Munich, was at first widely believed to be a terrorist attack, but later turned out to be the actions of a loner obsessed with US high school shootings. The second, where a man blew himself up in the town of Ansbach, caused less physical damage - three were seriously injured, but none killed. Nevertheless, this event may prove to affect even more people's lives. Because that man had come to Germany claiming to be a Syrian refugee. 

The attack came hours after a Syrian refugee murdered a pregnant Polish woman, a co-woker in a snack bar, in Reutlingen. All eyes will now be on Merkel who, more than any other European politician, is held responsible for Syrian refugees in Europe.

In 2015, when other European states were erecting barriers to keep out the million migrants and refugees marching north, Merkel kept Germany's borders open. The country has resettled 41,899 Syrians since 2013, according to the UNHCR, of which 20,067 came on humanitarian grounds and 21,832 through private sponsorship. That is twice as much as the UK has pledged to resettle by 2020. The actual number of Syrians in Germany is far higher - 90 per cent of the 102,400 Syrians applying for EU asylum in the first quarter of 2016 were registered there. 

Merkel is the bravest of Europe's politicians. Contrary to some assertions on the right, she did not invent the refugee crisis. Five years of brutal war in Syria did that. Merkel was simply the first of the continent's most prominent leaders to stop ignoring it. If Germany had not absorbed so many refugees, they would still be in central Europe and the Balkans, and we would be seeing even more pictures of starved children in informal camps than we do today. 

Equally, the problems facing Merkel now are not hers alone. These are the problems facing all of Europe's major states, whether or not they recognise them. 

Take the failed Syrian asylum seeker of Ansbach (his application was rejected but he could not be deported back to a warzone). In Germany, his application could at least be considered, and rejected. Europe as a whole has not invested in the processing centres required to determine who is a Syrian civilian, who might be a Syrian combatant and who is simply taking advantage of the black market in Syrian passports to masquerade as a refugee. 

Secondly, there is the subject of trauma. The Munich shooter appears to have had no links to Islamic State or Syria, but his act underlines the fact you do not need a grand political narrative to inflict hurt on others. Syrians who have experienced unspeakable violence either in their homeland or en route to Europe are left psychologically damaged. That is not to suggest they will turn to violence. But it is still safer to offer such people therapy than leave them to drift around Europe, unmonitored and unsupported, as other countries seem willing to do. 

Third, there is the question of lawlessness. Syrians have been blamed for everything from the Cologne attacks in January to creeping Islamist radicalisation. But apart from the fact that these reports can turn out to be overblown (two of the 58 men arrested over Cologne were Syrians), it is unclear what the alternative would be. Policies that force Syrians underground have already greatly empowered Europe's network of human traffickers and thugs.

So far, Merkel seems to be standing her ground. Her home affairs spokesman, Stephan Mayer, told the BBC that Germany had room to improve on its asylum policy, but stressed each attack was different. 

He said: "Horrible things take place in Syria. And it is the biggest humanitarian catastrophe, so it is completely wrong to blame Angela Merkel, or her refugee policies, for these incidents." Many will do, all the same.