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

Photo: Getty Images
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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.