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
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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.