Growing from the middle out: the US economy in Obama’s second term

The US president needs to focus not just on employment per se but on creating good jobs.

The US economy has made a remarkable turnaround since 2008, moving from losing 800,000 jobs per month in the winter of 2009, to adding over 150,000 jobs per month over a two-year period. This shift from massive job losses to steady job gains occurred because of the decisive actions of policymakers who implemented a combination of monetary and fiscal policies in 2008 and 2009.

But while the economy has been in recovery since June 2009, the level of output continues to be significantly below potential, and as a result unemployment, especially long-term unemployment, remains unacceptably high. In his campaign, Obama made the case that the economy "grows from the middle out". Now, as president, he gets to work with Congress anew to realise that vision.

While the economics are fairly clear – and leading economists tend to be in broad agreement about this agenda – the politics are much more complex. The Democrats made significant victories in November’s election, keeping the presidency and increasing their seats in the Senate; however, the election also put Republicans in control of the US House of Representatives for the next two years.

It’s worth noting that while many of the policies implemented in response to the recession had a history of bipartisan support, Washington’s highly polarised political environment has meant that support for these efforts is now almost exclusively among Democrats. If he wants to see stronger improvements in the labour market, Obama will have to spend the next two years mitigating this gridlock and finding common ground.

Looking beyond the immediate problem of the fiscal cliff, Republican leaders in the House are unlikely to have any appetite for expansionary fiscal policy. Yet the president made the argument during the campaign that we ‘grow from the middle out’ – he now has to make this concept real, and lay out the specific policies that will accomplish this goal. He needs to focus not just on employment per se but on creating good jobs, with decent pay and benefits, and on the economic wellbeing of families, ensuring that every job is a good, pro-family job, and that families have the support they need.

Nearly half of all US workers do not have the right to take a sick day when they or a family member is ill, which creates enormous stress and anxiety for families. The typical US family paying for childcare spends about 13 per cent of their total family income on that care; families that need to pay for elderly care find that can be very expensive as well. Increasing funding for childcare and home health aids and other supports so that ageing Americans can live independently would not only help to support employment but would, in effect, boost the incomes of families who struggle to afford care. Similarly, focusing on policies that allow workers to balance work and family would show that the Obama administration truly understands what it means for families now that women are more typically than not also a family breadwinner.

While these issues are not currently at the top of the agenda, the president could begin to use the power of the bully pulpit to focus on increasing the net income of families, alongside policies to boost job creation and reduce unemployment, as this is the first step towards raising living standards more generally. These issues are ones that resonate especially strongly with women and Latino voters, although surveys show that the agenda around work and family resonates with conservative voters as well.

Another way to make real the idea of middle-out economics is to focus attention on America’s capacity to be a global leader in innovation and production. Over his first term, Obama put manufacturing and boosting exports at the top of his agenda, and the fact that he was unwilling to allow the US auto industry to die was a key component of his re-election campaign. Rebuilding US manufacturing should remain a key plank of our national investment strategy, and this includes making sure that any corporate tax reform follows the agenda that the president has already laid out, discouraging offshoring, encouraging domestic production, and stopping tax advantages for the use of debt over equity.

Critical to this strategy is tapping into the foundation laid by the American Recovery and Reinvestment Act in green technologies, such as through the production of components for solar and wind power generation as well as innovations in battery and other technologies. While there are certainly political hurdles, the president can make the compelling argument that these investments will improve US economic competitiveness and grow the economy over the long term, which resonates with the public. Furthermore, the administration could pursue a competitive dollar strategy, which would make US exports more affordable and would not necessarily require congressional action.

With President Obama winning a second term, he has a mandate to build on the successful policies of the first term. Putting the middle class at the core of what makes the economy grow, as he did during the campaign, would be a good place to start. Americans re-elected Obama because they believe he will do a better job bringing them a strong economy and – in no small part – because he recognises that a strong economy starts with them.

Heather Boushey is a visiting fellow at IPPR and senior economist at the Centre for American Progress in Washington DC. A longer version of this article appears in the latest edition of IPPR’s journal Juncture.

Barack Obama delivers a speech on the economy at the Daimler Detroit Diesel engine plant. Photograph: Getty Images.

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

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The industrial strategy acknowledges a fundamental truth about growth

It's time for the government to recognise that private businesses need help to thrive. 

When Theresa May created a new Department of Business, Energy and Industrial Strategy after taking office last summer, plenty of eyebrows were raised. Industrial strategy, it was widely remarked, was something attempted by the Labour governments of the 1960s and 70s – and it had dismally failed. British Leyland, Concorde and Delorean were the dead proof that governments were useless at "picking winners" and shouldn’t attempt to. What was the new Prime Minister thinking? 

A few commentators did observe that the concept of industrial strategy had in fact been revived at the end of the Labour government and in the early years of the Coalition. Gordon Brown and Peter Mandelson had successfully revived the motor industry in 2009-10 and initiated a new offshore wind manufacturing sector; Vince Cable and David Willetts had identified key manufacturing growth sectors and established new support systems for innovation. But they also pointed out that this had been largely abandoned by the next Business Minister, Sajid Javid, and was never embraced by David Cameron or George Osborne. 

So what did May mean? We are about to find out, when the government publishes its green paper on industrial strategy today. 

Among economic and business commentators, it has been widely assumed that this will again largely be about government support to manufacturing industry, particularly in the field of research and development. This is after all where the orthodox theory of "market failure" acknowledges that government intervention may be warranted. 

But this expectation is wrong. Under Business secretary Greg Clark, the government is taking a much wider approach. In fact the green paper will start from two far-reaching observations about the British economy.

First, take the UK’s low rate of productivity. This is not primarily a problem of the major firms in our remaining manufacturing industries. It is instead rooted in the small and medium-sized businesses in the service sectors, which employ 84 per cent of the British workforce. These are characterised by systematic under-investment in new technologies. 

Second, this is compounded by the huge disparity in productivity across the UK’s nations and regions. While London has the highest output per head of any region in Western Europe, more than a quarter of the UK’s regions rank among the lowest. Only if productivity is raised everywhere can it be raised in the UK as a whole. And only if productivity is raised, can wages be increased. So this is crucial to any attempt to help those "left behind" or "just about managing". 

The green paper will therefore make it clear, as IPPR has argued, that industrial strategy is not just about galvanising R&D and brand new innovation – though this is certainly important. It is about stimulating the much more widespread adoption of new technologies in all businesses - the service sector too. And it is not just about high-tech companies in the UK’s golden triangle between London, Cambridge and Oxford. It must happen in every region and nation of the country

In other words, the government looks likely to accept a vital truth - that industrial strategy is not a single strand of policy, but an approach to economic policy in general. It involves a fundamental recognition that firms and markets left to their own devices do not necessarily generate the optimum results for society as a whole.

Firms under-invest; they do not always adopt the most efficient technologies; they cannot on their own achieve the benefits of clustering together in regional centres; their investors’ horizons may be too short termist; they need infrastructure, skills, planning and other public policies to be aligned; they need to be encouraged to locate outside the existing growth centres. 

In other words, industrial strategy acknowledges that wealth is co-produced by the private and public sectors working together, and successful economies need both.

The chief theoretician of this understanding in recent years has been the economist Mariana Mazzucato, who has argued that the best way of driving investment in innovation is for government to set "missions" to address major social challenges. Just as the US moonshot programme generated innovation in a wide range of sectors, so modern missions such as decarbonisation, meeting the health and social care needs of an ageing population and the housing shortage can galvanise a new wave today. The government can use both "demand-side" policies (such as energy policy and procurement) and "supply-side" policies (such as in infrastructure and skills) to promote private sector investment.

In Britain industrial strategy has always been thought to be a left of centre economic idea, because it requires an active role for government. The Telegraph and Mail will no doubt tell Mrs May this week that it is all very misguided. But this is not how the rest of the world sees it. The most successful economies – Germany, Japan, South Korea, the Scandinavians – all work on the basis of public-private partnership to maximise productivity and achieve better distributed growth. All of them have higher productivity, and lower regional disparities, than the UK.

Yet there remain real question marks hanging over the government’s approach. Will the Chancellor cough up? A strategy with no money will be stillborn at birth. In particular, will sufficient resources and powers be given to regional institutions to support long-term economic growth outside London? Shifting the geographic pattern of investment will ultimately be the key test of the strategy’s success. 

The Business secretary is known to favour "deals" with industry to deliver the strategy, in the manner of the "devolution deals" with local government he developed in his previous Cabinet role. But will these be properly transparent, as the agreement which kept Nissan in Britain in the autumn was not? Will they simply favour the best business lobbyists, or can they represent a real compact of mutual obligations between public and private sectors?

The government has already acknowledged that it needs to recruit overseas negotiators to do new trade deals. It could usefully employ some outside experts to help with industrial strategy too. A good test of its commitment to strengthening public sector capacity is whether the government continue with its crazy sell-off of the Green Investment Bank

Ultimately, the key question may be whether the strategy will outlast Clark, who is probably the only Heseltinian member of the Cabinet beyond Mrs May who really believes in it. Labour’s Shadow Minister Clive Lewis, who has been talking intelligently about industrial strategy and has recently launched his own consultation, is no doubt already sharpening his critique. 

For the Prime Minister, the rationale for industrial strategy is clear. As it goes through the trauma of Brexit, the British economy will need to be seriously strengthened. We are about to see whether she can deliver it. 

Michael Jacobs is the Director of the IPPR Commission on Economic Justice and co-editor of Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth (Wiley Blackwell 2016).