Politics & Policy

Fact-Free ‘Middle-Out Economics’

It’s a new term for the old leftist dream of redistribution over wealth creation.

President Obama has finally stopped blaming George W. Bush for America’s current economic mess. Now it’s Ronald Reagan’s fault.

Obama didn’t use those exact words or make that explicit claim in his Knox College speech last week, but that’s the gist of it. The Great Recession and its slow-growth, high-unemployment aftermath are really just the culmination of three decades of pro-market economic policies that favored the rich at the expense of the middle class.

#ad#Here’s how Obama rewrites economic history: The shared national purpose of World War II was followed by a golden age of shared prosperity in the 1950s and 1960s. Unions were strong, taxes high, pension benefits guaranteed — thanks to a grand egalitarian bargain between Big Government, Big Business, and Big Labor. “But over time, that bargain began to fray,” Obama said. “Technology made some jobs obsolete. Global competition sent a lot of jobs overseas. It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the very wealthy and smaller minimum-wage increases for the working poor.” And with the recession and financial crisis, Obama concluded, “the decades-long . . . erosion of middle-class security was suddenly laid bare for everybody to see.”

In other words, according to Obama, the only lasting effects of the Reagan “neoliberal” revolution are stagnant middle-class wages, extreme income inequality, and reduced income mobility. And with those claims, Obama is using the bully pulpit to propagate the leftist story that after 30 years of failed supply-side, “trickle-down” economics, America needs a dose of “middle-out” economics. That phrase, “middle-out,” was coined by Clinton speechwriter Eric Liu and venture capitalist Nick Hanauer, who argue in a new Democracy magazine essay, “We have 30 years of terrible policy to undo.”

Time for a fact check:

1. The U.S. economy in the 1950s and 1960s benefited greatly from its temporary postwar position as the world’s dominant industrial producer. That, along with a constrained labor supply from the 1930s baby bust and from war casualties, produced huge income gains for workers. But both factors were fleeting, of course. Our competitors rebuilt their industrial capacity, and all those returning soldiers started families. What’s more, research from economist Alexander Field finds that the basis for much of the productivity boom of those decades was built on technological advances of the 1930s.

2. With their postwar recoveries fully in place, our competitors began to catch up to U.S. levels of wealth — until the 1980s. At the exact moment that Obama and the middle-outers contend the U.S. economy went off track, it began once again to pull away from Europe. French per capita GDP, for instance, went from 64 percent of U.S. per capita GDP in 1960 to 82 percent in 1980. But when America decided to re-embrace market economics, France sniffed at it. France’s per-person wealth is now back down to 73 percent of America’s.

3. Echoing the claims of the middle-outers, Obama said, “The income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.” That’s not right. The economic consensus is that real median market household income — inflation-adjusted income before taxes, government transfers such as Social Security and the Earned Income Tax credit, and health-care benefits — actually rose more like 20 percent over that period. And once you adjust for taxes, transfers, and benefits — median incomes are up 40 percent.

4. Obama also claimed the “link between higher productivity and people’s wages and salaries” was severed during the past three decades, with workers no longer enjoying the fruits of their labors. The gains all flowed to the wealthy. But research from both the Heritage Foundation and liberal economist and productivity expert Robert Gordon of Northwestern University finds only a small gap between middle-class incomes and productivity.

5. While high-end income has risen dramatically since the 1970s, it doesn’t seem to have affected economic mobility. Research from Brookings scholar Scott Winship found that men experienced, at most, only a bit less ability to climb the economic ladder than did their counterparts born in the early 1950s.

To believe the middle-out view of economic history, one also has to believe that beleaguered middle-class voters from 1981 through 2008 voted time and again against their own economic interests by electing conservative Republican presidents and a Democratic one who slashed investment taxes and signed a massive free-trade agreement. When it comes down to it, “middle-out” economics seems little more than a mildly clever rebranding of pre-Clinton, Democratic economics: high taxes, protectionism, and industrial policy all held together by boomer nostalgia for the ’50s and ’60s. It’s the familiar leftist dream of redistribution over wealth creation. Dealing with America’s economic woes will take fact-based, data-driven analysis of its problems and an accurate appraisal of how we got here. Obama and the middle-outers are apparently uninterested is doing either.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

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