A strong middle class is the source of America’s strength
Nearly every day a new candidate announces his or her candidacy for the Republican presidential nomination, making it hard to keep track of all the primary contenders. But tracking their economic policies is a much simpler matter, because the basic proposition for the Republican candidates is the same as it has been for the past three decades: close adherence to trickle-down economics.
Some candidates may propose George W. Bush-style tax cuts that provide some modest relief for regular Americans but disproportionately benefit the rich, while other candidates would only reduce taxes for the rich. All support massive tax cuts for the 1% on the theory that doing so is good for the economy.
What makes the 2016 presidential election different is that Democrats are increasingly challenging this line of thinking. Because of a revolution in academic thought, progressive policy makers have begun to directly challenge the premise underlying trickle-down economics — that extreme levels of inequality are good for the economy.
As a result, the 2016 presidential election is shaping up to be one of those rare and especially important elections that is about ideas.
For years economists tended to think that inequality was helpful for economic growth, and thus provided cover for the trickle-down ideology. But increasingly, economists recognize that the decline of the American middle class has harmed our economy. Without a strong middle class, consumer demand is unstable and too dependent on debt, fewer people are able to develop their human capital, government becomes captured by the wealthy, and the social trust that makes transactions possible weakens.
A strong middle class is a source of America’s economic growth, and not merely the result of a strong economy, as was previously thought.
Economists have long known that inequality is high in the United States, but new data developed by economists like Thomas Piketty and Emmanuel Saez showed just how extreme inequality in the U.S. was compared to other wealthy countries. The data also showed that the share of the nation’s income the top 1% received equaled record levels in American history.
Another blow to trickle-down came from the actual growth rates of countries around the world. In the developing world, some relatively equal countries like South Korea grew much faster than more unequal countries like the Philippines. Similarly, even in the early 2000s, it was obvious that the U.S. economy had grown more slowly over recent decades that it had in the 1950s and 1960s when the country was more middle class.
It took the onset of the Great Recession to fundamentally change the way economists thought about inequality. To be sure, there isn’t a formulaic relationship between economic inequality and financial collapse as some have claimed, but the story of the Great Recession is closely related to economic inequality. High levels of debt for the middle class and inadequate financial regulation due to the wealth and political power of Wall Street clearly helped fuel our most recent economic downturn.
This growing body of academic research has deeply affected the way many progressive policy makers think about inequality and the economy. Not surprisingly, many leading Democrats— many of whom only danced around the edges previously — have now sharpened their critique of trickle-down economics. Arguments that tax cuts for the rich would reduce the amount of money available for education spending have given way to direct challenges to the theory of trickle-down.
Hillary Clinton notes that “as secretary of state I saw the way extreme inequality has corrupted other societies, hobbled growth and left entire generations alienated and unmoored.”
Similarly, other prominent candidates for the Democratic nomination for president voice similar concerns: Bernie Sanders says that income inequality is not only a moral problem but also “an economic issue,” and Martin O’Malley argues that “trickle-down economics has been an abject failure.” And Sen. Elizabeth Warren, who is not running for president but has still has significant influence, argues that the claim that “we have to choose economic growth or our families … is flatly wrong.”
As a result, we are poised for a debate about the true sources of economic growth that will have a long-lasting impact on economic policy making. While the candidates’ personalities, campaign strategies, blunders, and gaffes will undoubtedly be the focus of much news coverage, the real story of the election will be the growing challenge to trickle-down economics.