Obama says the economy grows best from the middle. Research suggests he’s right.

(Photo by Stephen Lam/Getty Images)
(Stephen Lam/Getty Images)

Since the 2012 campaign, President Obama has been talking up an economic philosophy he calls "middle-out" — the idea that the stronger the middle class is, the better the economy grows. Today he'll put that idea at the center of what the White House is billing as the kickoff in a series of speeches meant to refocus Washington on the still-tepid recovery.

Everyone in Washington loves to talk up the middle class. So it might be tempting to ask whether the president is pandering here. In other words, is "middle-out economics" even a real thing? A theory backed by data and serious economic research?

Well, yes. It is.

The phrase "middle-out" doesn't trace back to an economist. It was coined by authors Eric Liu and Nick Hanauer, the latter being a super-rich entrepreneur who has made waves in the past two years by pushing the idea that average workers, and not wealthy guys like him, are the real "job creators." (If you'd like to read several thousand words on Hanauer, and on the theories and data I'm about to break down for you, check out this magazine profile I wrote in 2012.)

Still, there's plenty of economic evidence that support the basic tenants of "middle-out" theory. (There's also skepticism, from the right and even from the left; New York Times columnist Paul Krugman, a Nobel-winning economist, has written that he sees no compelling argument against the idea that you could run an economy based around, essentially, a bunch of yacht-makers serving a few very rich yacht-buyers.)

"Middle-out" is an emerging area of study, with nowhere near the literature - for or against its conclusions — that has built up around its counterpart, "trickle-down" economics. Some of the best compilation work has come from the liberal Center for American Progress think tank, but the underpinning studies aren't ideological at all. Here, from those studies, are some of the best arguments for why economies do better when the middle class is stronger.

*A strong middle class boosts economic growth. Two major studies a decade apart reach this conclusion. In a 2001 paper for the World Bank, economist William Easterly studied the performance of economies across time and borders and found "a higher share of income for the middle class" to be "empirically associated with higher income and higher growth" in a country. A pair of International Monetary Fund economists found in a 2011 paper that countries with lower income inequality tend to experience more sustained periods of growth. Why? In large part, political stability. It's better for your economy if the poor aren't rioting — or if the rich aren't investing large amounts of their money in home security.

*It nurtures entrepreneurs. One of the strengths of the U.S. economy has typically been Americans' willingness to take risks, start companies and seek innovative new solutions to human problems. Those risk-takers were very, very rarely born very rich or very poor. A landmark study by the Ewing Marion Kauffman Foundation found that more than 90 percent of all American entrepreneurs came from middle-class or lower-middle-class backgrounds. Growing up in the middle class appears to provide the right combination for successful entrepreneurship: a hunger to start your own business and the educational and economic opportunities to give you the skills to pull it off.

*It stabilizes consumption. There's a huge debate among economists — including between Krugman and fellow Nobelist Joseph Stiglitz — about whether less-wealthy people spend less, per dollar in their pockets, than wealthy people. A good new paper from this spring, from a trio of economists led by Christopher Carroll of Johns Hopkins, argues the case that the so-called "marginal propensity to consume" is higher for poorer people than wealthier ones, and it implies that the best way to stimulate growth is to get more money in the hands of those poorer people, who will spend it more readily, spurring economic activity.

*It reduces the risk of financial crises. Other studies show the dangers of less-wealthy people borrowing beyond their means in order to keep up with an increasingly flush wealthy class, implying that more evenly distributed wealth helps stave off, say, financial crises. Which remains a very important goal today, even if some Americans appear to be forgetting why.

It's important to note that "trickle-down" economics is, in a way, about the middle-class, too — it's the idea that when you direct more income to wealthy people, usually in the form of tax cuts, they'll use that extra money to create jobs for middle-class Americans to work in. Part of the rise of "middle-out" theory is a reaction to the results of trickle-down policies over the last few decades.

Polls show Americans don't like those policies, and economic data show the middle-class stagnated under them. That stagnation has continued under Obama, and in some ways worsened. The challenge of his "middle-out" message isn't just spelling out how a weakened middle class has hurt the economy overall — it's finding policies that will finally reverse the trend.

Jim Tankersley is the editor of Storyline, where he explains complex public policies and illuminates their human impact. He's from Oregon, and he misses it.
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