Equitable growth was a central theme in President Obama’s State of the Union address last night. The president’s speech laid out a vision for “middle-class economics” that is clearly meant as a rebuke to “trickle-down economics,” the philosophy which has dominated Washington policymaking for the past four decades. But what exactly is middle-class economics?
First of all, it’s good political messaging because a plurality of Americans self-identify as middle class—it’s not just for those at the middle of the income ladder. The President’s “middle class economics” vision includes policies that help those at the bottom, middle, and, yes, the top of the income and wealth spectrum in our society, and in turn aims to kick-start the U.S. economy into a new era of equitable growth.
But middle-class economics also is good economics. Boosting wages is perhaps the right place to start, given the salience of wage stagnation as a key indicator of the failures of the past several decades of trickle-down’s ill-distributed growth. The president’s speech called for boosting the minimum wage, a policy move supported by a widening circle of politicians, including prominent Republicans who recognize that it’s not only publically popular but also important to improving the livelihoods of those on the bottom and middle rungs of the income ladder as that wage increase “trickles up” the income ladder.
The declining strength of the minimum wage over the past three decades is illustrated in this great infographic. And the best evidence on the economics of the minimum wage suggests little-to-no meaningful effects on job creation or job losses. Instead we see substantial reductions in labor employee turnover and improvements in business efficiency that help business owners and shareholders alike. Moreover, recent studies using a wave of state-level minimum wage increases show that states that increased their minimum wage saw stronger job growth than those that did not—another boon to both employees and employers.
It’s also worth noting that Econ101 says putting more money in the pockets of low-wage workers is good for the economy as it boosts consumer demand. It is these individuals that are most likely to spend that extra dollar in their pocket, and that spending is part of what drives economic growth. And, despite the popular counterpoint that many minimum wage workers are teenagers working for pocket change, over half of all minimum wage workers were 25 years old or older.
The president’s speech last night also included a pitch to reduce work-family conflict, with a policy agenda including paid sick leave, paid family leave, and affordable child care. All of these are much needed updates to workplace rules designed for the Mad Men-era, when a family could maintain a comfortable middle-class standard of living on one income. An updated set of family friendly policies isn’t just good for hard-working families, whether they’re dual-earner couples or struggling single parents. What’s good for families is also good for the economy.
One recent study shows that paid parental leave is not the “job killer,” and in contrasts actually boosts labor force participation and wages, as well as job quality. For instance, in a 2009-2010 survey of California employers, 87 percent reported that the state’s paid family leave policies resulted in no cost increases. Family friendly workplace programs also help working parents stay in the labor market. These policies mean breadwinners do not face the hard choice that 41 million American workers currently must make—miss a paycheck or even lose a job to care for a sick child or taking an ailing parent to the doctor’s office.
Finally, the President’s middle-class economics includes a new set of taxes on capital to lift them closer to those already levied on wages. The focus on capital taxation makes sense in light of the new evidence on the dramatic wealth gaps in the United States. My colleague, Nick Bunker, has written elsewhere on the president’s tax-reform proposals, but it’s worth briefly noting here the key take-away: Trickle-down economic messengers contend that increasing taxes on capital is a sure-fire way to kill growth, but a wide range of thoughtful economists tells us otherwise.
Tax Policy Center director and Syracuse University economist Len Burman, for instance, concludes that top capital gains rates have no relationship to economic growth. This means raising taxes on capital would enable our nation to make the investments we need to power more broad-based economic growth that helps everyone up and down the economic ladder now and well into the future. Think new infrastructure, universal pre-kindergarten, more affordable college, and more money for basic research and development to ensure the United States remains the world’s global technology and innovation leader.
In short, middle class economics tells us we can raise capital gains tax rates back to where they were under President Ronald Reagan—and by doing so finance government programs that can serve as a springboard for more equitable growth.