3.5.6.4 ‘Middle-Out’ versus ‘Trickle-Down’ Economics

The emerging narrative of ‘middle-out’ economics puts forward the argument that giving more money to middle-income people would increase the consumer demand that is necessary for the economy to grow – as described in a Democracy Journal article: The True Origins of Prosperity.  President Obama picked this up.  He repeatedly mentioned the “middle class” and promised to fight for “an economy that grows from the middle out, not the top down” in his Galesburg speech of 24 July 2013.

There is a popular fallacy, described in the article Rising-Tide Economics, that paying more to top people would result in increased economic growth.  The title of the article referred to John F. Kennedy’s observation that “a rising tide lifts all boats”, which encapsulated the argument that, as the rich get richer, their wealth would trickle down to the rest of the economy.  Hah-Joon Chang has pointed out,[1] though, that economic growth in America slowed down during the period when inequality was rising so rapidly and “[m]aking rich people richer doesn’t make the rest of us richer.

An Economist article, How inequality affects growth, suggested:

“inequality may also contribute to the world’s “savings glut”, since the rich are less likely to spend an additional dollar than the poor. As savings pile up, interest rates fall, boosting asset prices, encouraging borrowing and making it more difficult for central banks to manage the economy.”

Instead of investing more in wealth-creation, as described below (3.5.6.5), much of the extra wealth of the super-rich was used for speculation.  This has created repeated ‘boom-bust’ situations.

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[1] Thing 13 in Hah-Joon Chang’s book quoted earlier, 23 Things You Didn’t Know about Capitalism, is entitled Making rich people richer doesn’t make the rest of us richer.

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