President Barack Obama during his state of the union address last night introduced the concept of “middle class economics.” My first reaction was, “what the hell is middle class economics?” Are we referring to how middle class consumers leverage their capital to create output and income? Are we talking about the decisions the middle class make that impact income and output?
Or are we talking about how decisions on output and income made by business and the state impact that subset of consumers known as the middle class? And who the heck are the middle class anyway?
Mr. Obama’s definition of middle class economics still left me with more questions than answers. Based on his story about a young couple, Rebekah and Ben, and their son, Jack, Mr. Obama’s apparent social policy goal of middle class economics is to grow and “protect” this particular group of consumers to which Rebekah, Ben, and baby Jack belong.
The troubling part about Mr. Obama’s social policy, however, is whether it’s about helping Americans make better home economics decisions or about government managing a stronger macro-economy. Before addressing that question, let me summarize what Mr. Obama, based on his speech, believes middle class economics to be.
The components of middle class economics appear to include:
- Reversing outsourcing which creates new jobs;
- Reducing dependence on foreign oil and bringing online more wind and solar power;
- Falling gas prices;
- Stopping tax-funded bank bailouts while putting in place a consumer watchdog to protect consumer from the ravages of predatory lending;
- Increasing the number of Americans covered by health care insurance.
His definition, based on his speech, lacks the macroeconomic focus necessary to make his policies legitimate approaches toward managing the economy. Is his mission to be the uber community organizer building better communities or helping build an economic ship that individuals can choose to board on their own?
It’s bad enough that we can settle down on a definition of the middle class. A significant portion of Americans believe they are a part of this category and the income ranges for inclusion in this group, from $30,000 to $100,000, are a politician’s dream because with an income range that wide, he enjoys creating a moving target that constituents can’t nail him down on.
But the question is important to answer if anything for the sake of equity. If you start coming up with laundry lists of benefits, you have to decide who is eligible for them. The person in Atlanta making $96,000 a year may be upper middle class, but the person making $96,000 a year in San Francisco or New York City may just be getting by.
From a macroeconomic perspective, the only perspective I believe the government should be concerned about, you want a middle class that can keep pumping the engine via consumption. Economist Jared Bernstein aptly describes the propensity to consume depending on income:
“The theory is simple enough and has its roots in basic microeconomics, specifically the decline in marginal propensity to consume as incomes rise. That may sound trick but it’s just commonsense: an extra dollar that finds its way to an ‘income constrained’ (or ‘poor’ or these days even ‘middle class’) is likely to be spent than saved.”
Mr. Bernstein is describing the President’s growth from the middle out philosophy that while differing from the conservative, “take care of the wealthy first, everything will follow” approach, ends up with the same result: maintaining a class of consumer that acts as the battery for the national economy.
The irony is that the middle class that Mr. Obama is so focused on re-energizing can end up being a perpetual trap for those who are drawn to its comforts, comforts that Mr. Obama is enthusiastic to create. Just give them enough insurance coverage, two years of free education, and the feeling that Wall Street isn’t getting over on them and the middle class will spend 70% of its income to maintain the illusion while keeping the commercial sector profitable.
So what is middle class economics? A scheme to create a class of consumer fat and happy enough to settle while providing a steady flow of income to the commercial sector in the form of cosumer expenditures. It’s about making sure the consumer side of the social contract can meet their obligation.