Inclusive Prosperity Without the Prosperity: the Limits of the “Middle-Out” Strategy

Why Democrats (and Republicans) need a growth strategy that boosts enterprise demand for productive investments in research and development, skilled workers, and new machinery, equipment, and software.

To grow or to redistribute, that is a question up for debate heading into the 2016 presidential campaign. Many are urging the next Democratic standard-bearer to embrace the latter—redistribution and fairness—not only as the best political strategy, but also as the best economic strategy. Emblematic of this impulse is the Center for American Progress (CAP), which recently convened a group of prominent, left-leaning economists to produce a weighty report that is sure to provide foundational guidance to Democratic presidential aspirants. Issued in January 2015, the “Report of the Commission on Inclusive Prosperity” lays out a narrative that has become the received economic wisdom for many on the left: that the central challenges of our time are inequality and dwindling opportunity; that economic policy must focus on more equitable distribution of output; and, importantly, that doing so will result in superior rates of economic growth. But, on close inspection, the commission’s “middle-out” policy agenda actually will do very little to move the needle on the most important drivers of economic prosperity: productivity, innovation, and competitiveness. What Democrats (and Republicans) really need is a growth strategy that boosts enterprise demand for productive investments in research and development, skilled workers, and new machinery, equipment, and software.

The report focuses primarily on reducing taxes paid by the bottom 80 percent of Americans and ensuring they receive significantly expanded job benefits (through higher wages and more overtime pay, profit sharing, more unionization, and other employee benefits) and subsidized goods and services (from housing to infrastructure to education). The lion’s share of the commission’s recommendations are thus redistributionist in spirit and, if enacted, would likely improve the near-term economic condition of the bottom 80 percent (while raising prices and taxes for the top 20 percent). It is not the goal of this paper to pass judgment on the desirability of these policies, although the Information Technology and Innovation Foundation (ITIF) views the principal goal of economic policy first and foremost to be accelerating overall economic growth, not improving fairness, as the left supports, or freedom, as the right supports. 

The fact is that, at its heart, the debate over U.S. economic policy today is not about the efficacy of certain policies to drive growth, but about what should be the country’s highest priorities. On this matter, reasonable people can and do hold different views, with the advocates of the middle-out strategy prioritizing fairness. It is quite another matter, however, for the commission to assert that its policies are the best way to drive growth, for this is an empirical assertion. This report argues that the commission’s agenda—and the middle-out strategy more broadly—is a decidedly flawed growth strategy, because, in the longer term, its proposals would have little or no positive impact on the “100 percent”—in other words, on America’s overall economic health. Moreover, because the middle-out strategy would do little to grow the overall GDP “pie,” it would likely do significantly less in the long term for middle-class living standards than would a robust growth strategy focused on enterprises. As this report details, CAP’s commission report falls far short of providing a growth agenda, and it therefore should not be the next blueprint for Democrats. 

To be sure, the CAP report gets some things right. Income inequality certainly has grown—but, as discussed below, not to the extent the report claims. It is also true that the government has an important role to play both in alleviating inequality and in promoting growth. In terms of promoting growth, the government has a larger role than the report acknowledges—and that role has less to do with reducing inequality and spurring consumer demand and more to do with actively promoting productivity, innovation, and competitiveness by expanding enterprises’ demand for investments in R&D, skills, machinery, and software.  

This report first summarizes three competing economic doctrines that provide the contextual backdrop to the current debate.  It then identifies five key flaws in the premises of CAP’s report. It then shows why almost none of the commission’s proposals would spur productivity, innovation, or competitiveness. Finally, it suggests an alternative approach based on “innovation economics” that would drive broadly shared growth and higher living standards.