The Economics Behind Obama's Unapologetically Liberal Second-Term Agenda
A higher minimum wage and universal pre-K might sound like hackneyed progressive goals. But they're supported by broad economic research -- and common sense.
Last night, President Obama laid out his vision "to reignite the true engine of America's economic growth - a rising, thriving middle class." At first blush, talking about a thriving middle class may seem like an old, hackneyed idea. We often hear politicians talk about how they believe that everyone who works hard and plays by the rules should be able to live the middle class dream.
But the argument that Obama made last night was not the traditional one. It was rather, an ambitious and strikingly brainy argument. It built on a growing body of economic evidence showing how a strong middle class and less income inequality aren't just nice-sounding goals, but also the keystone for long-term economic growth in a developed economy.
Obama's vision of how the economy works stands in stark opposition to Florida Sen. Mark Rubio, who argued that the opportunity to make it to the middle class comes from a free economy "where people can risk their own money to open a business," he said. "And when they succeed, they hire more people, who in turn invest or spend the money they make, helping others start a business and create jobs."
There is no question that a competitive economy needs an appetite for risk. But outside of the mantra of more tax cuts for those at the top and less "regulation" -- a perennially vague enemy whose opponents rarely define it more specifically -- he did not offer a strong argument on behalf of policies and rules that would make it more likely for people to identify and take risks that become thriving businesses. If business relies on customers above all, the primary concern for entrepreneurs should be the great stagnation of their most important customer base: the American middle class.
The president's speech explicitly pointed to a variety of ways that government could encourage strong economic growth by supporting a strong middle class and how these investments would enable more risk-taking, support economic demand, and create profitable opportunities.
Let's start with demand. The president argued that we should raise the minimum wage from $7.75 to $9.00 an hour because "for businesses across the country, it would mean customers with more money in their pockets." There is a strong theoretical economic argument that higher minimum wages eliminate cheap work that might have been done below minimum wage. But the weight of economic evidence from decades of intensive study finds that raising the minimum wage doesn't raise unemployment. Instead, the principle effect is to make low-income workers richer.
If you're deficit hawk, you might consider becoming a higher-minimum-wage hawk. Richer low-income workers would decrease government spending on food or other assistance, and it would increase tax revenues.
THE MOST IMPORTANT CAPITAL IS HUMAN
Another way policymakers can support profitability and risk-taking is by making investments in the kinds of "public goods"--goods that benefit us all--that provide a foundation for businesses to grow. We can build that foundation on a bargain today, because there are so unemployed workers, especially in the trades, and interest rates are low, making projects more affordable than they would be in a stronger economy. "The CEO of Siemens America - a company that brought hundreds of new jobs to North Carolina - has said that if we upgrade our infrastructure, they'll bring even more jobs," the president said.
There is a similar argument for investments in education. The lowest taxes in the world might let businesses keep more of their earnings, but they can't magically create a skilled workforce. We know where talented workers come from. They come from schools. What economists call "human capital" is fundamental to economic growth, and there is accumulating evidence that since so many children are falling behind before they even get to middle school, policymakers should expand their focus from higher education to early childhood education. The president's proposal of universal pre-K would be a game-changer.
WHERE OBAMA COULD HAVE GONE FURTHER
Here's where the president could have gone further. In a nation where the majority of mothers are also breadwinners, access to excellent childcare for children from zero to school age--and beyond, as we know that adolescents need after school care and nurturing, too--is critical for not only the next generation, but the generation at work today. Most employees need flexibility to focus on their family's needs, like when a child has the flu or when an ailing loved one needs care, but most workers do not have the right to paid leave do provide that care. Far from "coddling" parents, addressing the need for workplace flexibility could raise office productivity, as the Council of Economic Advisers concluded.
Promoting economic growth requires us to focus on what is happening inside families, how firms actually make investment decisions, and whether there is adequate demand that is not dependent on debt and financial bubbles. The weight of economic evidence supports this perspective. While the rate of taxation on the rich may be one piece of information that drives investment, in reality, the quality of infrastructure, the effectiveness of governing institutions, the level of human capital are all much more important to our nation's economic future.