Middle-Out Economics Already Producing Serious Policy Confusion

This summer, President Obama gave a speech where he talked about middle-out economics, which is apparently the Democrats response to trickle-down economics. As far as I can tell, Eric Liu and Nick Hanauer coined the phrase. Personally, I don’t like the phrase and when I think hard about what it might mean for policy, my mind actually touches the void.

Various liberal groups are already rallying around the phrase “middle-out economics,” including the Center for American Progress (CAP), which has a project by that name. The latest report from CAP utilizing the middle-out theme is a perfect example of just how utterly confusing the middle-out concept can actually be.

The report is called “Middle-Out Mobility” and is authored by Ben Olinsky and Sasha Post. The authors use the impressive data sets from the Equality of Opportunity Project to determine what effect the size of the middle class in a particular region has on the upward mobility of poor kids. Interestingly enough, the method the authors use actually suggests that fiddling around with the middle class will have no effect on the upward mobility of poor kids.

To see how this report inadvertently does this, you have to dive deep into the method, so bear with me for a moment. The authors define the middle class as those with incomes between the 25th and 75th percentile (nationally).  The authors first determine what percentage of each region’s population had incomes that put them in this middle class bucket (call this X). Then it determined how upwardly mobile poor (bottom 25 percent) kids in each region are (call this Y). The authors compared all the Xs to all the Ys to see if there was a relationship. And they found one: regions with larger middle classes had higher relative upward mobility for poor kids. Specifically, when the middle class grows 1 percentage point, poor kid upward mobility grows around 0.5 percentage points.

So now the big question is: what do we do policy-wise? The report provides no answer to this question, and that’s because it literally can’t. It would be impossible to come up with a policy geared towards this middle-class size metric that actually improved the overall mobility of poor kids. Why? Because, by definition, exactly 50 percent of the population will fall between the 25th and 75th income percentile. You can’t ever increase the size of the middle class. Therefore, every change you might make would basically be one big game of social immobility whack-a-mole: beating it back in one region just increases it by an identical amount somewhere else.

For example, imagine you live in a specific region and it has a particular middle class size right now. The report says if you increase the size of that middle class, upward mobility for the poor would increase. So you take one of the rich families in the town and you bring them below the 75th percentile. Your middle class is now larger and the region’s poor kids now have higher upward relative mobility. But wait a second. Since exactly 50 percent of population is always in the national middle class, the only way for that rich family to have gone into the middle class is for some family in some other region to have come out of it. What would happen is that the richest middle class family (the one right on the 75th percentile line) would have been pushed out of the middle class by this move. The region where that pushed-out family lives now has a smaller  middle class, and therefore the poor kids in that region will, according to the report, have lower upward relative mobility.

You can run this thought experiment with every other conceivable policy, including moving people around the country, moving poor people into the middle class, and all the rest. The basic point here is that, under this definition of the middle class, the only way for one region to increase the size of its middle class is for another region to reduce the size of its middle class. And therefore no policy regarding this particular topic will ever improve the aggregate upward mobility of poor kids. At best, policy of this sort will only improve the mobility of poor kids in some regions at the expense of poor kids in another.

This report is a perfect example of why my mind touches the void whenever I begin to think about what middle-out economics actually means and how it is supposed to somehow help the poor. The concept is, in many ways, logically incoherent, and this is just one very glaring instance of that. If you take a step back from the actual specifics of the report, you can see a more straightforward way to get at a similar point. It is surely the case that reducing national inequality by decreasing the incomes of the rich in order to increase the incomes of the poor will “grow the middle class” in a less rigid sense of the term, and this will surely have positive upward mobility effects for poor people. But this is not “middle-out” economics. It is orthodox egalitarian economics that has nothing to do with the middle class: flatten the income distribution, and both outcomes and mobility become more equal. So, in addition to being totally unnecessary, the “middle-out” focus actually obscures the real point and generates serious policy confusion.