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Growth or Redistribution to Help the Middle Class?

David Callahan

What's the best way to rebuild America's battered middle class: redistribute wealth downward from the top 1 percent? Or grow the overall economy? In fact, both strategies are crucial, but it will be interesting to see which path President Obama stresses tomorrow when he pivots back to economic issues with a major policy address. 

A year ago, the Obama campaign was battering Mitt Romney with a populist attack on his private equity career -- effectively defining the GOP nominee as at, worst, a modern Gordon Gekko, and at best, an out-of-touch rich guy. Anyone who said that "class warfare doesn't work" learned otherwise in the 2012 election. 

Is class warfare a winning strategy going forward? In large part, yes, for the simple reason that we can't rebuild the middle class without reslicing the economic pie. No mainstream Democrat is ever going to use the word "redistribution" (which is understandable), but past efforts to grow the middle class involved exactly that: Unions created good jobs in the mid-20th century by demanding, and getting, a larger share of the wealth created by industry -- shifting more profits away from capital and to labor. High tax rates on the wealthy and corporations during this same era allowed government to make historic investments in higher education and other public goods that fostered the middle class. 

All that needs to happen again. In particular, today's bad jobs in the service sector need to be turned into good jobs -- which means labor must grab a bigger share of the record profits enjoyed by the retail and restaurant companies that now employ many of America's low-wage workers. (Demos shows how that can happen in our recent reports on retail and also federal contracting.) Also, higher taxes on the wealthy are needed to fund new investments in education and other pathways of upward mobility. 

Ultimately, though, redistribution will only get us far. Past expansions of the middle class have occurred in eras of innovation and economic dynamism. We need to create more wealth, not just shift around existing wealth. Certainly we don't want efforts at redistribution to thwart wealth creation. 

President Obama is sure to stresses these points, and he has long had a clear -- if modest -- agenda for bolstering prosperity through core investments in human and physical capital, as well as scientific research. Now would be a good time for him to ramp up that vision, arguing that a nation of better educated people, with improved infrastructure and more resources for innovation, will ultimately be a much richer nation. 

And Obama must offer a credible plan to create lots of middle class jobs over the long run. Yes, we can grow the middle class by turning bad jobs into good jobs, but we also need to create large numbers of well-paying jobs -- and that is challenge that nobody seems to have an answer to right now. Quite the contrary: everywhere we look, good jobs are disappearing -- most recently in the legal profession, as I have written here. 

It's legacy time for President Obama. And it's hard to think of a more important legacy he could leave than restoring the American dream.