What Is ‘Middle-Class Economics’?

An awkward truth for politicians looking to help the middle class is that there’s much less the government can do for them than for the poor. So, the president has picked an opportune time to set his mantra to “middle-class economics”: a time when middle-class economic fortunes are already improving for reasons not much related to policy.

The last year has been the first really good year for the middle class since the crisis. Job growth has risen to a pace of more than three million jobs a year, and gasoline prices are through the floor. Consumer confidence is at levels not seen since 2007. Wage growth is still not strong but is better than it has been in years, and moves by a few large employers — including Walmart, which announced a $9 wage floor that would rise to $10 next year — may be signs that broad-based wage increases will come soon.

The big challenge for President Obama — and for Republicans seeking their own agenda to woo the middle class — is that middle-income economic fortunes are driven mostly by private employers. The government can raise the minimum wage, but it can’t make employers raise wages for workers already making well above that. It can give out targeted tax cuts, but these can’t have large effects on the average family’s income without getting really expensive. It can impose labor regulations, but it cannot overcome the fact that employers are powerful when many workers chase a small number of jobs.

This is a real contrast to the economic situation of the poor, which the Obama administration has affected greatly through policy. Between 2007 and 2012, the share of Americans who would have been poor based on their income before taxes and transfers rose by five percentage points. But after adjusting for taxes and transfers, poverty rose by just a point. Programs like Medicaid and unemployment insurance were highly effective in stopping the sharp rise in unemployment from turning into a sharp rise in poverty. Most of that policy effect was automatic, but a considerable portion was due to specific policy initiatives of the president, such as extending unemployment insurance benefits.

Having moved past the acute economic crisis, Mr. Obama has laid out three pillars of a plan to uplift the middle class, in his State of the Union address last month and the Economic Report of the President last week.

The first consists of tax and regulatory provisions aimed at supporting middle-income workers. He would offer tax credits for child care and college tuition, and a tax credit for the second earner in households where both parents work. He’d also require employers to provide paid sick leave, and he’d raise the minimum wage. The second pillar is policies aimed at making workers more productive, so they can command higher pay. This includes proposals to expand access to community college. The third pillar is policies aimed at increasing overall economic growth, like infrastructure spending and trade deals.

But these proposals are mostly small in scope, with limited near-term effects on middle-class economic fortunes. The White House had a telling spat last month with the Tax Policy Center, a center-left joint venture of the Urban Institute and Brookings Institution that produces estimates of the distributional impacts of tax proposals. Len Burman, the center’s co-director, who was a Treasury official in the Clinton administration, ran the numbers and found the president’s plan produced an average tax cut of just $12 for families in the middle quintile — a surprising result for a plan aimed at the middle class, and one that produced inconvenient headlines.

The Treasury Department says the Tax Policy Center has this wrong: that it is greatly overestimating the number of middle-income people who would get hit by a capital-gains tax increase the president is aiming at high earners. But it doesn’t even matter very much who is right: Treasury’s own numbers show the average middle-income family would get a tax cut of about $150 under the president’s plan. Whether $12 or $150, the average effects are small — much smaller than the several hundred dollars a typical family is saving this year because of falling gas prices, and much smaller than the raises Americans would get from a tight labor market that induces employers to offer higher wages.

The last part should be the crucial issue for policy makers. In recent months, the labor market has been tightening. Employers aren’t just announcing wage increases; changes in labor practices suggest they finally feel the need to sweeten the deal to attract workers. Walmart and Starbucks, under public pressure over scheduling practices that can make it hard to juggle a job and a family, have announced rules that will give workers more advance notice of when they will have to work. So, what can the government do to keep the labor market tight, so workers have more power to insist on rules that work for them, and so good news like this keeps coming?

A lot of that responsibility lies with the Federal Reserve. If the Fed reacts to the first sign of wage growth by raising interest rates, it may dampen the labor market recovery that is empowering workers, while continued Fed patience could aid the middle-class wage recovery. The president and officials in his administration do not talk about this very much, in part because Fed decisions are out of their hands. When members of Congress talk about it, it’s usually because they’d like the Fed to tighten sooner, which would make the middle class worse off.

Another way Washington can push up wages is by making it easier to work less. The Affordable Care Act is already doing this by decoupling health insurance from full-time work, making it affordable for more parents to work part-time and more workers to retire before they reach Medicare eligibility at 65. If people no longer feel the need to work just for the health benefits, employers will have to induce them into the labor market with higher wages or other improvements.

But right now, the best middle-class economic agenda might be to do no harm: Let the positive trends on job growth and gas prices continue, watch them flow through to wages, and hope the Federal Reserve doesn’t get in the way and that Congress and the president can keep policy at an approximate status quo without government shutdowns or other manufactured crises. It’s not a very ambitious agenda, but it’s one that could produce materially higher living standards for Americans over the next two years.