For too long, policymakers in West Virginia have relied on a trickle-down approach to state economic policy that emphasizes putting more money in the hands of the wealthy and large corporations. Instead of pushing money upwards in the hope it will trickle down, policymakers should focus on expanding the middle class — who are the real job creators.
The trickle-down approach emphasizes lower business costs and higher profits through top-down tax cuts (think corporate tax cuts), lower wages (think repealing prevailing wage), regulations that rig the system (think “right-to-work”), and fewer workplace protections (think weak coal mine safety rules). Not only does this approach lead to growing income inequality and a shrinking middle-class, it’s also bad for economic growth.
Trickle-down doesn’t work because wealthy investors tend to save more of their money while those lower on the income ladder typically spend most of their money. Since consumption is about 70 percent of our economy, a smaller middle class results in less demand for goods and services which is a drag on consumer spending and long-term economic growth. For example, the International Monetary Fund found that the decline in middle-class incomes in the United States from 1998 to 2013 cut consumer spending by more than 3 percent or $400 billion annually. This is about six times the size of West Virginia’s economy.
Instead of designing policies that give even more money to those who already have the most, policymakers should take a middle-out approach. The middle-class is the single biggest source of consumption in the economy and without it there would be very few businesses or jobs. They are the customers. And when businesses have more customers, they innovate, invest, and hire more workers. A strong middle class also nurtures more democratic participation and entrepreneurship. In fact, a majority of our inventors and entrepreneurs come from the middle class.
So, how do we grow West Virginia’s middle class into a strong economic driver? We need policies that invest in human and physical capital that improve health, workforce participation, education, and job skills while also building top-notch infrastructure and encouraging innovation and entrepreneurship.
Some ideas include placing higher taxes on unhealthy items such as tobacco, soda, and alcohol and using this revenue to invest in health care, obesity prevention, and healthy lifestyles. Policymakers can also improve health, productivity, and workforce participation by establishing a paid family and medical leave program similar to those in four other states.
To incentivize more people to join the workforce, West Virginia could enact a refundable state Earned Income Tax Credit, expand childcare assistance, make it easier for ex-offenders to find gainful employment, and create a subsidized employment program.
To boost pay and skills, the state could raise its minimum wage and tie it to inflation, increase teacher pay, allow all workers to participate in a state voluntary retirement account, invest in customized workforce training, and make higher education more affordable.
Enhancing infrastructure and innovation is also important to boost economic growth, including expanding high-speed broadband, improving our roads and bridges, investing in research and development at our universities, prioritizing small businesses instead of large ones, and making sure that our state’s rich natural resources are used here in West Virginia to boost manufacturing.
If West Virginia is going to rebuild its economy and put itself on a path toward stronger and broader economic growth, state policymakers need to stop pursuing trickle-down economics. A middle-out approach — one that will raise the living standards for everyone — is essential if our state is going to reach its full potential.
Ted Boettner is the executive director of the West Virginia Center on Budget and Policy.