Most economists do not think about the middle class when asked how do you make the economy grow? Although economists differ in their specific answer to this question, Heather Boushey and Adam Hersh point to five central ideas included in each answer: the level of human capital, cost of and access to financial capital, strong and stable demand, the quality of political and economic institutions, and investment in public goods, education, health and infrastructure. The middle class plays a central role in each of these categories. First, a strong middle class promotes the development of human capital through a well-educated population. Next, a strong middle class creates a stable source for demand and supports political and economic institutions. Lastly, a strong middle class creates and fosters the next generation of entrepreneurs. The Kauffman Foundation conducted a study on the demographics of entrepreneurs and found that only 1% come from extremely poor or extremely rich backgrounds, which leaves 99% coming from the middle class.
President Obama reiterated this idea in his State of the Union speech when he said that the middle class is the foundation of our economy. However, the issue lives in the declining number of households that are still considered middle class. Since 1967 the percent of households in the middle-income classification, defined as a cumulative household income between $35,000-$100,000, decreased from 53% to 43%. The decline of the middle class is not a homogenous trend, it is further divided when considering age and demographic. Younger households are facing the largest decline and therefore are more likely to fall into the lower income category, whereas households with people in their late 60s are more likely to remain in the middle class or move up to the upper class. Many of these changes are centered on income levels. For younger households, incomes are falling and for older households their wages continue to rise after a certain number of years in their career. In addition, geography of the household matters. The Northeast was hit the hardest in terms of job security during the Great Recession, where the economy relied on industry. These industrial economies turned into suburbanization and increased wealth for some and difficult times for others, therefore further increasing the inequality.
In order to preserve the middle class and further stimulate the economy, President Obama is focusing on offering raft proposals to help pay for a college education, taking parental leave, childcare, and buying a home in order to make working class families feel more secure. After the Great Recession the majority of lost jobs came from the middle class and as jobs started to come back most of them were from a lower income sector. If these programs work the direction of the economy will change, as more and more jobs will be created. Therefore, when considering how to stimulate or grow the economy taking into consideration the state of the middle class is necessary and vital for a full recovery of the economy.