The White House’s big mea culpa to the middle class

In the past few months, the Biden White House has reiterated an economic goal for the US that contains a radical admission of error.

After believing for years that what an economy did – be it trade, services or industry – “did not matter” so long as it grew, the White House now concedes that thinking was wrong.

We were wrong about the economy: US President Joe Biden.Credit: AP

This is a major change of elite opinion since the early 1990s, when, at the dawn of the free trade era, many US policy advisers treated most growth as equal.

One US presidential adviser famously asked: “Potato chips, computer chips, what’s the difference? A hundred dollars of one or a hundred dollars of the other is still a hundred dollars.”

The 2023 answer to that: try guiding your missiles with potato chips.

Or even try powering your life-saving medical technology.

Micron is the last remaining maker of computer memory based in the US.Credit: AP

Or for that matter, try powering an economy that offers the prospect of robust growth and rising incomes unless you are producing high-quality goods and services.

In an April speech to a union in Maryland, Biden said one of the reasons he ran for president was to rebuild the middle class – the “backbone of the country” – and grow the economy from the middle.

“Because when the middle class does well, the poor have a ladder up and the wealthy do very well still. And we middle class can get a shot. We do well as well,” Biden said.

But that same month, the Biden administration issued a mea culpa, in a speech by a national security adviser no less, that has been called “the most carefully intellectually developed exposition of the administration’s philosophy” to date.

We were wrong: White House National Security Adviser Jake Sullivan.Credit: AP

Biden repeated the theme in Chicago on Wednesday: “The trickle-down approach failed the middle class,” he told a crowd.

So it’s important to note how much American thinking on the economy and democracy has been wrong.

National Security Adviser Jake Sullivan said in April that while in past decades the finance sector expanded, “other essential sectors ... atrophied”.

“Our industrial capacity – which is crucial to any country’s ability to continue to innovate – took a real hit,” he said during an address in Washington.

The White House now hopes to “build new norms”, Sullivan said, that allow the US to address with allies “the challenges posed by the intersection of advanced technology and national security, without obstructing broader trade and innovation”.

‘Our industrial capacity – which is crucial to any country’s ability to continue to innovate – took a real hit.’

US National Security Adviser Jake Sullivan in an address in April

The White House’s thinking has been shaped by the fact that after decades of deregulation and faith that wealth would trickle downward in the economy, it has instead lowered the incomes and opportunities for swaths of the middle class.

Even as the economy grew, prosperity didn’t reach the middle class and below.

There have been other drivers: the financial crisis and lack of reform in 2007-08. Then the 2016 election of Donald Trump, which exposed the grievances of rust-belt voters.

Through it all, the orthodoxy of free market economics effectively blinded leaders to the fact that China was using a Washington-led financial order (rules-based trade, IP protection and arbitration in disputes) as a step stool for its own ambitions for economic prominence.

Finally, the COVID-19 pandemic exposed how, in a crisis, democracies’ withered supply chains left them incapable of protecting their own people.

So it turns out that what an economy or society makes, and the kind of growth it creates, does matter.

Microchips not potato chips.Credit: Monique Westermann

It’s not hard to find examples.

Just ask the Taiwanese. One of their most significant defences against the speculated threat of invasion by China is the island nation’s dominance of the microchip manufacturing.

Anyone who invades Taiwan could end up paralysing their own economy and stifling growth.

Australia, like the US and advanced economies everywhere, has got itself in trouble by relying too much on the wisdom of the market to allocate resources.

Australian universities, for example, are great exporters of high-quality education.

But they have developed an unhealthy dependence on foreign students.

In the process, Australia’s university research sector has become a potential step stool for China’s strategic ambitions.

Joe Biden and Jake Sullivan in February, going over a speech the president gave marking the one-year anniversary of the war in Ukraine.Credit: AP

And you don’t have to look too far inward at Australia’s economy to see the pitfalls of too much faith in the market.

Market forces have driven a wedge between the housing haves and have-nots.

What was once considered something akin to a right for those willing to work has become an asset, now unreachable for too many.

Worse, the free market model doesn’t and can’t offer a plan for the future for Australian housing.

A US Navy ship observes a Chinese navy ship conducting manouvres in the Taiwan Strait on June 3.Credit: AP

While the ills of the US economy are different and arguably more extreme, it’s no secret Australians are suffering from the same dislocation and inequality that afflicts middle classes everywhere.

Treasurer Jim Chalmer made reference to this in his essay on “values-based capitalism” in January, stressing that economic institutions – and also markets – “need renewing and restructuring”.

“The neoliberal [free market] model ... pretends to be agnostic on these questions, but ultimately a choice is still being made through passive de-prioritisation and the perverse outcomes and greater vulnerability that emerge over time,” Chalmers wrote.

This helps explain why there is so much middle-class pain in Australia, where market forces have been unleashed on the public.

This is part of what the White House’s Sullivan termed “the challenge of inequality and its damage to democracy”.

Owning a home is now unreachable for many Australians.Credit: Tamara Voninski

Economically, the White House wants to restart the wheels of social mobility for citizens (the ability for people to move upward through work and saving) which have ground to a halt in past decades.

And that is at the heart of what Biden’s White House has campaigned on, a so-called “foreign policy for the middle class”.

On one hand, this requires an industrial strategy that identifies key sectors needed for growth, key sectors that are “strategic from a national security perspective”, and looks where industry can’t make the investments on its own “needed to secure national ambitions”.

The underlying fact is that economies help shape political realities.

That was true in post-war Australia and post-war US, when the middle classes surged, wages rose, houses were bought and the quality of life improved for many.

Leaders from those eras understood that ensuring citizens can thrive is what effective governments do.

Ironically, what the Biden White House is pursuing matches a broad rhetorical goal embraced in China.

In 2021, China’s leader Xi Jinping warned that “in some countries, the wealth gap and middle-class collapse have aggravated social divisions, political polarisation and populism”. The solution in China, he said, was the party goal of “common prosperity”.

If a democracy can’t create conditions of where middle-class prosperity is possible, where some level of prosperity is shared, what kind of liberty can be expected?

And to be clear: one of the most surprising and disruptive features of the Biden White House has been its willingness – if not outright zeal – in making statements and reforms aimed at bolstering the middle class. This ranges from cancelling student debt and providing healthcare for children, to cutting the excessive costs for concert tickets.

In admitting its error on trade, and pointing out a new path, the White House identifies yet another dimension of competition with the authoritarian world: which society can better provide for its citizens.

It’s hard to see liberal societies winning this contest on the strength of its potato chips.

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