The US economy has made a remarkable turnaround from the depths of the 'Great Recession', moving from losing 800,000 jobs per month in the winter of 2009, to adding over 150,000 per month over a two-year period.

This shift from massive job losses to steady job gains occurred because of the decisive actions of policymakers who implemented a combination of monetary and fiscal policies in 2008 and 2009.

But while the economy has been in recovery since June 2009, the level of output continues to be significantly below potential, and as a result unemployment, especially long-term unemployment, remains unacceptably high. The best starting point would be a focus on growing the economy 'from the middle out', in Obama's own words. The basics of what will boost employment remain the same now as they have been since the crisis began:

  • Boosting needed investments to education, infrastructure and research that will build our future and support middle-class jobs, while in the short term adding to demand and reducing unemployment.
  • Focusing on reversing or preventing cuts by state and local governments so families can be sure of safe streets and high-quality schools.
  • Limiting the human cost of high unemployment, which also boosts demand, especially in high-unemployment areas.
  • Implementing monetary policy that supports growth, including paying attention to the full employment mandate.

The need for infrastructure investment comes into sharp relief every time we experience another natural disaster, especially as climate change increases the ferocity and frequency of these tragic events. Hurricane Sandy caused billions of dollars in damage across the east coast. In all, the American Society of Civil Engineers estimates that we need to spend at least $2.2 trillion over the next five years to upgrade and repair our nation's ageing infrastructure.

There are also investments to be made in basic science that will put people to work and help to build a stronger economic foundation, for example, simply upgrading weather satellites. Long-term planning and making the right investments early on can serve to both stimulate the economy and help keep Americans safe.

One of the striking developments during and after the Great Recession has been the rapidity with which states and localities have withdrawn investment from education, public safety, and other state and local responsibilities. While the federal government can borrow to maintain spending when tax receipts drop, states and localities cannot. Most states have struggled with steep budget cuts, and states and local governments have reacted by laying off nearly 600,000 workers since January 2009. These staffing cutbacks not only add to unemployment but have markedly slowed economic recovery. Estimates are that if not for these layoffs, the unemployment rate would now be a full point lower, below 7 per cent.

Moreover, these layoffs are not only about today's unemployment: they are also about the skills of our future workforce. In 35 states, current state education funding levels have fallen below where they were in 2008. The budget cuts are not over, even though the recession ended over three years ago: in 26 states, the beginning of the 2012 school year brought less funding per student to local schools than it did a year earlier.
Finally, Congress has within its power the ability to limit human suffering from the Great Recession. Unemployment benefits, for example, have kept millions of people out of poverty. The Congressional Research Service found that unemployment benefits kept 3.3 million people out of poverty in 2009, and the US Census Bureau found that they kept 3.2 million people out of poverty in 2010 and 2.3 million in 2011. Yet, at the end of the year, millions could be cut off from these benefits.

Growing the economy from the middle out

While the economics are fairly clear - and leading economists tend to be in broad agreement about this agenda - the politics are much more complex. The Democrats made significant victories in November's election, keeping the presidency and increasing their seats in the Senate; however, the election also put Republicans in control of the US House of Representatives for the next two years.

Looking beyond the immediate problem of the fiscal cliff, Republican leaders in the House are unlikely to have any appetite for expansionary fiscal policy. Yet the president made the argument during the campaign that we 'grow from the middle out' - he now has to make this concept real, and lay out the specific policies that will accomplish this goal. He needs to focus not just on employment per se but on creating good jobs, with decent pay and benefits, and on the economic wellbeing of families, ensuring that every job is a good, pro-family job, and that families have the support they need.

Nearly half of all US workers do not have the right to take a sick day when they or a family member is ill, which creates enormous stress and anxiety for families. The typical US family paying for childcare spends about 13 per cent of their total family income on that care; families that need to pay for elderly care find that can be very expensive as well. Increasing funding for childcare and home health aids and other supports so that ageing Americans can live independently would not only help to support employment but would, in effect, boost the incomes of families who struggle to afford care. Similarly, focusing on policies that allow workers to balance work and family would show that the Obama administration truly understands what it means for families now that women are more typically than not also a family breadwinner.

While these issues are not currently at the top of the agenda, the president could begin to focus on increasing the net income of families, alongside policies to boost job creation and reduce unemployment, as this is the first step towards raising living standards more generally.

Another way to make real the idea of middle-out economics is to focus attention on America's capacity to be a global leader in innovation and production. Over his first term, Obama put manufacturing and boosting exports at the top of his agenda, and the fact that he was unwilling to allow the US auto industry to die was a key component of his re-election campaign. Rebuilding US manufacturing should remain a key plank of our national investment strategy, and this includes making sure that any corporate tax reform follows the agenda that the president has already laid out, discouraging offshoring, encouraging domestic production, and stopping tax advantages for the use of debt over equity.

With President Obama winning a second term, he has a mandate to build on the successful policies of the first term. Putting the middle class at the core of what makes the economy grow, as he did during the campaign, would be a good place to start. Americans re-elected Obama because they believe he will do a better job bringing them a strong economy and - in no small part - because he recognises that a strong economy starts with them.

A longer version of this essay appears in the latest issue of Juncture, IPPR's journal for rethinking the centre-left.