Friday, October 2, 2015

Rising Tide No Longer Lifting Most Boats

From my entire lifetime a great debate has waged over one key question in political economy: are poor people helped more by government action or overall economic growth? Every time a liberal says we need to do more to help the poor (minimum wage laws, the Earned Income Tax Credit, welfare) some conservative says balderdash, that would only reduce overall economic growth, and what really helps poor people is economic growth. Over the whole period from 1750 to 1980, conservatives had a point; when the economy grew, wages generally rose across the board. If government anti-poverty measures did depress economic growth -- which is disputed, but anyway let's follow the argument -- then it really might have been true that poor people would be helped more by simply ramping up economic growth in whatever way we could.

But if this was ever true, it is no longer true. Now we know that we can have a long period of robust growth in the gross national product that has no impact whatsoever on the wages of poor people, or even on ordinary people. Since 1980, all of the gains in household income in the U.S. have accrued to people in the top 20%. Now even famously rigorous conservative economist Tyler Cowen agrees. As he said in his latest comments on the new employment data,
There is more and more evidence that we’ve shifted into a new regime where wage growth for most income classes simply doesn’t happen to any significant degree. This may not last forever, but it remains the status quo and too many people find it too hard to wrap their heads around that. That to me is the single biggest takeaway.
And there you have it. If we care about the incomes of poor and ordinary people, just working to create economic growth (the platform of ALL of the Republican presidential candidates) will not help.
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1 comment:

  1. G. VerlorenOctober 2, 2015 at 9:06 PM

    To continue the rising tide analogy, one must take into account that riverbeds and other bodies that retain water widen the higher up they go, requiring vastly greater inflows of water to achieve the same rates of climb.

    It can take relatively little water to flood a dry riverbed to the brim. But once the water leaps the banks, adding another equal amount of water isn't going to produce anywhere near the same rise - in fact, there's a good chance the rise would be so small a rise you wouldn't even notice it, and would have difficult measuring it.

    Diminishing returns mean that where it once took a relatively small input to get a significant gain, afterwards it will take inputs orders of magnitudes greater to achieve the same relative result. It's easy to fill a ditch, but it's very hard to fill a whole valley.

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