A Note On Economic Growth

Perhaps it's because I've been sick lately — it's some kind of flu that won't go away — but I am feeling very irritated with humans right now. Usually I just find them annoying.

The target of my wrath today is John Cassidy, a writer for the New Yorker. I was reading his article American Inequality In Six Charts. You can read it on your own. I've used some of those charts here on DOTE. Not that endless talk about inequality in America (including my own) has the slightest effect on the ever-worsening distribution of income and wealth—it does not.

Anyway, Cassidy finishes up like this.

That’s not a very encouraging conclusion, perhaps, but it gets across something important. In discussing the causes and effects of rising inequality, we’ve made quite a bit of progress in the past decade or so.

On the empirical side, particularly, we know much more than we did.

But there are lots of open questions, including a fundamental one: What is the relationship, if any, between inequality and growth?

In some recorded remarks shown at the conference, M.I.T.’s Robert Solow suggested that, at U.S. levels of inequality, there might well be a negative relationship, with inequality retarding growth. I’m sympathetic to that argument, which Columbia’s Joseph Stiglitz and others have also made, but it would be good to see more case studies and statistical evidence backing it up or knocking it down.

Now that the Center for Equitable Growth is up and running, there’s much for it to get cracking on.

I will briefly discuss the relationship between inequality and economic growth. Let's work it out, and think through the consequences.

• Straightforwardly, the U.S. economy grew and grew over the last 30 years as wealth and income inequality got worse and worse. The economy might have grown at a faster rate if inequality hadn't been getting worse and worse, but, if we look at the bottom line, as measured by Gross Domestic Product (GDP), the economy grew and grew when it was not in recession (as it does even now in 2013, chart below).

U.S real GDP, in 2009 chained dollars  from the St. Louis Fed (official keeper of the sacred data)

• Thus, the unofficial, never-explicitly-stated assumption is that inequality doesn't matter because while it may hinder GDP growth—and even this seemingly obvious point would be vehemently denied by self-interested or otherwise confused humans—it certainly does not halt GDP growth.

Now, consider this chart.

I used this Doug Short chart in Economic Growth Fantasies. I edited the chart to reflect the text below.

• You can see that nearly 80% of American households have not seen a significant real pay raise (inflation-adjusted via the CPI-U) in 30 years. In fact, you would see that the situation is even worse if you looked within the top quintile (top 20%). Most of the income gains in the top quintile went to the top 5% as shown above, and most of those gains went to the top 1% (see Cassidy's article).

• OK, let us ask a basic question — What is the point (function) of economic growth?

  If the U.S. economy can grow and grow independently of the relative prosperity of the vast majority of humans trying to eke out a living within it—see the opening bullet point and the charts above—then the only point of economic growth is to increase the incomes and wealth of those at the top. Indeed, that's exactly what we've seen over the last 30 years. If this were not the case, then we would have observed a decrease or no change in inequality over that period. We do not see that, indeed, we see its opposite. Economically speaking, there is no "rising tide lifting all boats" to use Jack Kennedy's splendid phrase.

• Having established the raison d'etre for economic growth in America over the last 30 years, we may now ask, outside of supporting mere subsistence, what is the reason for having an economy at all? What's the economy for? It would appear that the main function of the U.S. economy is to support, reinforce and reward a societal arrangement which consists of a hierarchy of lords (the monied elites, whose wealth always increases), vassals (those who profitably serve them) and serfs (peasants, everybody else), something very much like what existed in Medieval Europe (ignoring irrelevant structural differences with feudal systems).

• Therefore, supporting economic growth in the U.S. (as most everyone does) without also promoting a more equitable distribution of the wealth & income (as hardly anyone does) is tantamount to championing a modern version of Medieval feudal arrangements. And we are further encouraged to believe that such an arrangement represents Progress, although that bullshit story is getting harder and harder to maintain as time goes on.

• And, oh yeah, I forgot — now you can buy iPhones (or similar smart phones) and pay outsized monthly subscription fees to service providers so you can text and tweet your brains out. You weren't able to do that 10 years ago, so that's another function of modern economies. Somebody is getting rich off that shit, but you can believe me when I say this: it isn't you.

  The obvious "solution" to worsening inequality is to get "consumers" to watch more TV, go see more comic book movies, or play more video games to make sure they don't notice, improbable as that seems, that they've been getting royally screwed for the past 30 years. Young adults in particular must be distracted from the fact that many of them do not (and will not) have a pot to piss in. Maybe they can text or tweet about it.

All this sums up the relationship between inquality and growth, at least in the United States. There's no need for the laudable Center for Equitable Growth to get cracking on the teasing that relationship out. And if the fix is in, as it clearly is, then who cares? Talk about missing the forest for the trees!

Sigh. Humans. John Cassidy. All the others. Reality isn't their strong suit, is it?

Comments

[Andy]

Well as George Carlin said "when you're born you get a ticket to the freak show, and if you're born in America you get a front row seat"

Economics is better described as a religion than as a science. You have to accept what they say on faith, not facts.

All best