Inequality Without Growth, Pain Without Gain

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Dean Baker
Truthout, October 10, 2006

It is an indisputable fact that there has been a massive increase in inequality in the United States over the last quarter century. More than 90 percent of the gains from economic growth over this period have gone to the richest 10 percent of the population, with the richest 1 percent alone pulling in more than half. However, the apologists for the policies that have brought about this massive upward redistribution of income claim that the benefits to the country in the form of more rapid economic growth offset any harm done by the growth in inequality. They have no case.

It would be foolish to use economic growth as the sole measure of a society's well-being; however, other things being equal, more growth is better than less growth. The most basic measure of economic growth is productivity growth, the amount of output that workers produce in an hour of work.

Productivity growth is a better measure than overall economic growth or economic growth per person, because some countries may opt to take part of the benefits of economic growth in the form of more leisure time - for example, shorter workweeks or longer vacations. This would mean that their growth would not be as rapid, but they would have more time to enjoy the benefits of a higher standard of living. Productivity growth is a useful measure since it reports gains in society's productive capacity, regardless of whether the society chooses to take these gains in the form of more leisure or higher income.

The story of US productivity growth in the post-World War II era is one of rapid growth in the years up to 1973, followed by two decades of slow growth. In 1995, there was a sharp upturn in productivity growth, bringing it almost back to the early post-war rate. According to the data from the Bureau of Labor Statistics, productivity growth averaged 2.7 percent annually until the slowdown hit in 1973. The growth rate then fell to less than 1.5 percent a year until 1995. The data then show that productivity growth picked up to 2.6 percent annually.

But, it turns out that the basic data miss an important part of the story. When used as a measure of potential improvements in living standards, the current rate of productivity growth is still far below its early post-war rate.

There are two reasons for discrepancy between measured productivity and its effect on living standards. First, a much larger share of output goes to depreciation - replacing worn out or obsolete equipment and software. Productivity only measures gross output. Imagine that we are growing corn and we increase our output per acre by 10 percent, but we have to use half of this increase (5 percent of output) as additional seed for next year's crop. Then we would have actually increased usable output by just 5 percent. This is what is happening in the economy today.

The other problem is that the prices of the goods people consume (housing, food, and health care) are rising faster than the prices of some of the goods they produce (e.g. computers). Workers' living standards depend on how much more they can consume, not on how much they can produce.

When productivity growth is adjusted for these two factors, it is still almost a full percentage point slower than the growth rate of the early post-war period. In other words, growth remains far slower in the era of inequality than it was in a period in which incomes were rising more or less evenly for all segments of the population.

So, there has been no growth dividend for the inequality of the last quarter century. We have seen growing inequality accompanied by modest economic growth. That is not a good track record.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.