This has become a hot topic, prompted by, among other things, the launch in November of the Washington Center for Equitable Growth, President Obama’s inequality and mobility speech in early December, and Ezra Klein’s recent comments. My current thinking is here.
Over the past several years a large group of researchers in Europe, the U.S., and a few other countries have been looking at the rise of income inequality and its social, cultural, and political impacts. A number of working papers are available from the project’s webpage. One on the United States is here.
Well-known economist in 1994: “There are many economic puzzles, but there are only two really great mysteries. One of these mysteries is why economic growth takes place at different rates over time and across countries. Nobody really knows why….”
Same economist in 2013: “The reasons some countries grow more successfully than others remain fairly mysterious….”
I agree. When it comes to rich nations, we have very little clue about what yields faster economic growth over the medium to long run.
From the mid-1940s through the early 1970s, the American economy enjoyed healthy growth. But then the economy sputtered for a decade — a deep downturn in 1973-75, followed by high unemployment and inflation, followed in turn by a double-dip recession in 1980 and 1981-82. Academics and policy makers were befuddled.
The changed context spurred a slew of recommendations for how to rejuvenate the economy. The right blamed government overreach. Taxes, regulations, Keynesian demand management, and welfare state generosity had gone too far, in this view.
The left offered up myriad solutions of its own, including industrial policy, managed trade, a stakeholder-centered financial system, flexible specialization, lean production, corporatist partnerships between business, labor, and government, and collaboration between and within firms. In the mid-to-late 1990s, a Clinton-Reich-Rubin-Sperling approach embraced some of these ideas but emphasized education and skill development, free trade, and a commitment to balance the government budget during economic upswings. Like the “Third Way” orientation championed by Anthony Giddens and Tony Blair in the United Kingdom, adherents aimed to reconcile traditional left concerns for justice and fairness with an emphasis on economic growth.
As it turned out, America’s economic growth from 1979 to 2007 (peak to peak) was pretty healthy. It was slower than during the post-World War II “golden age.” But that isn’t surprising; growth was especially rapid in those years because it had been so slow in the 1930s and because so much of the industrial capacity in western Europe and Japan was destroyed during the war. U.S. GDP per capita grew at a rate of 1.9% per year between 1979 and 2007. That’s right on the long-run trend; the American economy’s average growth rate from 1890 to 2007 was 1.9%. The U.S. also did well in 1979-2007 compared to 19 other rich longstanding democracies. Adjusting for catch-up (nations that begin poorer grow more rapidly because they can borrow technology from the leaders), America’s growth rate was third best.
Unfortunately, we know very little about why. Was it due to the U.S. economy’s traditional strengths, such as its large domestic market and its array of large firms with established brands? To its strong universities and R&D, which keyed a successful transition to a high-tech service economy? To deregulation, tax cuts, and wage stagnation? To the adoption of some of the strategies proposed by the pro-growth progressives? To stimulative monetary policy (after the early 1980s)? To stock market and housing bubbles? To something else? We don’t know.
Nor do social scientists have a compelling explanation for why some rich nations have grown more rapidly than others in recent decades. We know that catch-up matters. Limited product and labor market regulations and participation by business and labor in policy making seem to help, but they account for only a small portion of the country differences in economic growth between 1979 and 2007. Even education seems to have played little role. Growth hinges on technological progress, which should be boosted by education, particularly in the modern knowledge-driven economy. Yet across the rich countries, those with higher average years of schooling, larger shares of university graduates, or faster increase in educational attainment have not grown more rapidly than others since the 1970s. (I’m not yet sure what I make of this.)
An interesting and perplexing piece of the growth puzzle is the tendency of countries to do well for a while and then falter. In the past half century, any number of national models have gone in and out of fashion, first surging and then falling back.
Economic growth is important. Yet for affluent countries, our knowledge about what causes faster or slower growth is very thin. It’s pretty remarkable, not to mention unfortunate.
Overall, I’d say that, if anything, social scientists perhaps don’t spend enough time re-confirming the definitive statements. There’s a real push toward novelty, to the extent that maybe we don’t have enough “gold standards” of well-established social patterns.
Elise Gould, Hilary Wething, Natalie Sabadish, and Nicholas Finio, “What Families Need to Get By,” Economic Policy Institute
Michael Greenstone, Adam Looney, Jeremy Patashnik, and Muxin Yu, “Thirteen Economic Facts about Social Mobility and the Role of Education,” Hamilton Project
Ive Marx, Lina Salanauskaite, and Gerlinde Verbist, “The Paradox of Redistribution Revisited”
James Plunkett and Alex Hurrell, “The Future of the UK National Minimum Wage and Low-Pay Commission,” Resolution Foundation
Isabel Sawhill and Quentin Karpilow, “Strategies for Assisting Low-Income Families,” Brookings Institution
Lecture slides for my “The Good Society” course this spring are posted here. The topics:
- What should we seek?
- Economic security
- Shared prosperity I
- Shared prosperity II
- Shared prosperity III
- Health care
- Social policy
- Is big government bad for the economy?
- Can we pay for it?
- Other worries about big government
- Strengthen families?
- Expand our private safety net?
- The politics of getting from here to there
- What do Americans want?
- The rhetoric of reaction
- Can the left get elected?
- The balance of organized power has shifted to the right
- The structure of the U.S. political system
In the United States, wages for people in middle-paying jobs and below have been flat for more than three decades. This has gone on for so long now that we should see it as the new normal, rather than a temporary aberration. There are a host of causes: intense product market competition (whether global or domestic), shareholders obsessed with short-term profits, mechanization, the shift from manufacturing to services, firms’ ability to offshore, “pay for performance,” immigration, stagnant educational attainment, weak unions, and a flat minimum wage.
I suspect (here, here) that some of the left’s chief strategies for solving this problem — reviving manufacturing, strengthening unions, and full employment — aren’t likely to be achievable. Indeed, I don’t see any reason for optimism about wage growth for the lower half going forward. I therefore think it’s worth exploring alternative ways to ensure that household incomes and living standards can keep pace with economic growth.
Jared Bernstein has some characteristically thoughtful comments. His main point is that we shouldn’t give up on rising wages. He thinks in particular that there’s a reasonable chance we can get the labor market tight enough to push wages up, as happened in the late 1990s. He and I agree that much hinges on the Fed’s approach. Here’s Jared:
The monetary authorities will pursue full employment but the question is how will they define it? If they set it too high (i.e., if they assume a NAIRU that’s too high), we’ll fail to create the wage pressure Lane cites above. But remember, the Federal Reserve is not a “structural trend” like the shifting of manufacturing output from advanced to emergent economies. They are a policy making body and are not immutable nor impervious to change. For Keynes’ sake, it was Greenspan of all people who presided over—in fact, accommodated—the full employment period of the latter 1990s. And post-crash, Bernanke and Yellen have been, in word and deed, acting quite differently than Lane’s post-crash supposition above. So Lane might be right but I wouldn’t make that assumption and progressives should fight back hard on this one.
I agree we should try to get the Fed to take more seriously its full employment mandate. That would be an enormously beneficial policy shift. But it’s a difficult battle, even if Janet Yellen becomes the next Fed chair. And what the Fed has done in this crisis isn’t necessarily a signal of what it will do if and when the economy gets close to full employment. There, I think our best guide is the past. The late 1990s, when Greenspan chose to keep interest rates low despite an unemployment rate that reached below 4%, was very much the exception rather than the rule.
Let me put in this way: Given that we’ve had a labor market tight enough to push wages up in only a few of the past 30-plus years, is it wise to see this as a likely solution to wage stagnation?
Ultimately, though, I think any disagreement between Jared and me here is one of emphasis. Jared wants us to keep seeking ways to get wages rising again. I do too, but I’d like to see more exploration of non-wage paths to rising incomes and living standards.