President John F. Kennedy often liked to remark that “a rising tide lifts all boats,” echoing the consensus wisdom at the time that a growing economy benefited Americans all across the economic spectrum.
In his era, and for many years after, he wasn’t wrong. Between 1963 and 1979, average national economic growth was relatively close to the income growth experienced by typical Americans. Today, however, the rising tide only seems to lift the biggest yachts while the canoes amongst us run aground.
Since the 1970s, the relationship between growth of the national economy and growth of individual incomes seems to have disintegrated. Adjusted for inflation, wages have stagnated for many. According to data collected by the Federal Reserve Bank of St. Louis, the median male worker earns less now in real terms than he did in 1979.
On the other side, the top one percent earned 87 times more than the bottom 50 percent of workers in 2016, up from a 27-to-1 ratio in 1980.
It makes sense, then, that knowing the average height of the tide doesn’t help the boats left behind. Likewise, quarterly reports of headline Gross Domestic Product (GDP) growth do not necessarily reflect the economic state of the average person if inequitable growth patterns mean that most Americans experience lower income growth than the national average.
It follows that U.S. policymakers cannot tackle inequitable growth if it isn’t measured in any meaningful way. Into this vacuum of information have stepped Sens. Chuck Schumer (D-NY) and Martin Heinrich (D-NM).
They recently introduced a bill that would change the mandate of the Bureau of Economic Analysis (BEA), which reports on GDP growth, and would call for more sophisticated reporting of the National Income and Product Accounts (NIPA). The Measuring Real Income Growth Act of 2018 would instruct the BEA to disaggregate growth along certain demographic lines in order to ascertain how growth is divided between low-, middle- and high-income families.
Creating distributional reports would be tricky, as the BEA currently lacks federally produced datasets to do so. Aggregating such data would require making some educated guesses, but that’s also true of the process used to report GDP and other national income accounts.
At any rate, there are other ways that GDP could be reported that would provide policymakers with a more accurate picture of equity in economic growth or lack thereof.
Currently, GDP numbers are based on mean income, which is misleadingly skewed up by a small handful of astronomically wealthy individuals. “If Jeff Bezos walks into a bar, the average wealth of the bar’s patrons suddenly shoots up to several billion dollars,” Nobel Prize economist Paul Krugman recently wrote in a column in The New York Times. “But none of the non-Bezos drinkers have gotten any richer.”
Instead, GDP could be based on median income, which would be the income of the person exactly in the middle if you lined up every person in the U.S. from richest to poorest.
In that situation, one Bezos wouldn’t do any meaningful damage or generate any meaningful benefit. Alternatively, the BEA could focus on income growth in a particular segment of the income distribution — say, among the bottom 80 percent of income earners. That way, growth in the top 20 percent wouldn’t have any impact on the measure at all.
Producing statistics that would allow the BEA’s mandate to change as Schumer and Heinrich have outlined would require some legwork.
The best information the government currently has comes from the Current Population Survey (CPS) conducted by the U.S. Census Bureau, the Congressional Budget Office (CBO) and tax-return data from the Internal Revenue Service, but the CPS excludes some segments of the population and CBO reports don’t come out regularly.
However, that legwork is no excuse for why methods used to report economic data shouldn’t evolve along with the constantly-changing economy.
The White House may incessantly herald GDP growth reports exceeding four percent, but if the only Americans who actually benefit from that growth are at the tippy-top of the income distribution, the standard bellwether economic indicator is more misleading than informative.
According to the Federal Reserve, 40 percent of U.S. households cannot afford a $400 emergency expense (yes, you read that correctly). In addition, more than 25 percent of U.S. households have no retirement savings whatsoever.
These numbers just don’t fit in with the current narrative of robust economic growth — unless the picture is rosiest only from a bird’s-eye view. Our legislators need to know the full story, and right now, headline GDP growth numbers don’t tell them enough.