Last week, it was reported that GDP had dropped 9.5 percent in the second quarter of 2020. Since GDP captures a country’s total income, a large drop isn’t good. And, indeed, our economy is struggling. Unemployment is both high and unequal.
But while GDP growth is a commonly used economic metric, I don’t place the same stock in it that I used to. Why not? Because economic growth hardly matters when most people don’t get the full benefit. And, by the way…that probably includes you. Don’t believe me? Read on, and use the calculator in two sections.
GDP Growth without Growth
GDP growth is one of those things politicians sometimes brag about. And, since the end of the Great Recession, the picture has been fairly rosy. In the last three years of the Obama Administration, the annual rate of GDP growth was 2.44 percent. In the first three years of the Trump Administration, it was 2.50 percent. So, before COVID-19, growth had been pretty darn stable, with barely a difference across the two administrations.
To which I’d say: why do we care about GDP growth in the first place? I suppose it’s because we think that if the economy grows, then peoples’ incomes will grow too. You know…a rising tide lifts all boats? Well, we’ve had a rising tide. And the boats are right where they were. Which, if you continue the metaphor, puts those boats under water.
Don’t believe me? Let’s go to the data. The Federal Reserve Economic Data (FRED) contain information on GDP Per Person and on Median Household Income. (Remember, the median household is the one right in the middle — half are poorer, half are richer.) The figure below shows how these two numbers have grown since 1984. The red diagonally shaded area indicates the gap between GDP growth and growth for the median household. Between 1984 and 2018, GDP per person grew 77 percent. Median household income grew 22 percent. So, less than one third of economic growth went to the typical family.
Figure. Growth in GDP Per Capita versus Growth in Median Household Income Relative to 1984
How Uneven Growth Affected your Household
By the way, this lack of growth to the typical household isn’t something that only affects people in the middle of the distribution. You and your family have probably been affected too. The calculator below is designed to illustrate. When you punch in your household’s annual pre-tax income, it tells you how much you would have made if economic growth had been equal. It also shows you how much more you would have made with equal growth. It’s fun…in a super sad way.
How did it look? Odds are, had we seen equal growth, you’d be doing a whole lot better.
We Need to Measure What Matters
Clearly, growth in GDP isn’t translating equally to most households. The above exercise was designed to show you how much unequal growth has cost you. Inequality is one thing. A capitalistic society needs some inequality to encourage people to…you know…get out of bed. But, when all of the growth goes to the top, the vast majority of us lose out. And that probably includes you.
Going forward, it is clear that our policymakers need to focus on more than just GDP growth. I’m not saying the measure is useless — certainly it’s important to understand how our economy is growing. A shrinking economy can lead to a loss of jobs and a loss of income.
However, too often, a growing economy is presented as a sign that everyone is benefiting. That hasn’t been the case over the last several decades. Fairly large increases in GDP have been met with much smaller increases in income for the typical household. Our government and the press should start treating median household income as another key indicator of economic performance. Because I’ll tell you what. When growth only goes to the few, it is real hard to be too excited about it. Our political leaders shouldn’t be either.