The Affluent Economy

Our Misleading Obsession with Growth Rates

1. See his 2012 National Bureau of Economic Research Working Paper, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.”

2. I am working on a companion piece that will argue that the “stagnation” of earnings and income for middle class families represents a historical correction and return to the long-run trajectory of growth that productivity gains would predict.  Wage growth outpaced productivity growth in the middle of the twentieth century, and recent decades have restored wage levels to historical patterns by allowing productivity to catch up.  The historic shift of married women into the workforce also produced invaluable benefits to women that are not captured in measures of GDP, income, and earnings.

3. GDP per capita estimates are from Louis Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?"  Nominal figures are adjusted for inflation using the implicit price deflator for GDP.  All dollar amounts in this essay are in 2010 dollars.

4. Presenting rolling averages allows the longer-term patterns to emerge from noisier year-to-year changes and ensures that the results are not sensitive to the starting and ending years chosen.  The scaling allows the trends in the relative and absolute rates to be compared easily.  I chose to use 1959-69 as the benchmark because it represents a period that started and ended with a business cycle peak and was followed by a period of slower growth.

5. Some researchers believe that the increasingly common practice of offshoring production to low-wage countries has overstated economic growth over the past fifteen years.  Government economists within the Bureau of Economic Analysis acknowledge the methodological issue but believe it to be relatively minor, constituting at most 0.1 to 0.2 percentage points of annual real GDP or productivity growth (and likely less due to offsetting biases).  See here  and here.  At worst, this issue would marginally change the quantitative figures presented in this essay without affecting the broader point that a focus on absolute growth should change our evaluation of trends in living standards.

6. Per worker estimates use the same GDP figures as the per capita and per hour estimates.  Estimated number of workers prior to 2001 are from the Historical Statistics of the United States, Millennial Edition Online, Table Ba478-486.  From 2001 to 2010, they are from and the 2010, 2011, and 2012 editions of the Statistical Abstract of the United States.  Charts for per capita and per worker growth available from the author on request.

7. Keep in mind, all of these absolute growth figures are in real, inflation-adjusted terms.  So it is not that we have more growth but a dollar today is worth less than a dollar in the past.  They are also in “per capita,” “per worker,” or “per hour” terms, so increases in population, employment, or hours worked do not affect these estimates. The different growth measures have different trends because of changes in the share of the population that works (e.g., due to shifting retirement or schooling patterns, to rising labor force participation among wives, or unemployment) and changes in the number of hours worked per worker (e.g., due to greater frequency of voluntary or involuntary part-time work).

8. Again, there remains the question of how this growth was distributed, but even here the picture is more complicated than progressives believe, as my companion piece to this essay will show.

9. Total compensation of employees in domestic industries is from National Income and Product Accounts, Table 6.2, and hours worked by full-time and part-time employees is from Table 6.9.  Estimates are adjusted for inflation using the Personal Consumption Expenditures deflator from the National Income and Product Accounts Table 1.1.4.

10. Actually, this characterization understates the importance of levels of wealth and absolute growth.  Holding constant changes in the age profile of the workforce and other population dynamics, what a 41-cent increase in pay really means is that, for example, 39-year-olds in 2004 received 41 cents more in 2005 than 2004’s 40-year-olds did.  In the absence of growth, the 2004 39-year-olds would have received pay raises that left them in 2005 with the same average pay as the 2004 40-year-olds.  If all else is equal—that is what zero growth means—the 2005 40-year-olds would make no more than the 2004 40-year-olds did.  But they would still have made more than they had in 2004 as 39-year-olds. For sake of illustration, assume that workers of a given age in both 1951 and 2004 would have received raises of one percent even in the absence of growth, purely as a consequence of becoming more experienced or skilled.  In that case, the increase in pay experienced in 1952—as a result of aging and economic growth combined—would have been 4.8 percent, while the increase experienced in 2005 would have been just 2.2 percent.  But because pay was so much higher in 2004 than in 1951, the absolute increase for a worker with average pay would have been $0.74 an hour in 2005 rather than the $0.56-an-hour increase in 1952.

11. Angus Maddison, The World Economy, Volume 2: Historical Statistics, Tables 1c and 2c (Organization for Economic Co-operation and Development, 2006).  The twelve European countries are Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.

 12. I computed these rates using 1969-2001 estimates from Maddison and 2001-2009 rates from OECD.StatExtracts.  All cross-national comparisons I cite use figures adjusted for differences in purchasing power across countries and over time.

13. Note that I am not heralding the so-called “Singularity,” where technological advances lead to an almost impossibly accelerating rate of improvement in our wellbeing.  My argument is not that rates of growth will increase any time soon (though they may).  I am simply noting that even the diminished growth rates of the past few decades imply large absolute gains in our material conditions.

14. So I will argue in a future complementary essay to this one on the distribution of growth. Male wage growth has lagged productivity growth because productivity levels have had to catch up to the over-heated union-driven wage growth of an earlier era. Once productivity has caught up, the two should move in tandem in the future.

15. Robert W. Fogel (2000), The Fourth Great Awakening and the Future of Egalitarianism (Chicago: University of Chicago Press).  See Chapter 5.

16. Indeed, simple demographics appear to be a big part of the story.  Changes in the composition of the workforce—due to baby booms, the rise in immigration, and the increased labor force participation of married women—may have lowered experience and skill levels.  Changes in schooling and retirement—and increases in longevity—have altered the ratio of workers to non-workers.

17. Pew Economic Mobility Project (2012), “Pursuing the American Dream: Economic Mobility Across Generations.”  See also Julia B. Isaacs (2008), “Economic Mobility of Families Across Generations,” in Isaacs, Isabel V. Sawhill, and Ron Haskins, Getting Ahead or Losing Ground (Pew Economic Mobility Project). 

18. See my recent essay, “Bogeyman Economics,” in National Affairs (Winter, 2012), as well as my recent piece on the New Republic website, “Stop Feeling Sorry For the Middle Class! They’re Doing Just Fine."

19. See Bruce D. Meyer and James X. Sullivan (2011), “The Material Well-Being of the Poor and the Middle Class Since 1980,” American Enterprise Institute Working Paper #2011-04, and Richard V. Burkhauser, Jeff Larrimore, and Kosali I. Simon (2011), “A ‘Second Opinion’ on the Health of the American Middle Class,” National Bureau of Economic Research Working Paper 17164.

20. See Mark Schmitt (2012), “If Liberals Want to Help the Poor, They Should Focus on the Middle Class,” The New Republic online.

21. Samuel Lubell (1952), The Future of American Politics (New York: Harper).

22. These computations are based on median family income estimates found here, adjusted for inflation using the Personal Consumption Expenditures deflator.  The figures indicate a 128 percent increase from 1952 to 2010, but adding the value of health insurance would push this significantly above 130 percent.

23. From the U.S. Department of Agriculture’s Economic Research Service.