Absolute Change, Relative Change, and America’s Economic Future

Reihan has $10,000 and Reyhan has $100. For the next decade, Reyhan’s nest egg grows at 5 percent a year while Reihan’s nest egg grows at 2.5 percent a year, leaving Reyhan with $169.89 and Reihan with $12,800.85. Over the course of this decade, Reihan laments the pitiful returns he is earning on his nest egg, and he’s constantly pointing to Reyhan’s astonishing success. Yet Reyhan’s purchasing power has increased by $69.89 over this period, Reihan’s has increased by $2,800.85, or about 40 times as much. I think it’s reasonable to suggest that Reihan ends up with the better end of the deal, even if we don’t assume that (in our counterfactual universe) it’s a lot harder to grow $10,000 to $16,288.95 than it is to grow $100 to $169.89. 

Scott Winship explains that while the U.S. growth rate has slowed since the midcentury golden age of productivity growth, annual absolute gains are almost as high as they were when growth was blazingly fast by comparison simply because we’re growing from a bigger base:

When annual productivity growth is measured in terms of percentage changes, rates fall and never achieve the early 1960s level again. But when year-to-year growth is measured in absolute terms — the inflation-adjusted dollar change — productivity growth has been at historic highs since the mid-1990s. At its peak around 2000, it was nearly 80 percent higher than productivity growth in the 1960s.

Comparisons of per-capita and per-worker GDP growth to past levels tell a similar story. Absolute growth exceeded early 1960s growth starting in the mid-1990s and dipped below those levels again during the recession. Absolute per-worker growth is exceeding early 1960s growth once more, even though absolute per-capita growth has not fully recovered. In contrast, as with productivity growth rates, neither per-capita nor per-worker growth rates have returned to their early 1960s levels.6 Once the economy fully recovers, absolute growth measured per hour, per worker, or per capita and averaged over several years can be expected to permanently exceed the annual growth experienced during the Golden Age of the postwar American economy. 

But we live in a world of rival states, and if Reyhan keeps growing twice as fast as Reihan, there will be some point in the distant future when Reyhan will overtake Reihan — unless, as we suggested above, it gets harder to grow really fast the higher you climb up the economic ladder, an idea that applies decently well to economies once they enter the so-called middle-income trap (see Barry Eichengreen).

If it really were true that many countries were zooming past the United States, and not just small petrostates and sovereign entrepôts, we would have more reason to be concerned. As Scott explains, however, what is really happening is that far from living in an “age of diminished expectations,” we live in an era in which our expectations are arguably unmoored from reality:

To fixate on the diminished rate of growth is to jealously compare ourselves not to Americans in the 1960s, who were poorer than we are and whose living standards improved less than ours did, but to Americans living today in some parallel universe, where growth rates did not decline.8

Consider what would have been required to have maintained 1960s growth rates. If we start with actual 1969 GDP per capita and begin applying annual growth rates of 3.0 percent, the absolute increase per person in 1970 would have been $700. In 1990, after cumulating annual 3 percent gains, the per-person increase would have been $1,264. By 2010, a 3.0 percent increase in per-capita GDP would have amounted to $2,283 — more than three times the actual 1970 increase.

That certainly would have been nice — much better than the $922 gain we actually saw — but it is asking a lot from the economy to produce ever-bigger absolute gains from ever-higher initial levels. It is an unreasonable expectation — it demands bigger absolute gains year after year not because prices have increased (inflation adjustment takes that into account) and not because we work harder (estimates of productivity growth control for hours worked). Just … because. [Emphasis added]

Some will find Scott’s attitude defeatist, yet essential point is that we need to accept (a) that America is an extremely affluent country, (b) that middle-income households are quite well off by historical standards, and (c) that the narrative of an immiserated middle class undermines the political case for addressing the economic and social needs of the poorest U.S. households. That is, if we argue that middle-income households are the victims of a broken economy rather than the heirs of an extraordinary historical run of growth, it is easier to argue that it is absolutely unacceptable to raise taxes on households earning, say, $150K or even $350K to finance more extensive and expensive social programs, or a WPA-style jobs program or work subsidies, for those at the bottom of the economic ladder. 

This, interestingly, is in a sense the reverse of Ramesh Ponnuru’s smart argument that if our goal is to “starve the beast,” i.e., to restrain spending growth, our best bet is to restrain tax increases on middle-income households, as middle-income households are where the resources for a robust expansion of social transfers can be found. 

All of this is to say that while the basics of Scott’s argument strike me as totally correct — neglecting annual absolute gains in income gives us an ahistorical, highly misleading picture of American prosperity — its political implication is deeply unattractive to the right and the left, as it implies that a large set of Americans (the middle class as well as top earners) ought to make greater sacrifices to ameliorate the phenomenon of stickiness at the bottom, i.e., the relative lack of absolute upward mobility from those born into the poorest income quintile:

Politics is about prioritizing. The more time, energy, and dollars we spend on the overstated economic problems of the middle class, the less we can devote to the poor. The poor are certainly better off than in past decades, but one in five American household heads still reported that sometime in 2010 they worried about whether their food budget would fall short before the month ended. Only 13 percent of children starting in the bottom fifth will end up in the top two-fifths in adulthood (compared with 63 percent of children who start out in the top two-fifths).

It is time to shift our focus to all that we have rather than that which we do not. It is time to renew our commitment to the American Dream of upward mobility — to help those facing long odds of occupying the most desirable positions — even as we recognize that the broad majority of us have never had it so good.

Though it’s possible that I favor less redistribution than Scott, I’m generally of the view that if we’re going to maintain large and expensive social insurance and social transfer programs, we ought to rely somewhat more heavily on broad-based consumption taxes than steeply progressive income taxes, as the former appear to be less volatile and more conducive to growth. And this is very much in line with Scott’s core point about the middle class.

Where we might part company is on how child-rearing enters the picture. My concern is that as we grow more affluent, the opportunity cost of child-rearing increases, and so there is a case for using public policy levers to ease the economic burden on middle-income households with children. One of the more attractive vehicles for doing so is expanding the child tax credit so that it can offset the Social Security payroll tax burden. Other approaches, like expanding pre-K programs, might have merit, but they require far more in the way of efficiency and administrative competence from the public sector — an expanded child tax credit, in contrast, requires comparatively little from overstretched public bureaucracies.

I hope Scott’s essay gets a wide hearing.  

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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