04 March 2016

Economic growth and inequality

One of the less obvious advantages of a Social Policy Bond regime is that it insists on defining our goals; transparently and explicitly. And perhaps the least laudable feature of the current regime is that there are few explicit goals, and those that are stated have little to do with society's well-being. The goal that is usually invoked to justify some policy or other is economic growth, expressed most often as Gross Domestic Product per person. I've blogged about the flaws in the targeting of GDP before (here and here, for instance). It needs restating, though, that economic growth, however measured, does not inevitably benefit everybody. Most people in the US, for instance, feel this, but work by Professor John Komlos tries to quantify it. His main conclusion?

The major consistent findings are what in the colloquial is referred to as the “hollowing out” of the middle class as well as the tremendous increase in the income of the top 1%. The income of the latter relative to the 1st [poorest] quintile increased from a factor of 21 in 1979 to 51 in 2011. Growth of income and welfare in the U.S, (pdf) 1979-2011, John Komlos, Professor Emeritus, University of Munich
In a column, Professor Komlos shows that US census data shows that:
[T]he bottom 20 percent of U.S. households is underwater with an average net worth of -$32,000, that is, the debts of about 60 million people are greater than all their assets combined. If you combine the first and second quintiles of the wealth distribution, it’s apparent that 120 million people’s average net wealth is still below zero at minus $11,000. These facts about inequality can’t be whitewashed, 21 December 2015
The essential lesson from all this is one that bears repetition: economic growth is not an end in itself. In our increasingly complex world we cannot rely on trickle-down economics to achieve our social goals. More explicit targeting of broad social and environmental outcomes is necessary. Social Policy Bonds are one way of setting such targets and ensuring that they are achieved efficiently.

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