Oct 29th 2014

American Wellbeing Since 1979

by J. Bradford DeLong

J. Bradford DeLong, a former Assistant US Treasury Secretary in the Clinton administration, is Professor of Economics at the University of California at Berkeley.

BERKELEY – The story goes like this: Since 1979 – the peak of the last business cycle before the inauguration of Ronald Reagan as President – economic growth in the United States has been overwhelmingly a rich-only phenomenon. Real (inflation-adjusted) wages, incomes, and living standards for America’s poor and middle-class households are at best only trivially higher. While annual real GDP per capita has grown 72%, from $29,000 to $50,000 (in 2009 prices), almost all of this growth has gone to those who now occupy the highest tier of the US income distribution.

All of this is true, but there are a few important caveats. One is found in the Distribution of Household Income and Federal Taxes, published by the US Congressional Budget Office (CBO) last year. After-tax real income for the lowest quintile of US households was 49% higher in 2010 than in 1979, growing at an average rate of 1.3% annually. After-tax income for the middle three quintiles in 2010 was 40% higher – equivalent to 1.1% average annual growth.

To be sure, households in the 81st to 99th percentiles gained 64% in after-tax income, with the top 1% up by 201%, representing an average annual growth rate of 3.6% – far ahead of any other income group. And, by now, with the recovery concentrated among the rich as well, the top 1% of Americans are highly likely to be approaching a cumulative 300% gain since 1979.

But real income gains of 1.3% per year for the middle quintiles and 1.1% for the bottom are not exactly chopped liver, are they? The gap with 1.6% average annual growth rate for per capita GDP is small, isn’t it?

Well, yes and no. An optimist (or an apologist) could argue that, though market income has indeed become grossly more unequal since 1979, with the slots in the bottom half of the income distribution losing absolute ground in real income, and with taxation becoming less progressive, welfare-state growth substantially moderated this increase in inequality.

But when one looks at the 1.3% annual growth rate of after-tax real income that the CBO calculates for the bottom quintile, 0.9 percentage points comes from the growth of the health-care financing programs Medicare, Medicaid, and the State Children’s Health Insurance Program. The CBO counts all of that growth as an increase in poor US households’ after-tax real income. But that is not money that America’s poor can spend, so some downward adjustment should be applied.

Moreover, only half of those expenditures show up as more health care received by program beneficiaries; the other half flow into the general US health-care financing system and cover care that was previously uncompensated. And America’s health-care financing system is uniquely inefficient: other OECD countries get more in terms of health and healthcare services from every dollar they spend than America gets from every $2 it spends. As a result, a better estimate of the contribution of expanded US public health-care programs to the material wellbeing of America’s poor is just 0.2 percentage points per year.

Hence the necessity of something like the individual health-insurance mandate of the 2010 Patient Protection and Affordable Care Act (“Obamacare”), or of biting the bullet and adopting a single-payer system for financing health care. Either way, America needs to gets something comparable to other OECD countries’ value out of its enormous health-care expenditures.

Frankly, I am of two minds on the relationship between growing government health-care financing programs and inequality. On odd days, my bottom line is that material wellbeing since 1979 has grown at 0.5% per year for America’s poor, compared to 4% per year for America’s rich (and 6% per year for its super-rich). This is because most of the expansion is not the equivalent of a greater income for America’s poor in any reasonable sense, and because America gets relatively little value for its health-care financing.

On even days, however, my bottom line is very different. America’s poor in 1979 lagged so far behind normal OECD social democracies in terms of health and health care that even though each extra dollar produced only $0.25 of real health-care services, that $0.25 was worth about one dollar to the poor in terms of material wellbeing.

On this reading, the expansion of America’s health-care programs has kept the properly measured material wellbeing of its poor on an upward path since 1979 at a rate not much less than that of real per capita GDP. But the health-care coverage and financing gaps that existed in America in 1979 made it a much more unequal place than the income-distribution data showed.




Copyright: Project Syndicate, 2014.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Apr 9th 2021
EXTRACT: "New ways of thinking about the role of government are as important as new priorities. Many commentators have framed Biden’s infrastructure plan as a return to big government. But the package is spread over eight years, will raise public spending by only one percentage point of GDP, and is projected to pay for itself eventually. A boost in public investment in infrastructure, the green transition, and job creation is long overdue."
Apr 7th 2021
EXTRACT: " One can, and perhaps should, take the optimistic view that moral panics in the US blow over; reason will once again prevail. It could be that the Biden era will take the sting out of Trumpism, and the tolerance for which American intellectual life has often been admired will be reinvigorated. This might even happen while the noxious effects of American influence still rage in other countries. For the sake of America and the world, one can only hope it happens soon.  "
Mar 28th 2021
EXTRACT: "By refusing (despite having some good reasons) to end electoral gerrymandering, Chief Justice John G. Roberts, Jr., has directly enabled the paralyzing hyper-partisanship that reached its nadir during Donald Trump’s presidency. By striking down all limits on corporate spending on political campaigns in the infamous 2010 Citizens United decision, he has helped to entrench dark money in US politics. And by gutting the 1965 Voting Rights Act in Shelby County v. Holder, Roberts has facilitated the racist voter-suppression tactics now being pursued in many Republican-controlled states."
Mar 24th 2021
EXTRACT: "the UK’s tough choices accumulate, and the problems lurking around the corner look menacing. Britain will have to make the best of Brexit. But it will be a long, hard struggle, all the more so with an evasive fabulist in charge."
Mar 15th 2021
EXTRACT: "Over the years, the approach of most American policymakers toward the Israeli-Palestinian conflict has been Israel-centric with near total disregard for the suffering endured by the Palestinian people. The architects of policy in successive US administrations have discussed the conflict as if the fate of only one party (Israel) really mattered. Israelis were treated as full human beings with hopes and fears, while Palestinians were reduced to a problem that needed to be solved so that Israelis could live in peace and security.  ..... It is not just that Israelis and Palestinians haven’t been viewed with an equal measure of concern. It’s worse than that. It appears that Palestinians were judged as less ​human than Israelis, and were, therefore, not entitled to make demands to have their rights recognized and protected."
Mar 8th 2021
EXTRACTS: "XThere’s a global shortage in semiconductors, and it’s becoming increasingly serious." ...... "The automotive sector has been worst affected by the drought, in an era where microchips now form the backbone of most cars. Ford is predicting a 20% slump in production and Tesla shut down its model 3 assembly line for two weeks. In the UK, Honda was forced to temporarily shut its plant as well." ..... " As much as 70% of the world’s semiconductors are manufactured by just two companies, Taiwan Semiconductor (TSMC) and Samsung."
Mar 5th 2021
EXTRACT: "Back in 1992, Lawrence H. Summers, then the chief economist at the World Bank, and I warned that pushing the US Federal Reserve’s annual inflation target down from 4% to 2% risked causing big problems. Not only was the 4% target not producing any discontent, but a 2% target would increase the risk of the Fed’s interest-rate policy hitting the zero lower bound. Our objections went unheeded. Fed Chair Alan Greenspan reduced the inflation target to 2%, and we have been paying for it ever since. I have long thought that many of our economic problems would go away if we could rejigger asset markets in such a way as to make a 5% federal funds rate consistent with full employment in the late stage of a business cycle."
Mar 2nd 2021
EXTRACT: "Under these conditions, the Fed is probably worried that markets will instantly crash if it takes away the punch bowl. And with the increase in public and private debt preventing the eventual monetary normalization, the likelihood of stagflation in the medium term – and a hard landing for asset markets and economies – continues to increase."
Mar 1st 2021
EXTRACT: "Massive fiscal and monetary stimulus programs in the United States and other advanced economies are fueling a raging debate about whether higher inflation could be just around the corner. Ten-year US Treasury yields and mortgage rates are already climbing in anticipation that the US Federal Reserve – the de facto global central bank – will be forced to hike rates, potentially bursting asset-price bubbles around the world. But while markets are probably overstating short-term inflation risks for 2021, they do not yet fully appreciate the longer-term dangers."
Feb 28th 2021
EXTRACT: "To be sure, calls to “build back better” from the pandemic imply some awareness of the need for systemic change. But the transformation we need extends beyond constructing modern infrastructure or unlocking private investment in any one country. We need to re-orient – indeed, re-invent – global politics, so that countries can cooperate far more effectively in creating a better world."
Feb 23rd 2021
EXTRACT: "So, notwithstanding the predictable release of pent-up demand for consumer durables, face-to-face services show clear evidence – in terms of both consumer demand and employment – of permanent scarring. Consequently, with the snapback of pent-up demand for durables nearing its point of exhaustion, the recovery of the post-pandemic US economy is likely to fall well short of vaccine development’s “warp speed.” "
Feb 20th 2021
EXTRACT: "Human rights abuses under Erdogan are beyond the pale of inhumanity and moral decadence. The list of Erdogan’s violations and cruelty is too long to numerate. The detention and horrifying torture of thousands of innocent people for months and at times for years, without being charged, is hard to fathom. Many prisoners are left languishing in dark cells, often in solitary confinement. The detention of tens of thousands of men and hundreds of women, many with their children, especially following the 2016 failed coup, has become common. It is calculated to inflict horrendous pain and suffering to bring the prisoners to the breaking point, so that they confess to crimes they have never committed."
Feb 20th 2021
Courtyard of the Amsterdam Stock Exchange, circa 1670, (Job Adriaenszoon Berckheyde).
Feb 12th 2021
EXTRACT: "Global regulators will no doubt be concerned about a potential volatility spillover from digital asset prices into traditional capital markets. They may not permit what could quickly amount to effective proxy approval by the back door for companies holding large proportions of a volatile asset on their balance sheets."
Feb 11th 2021
EXTRACT: "Since Russians began protesting opposition leader Alexei Navalny’s imprisonment, the security forces have apparently had carte blanche to arrest demonstrators – and they have done so by the thousands. If Russians so much as honk their car horns in solidarity with the protesters, they risk personal repercussions. The official response to the protests goes beyond the Kremlin’s past repression. It is war."
Feb 6th 2021
EXTRACT: ".......like Biden, Roosevelt was certainly no revolutionary. His task was to save American capitalism. He was a repairer, a fixer. The New Deal was achieved not because of Roosevelt’s genius or heroism, but because enough people trusted him to act in good faith. That is precisely what people are expecting from Biden, too. He must save US democracy from the ravages of a political crisis. To do so, he must reestablish trust in the system. He has promised to make his country less polarized, and to restore civility and truth to political discourse. In this endeavor, his lack of charisma may turn out to be his greatest strength. For all that he lacks in grandeur, he makes up for by exuding an air of decency."
Feb 2nd 2021
EXTRACT: "Europe must not lose sight of the long game, which inevitably will center on China, not Russia or relations with post-Brexit Britain. China is already establishing a presence in Iran, and demonstrating that it has the capital, know-how, and technology to project power and influence beyond its borders. Should it succeed in turning the Belt and Road Initiative into a line of geopolitical stepping-stones, it might soon emerge at Europe’s southeastern border in a form that no one in the EU foresaw."
Jan 29th 2021
EXTRACT: "One sign of this change is that, unlike all recent Democratic administrations, Biden’s hasn’t paid obeisance to Wall Street by giving bankers top jobs. The new Secretary of the Treasury, Janet Yellen, is a former Federal Reserve chair and academic who has made it clear that she understands the country’s pressing social needs. Moreover, Biden consulted Warren on her economic views, and has named a former Warren adviser as Yellen’s deputy. Yellen’s appointment demonstrates that Biden shares the insight that enabled Trump’s rise: that too many Americans feel that they cannot get a fair share. "
Jan 24th 2021
EXTRACT: "Barack Obama cautioned in his final speech as president that, “Our democracy is threatened whenever we take it for granted.” Yet isn’t that exactly what America has been doing? In a decade punctuated by the global financial crisis, the COVID-19 crisis, a racial-justice crisis, an inequality crisis, and now a political crisis, we have only paid lip service to lofty democratic ideals. ... Sadly, this complacency has come at a time of growing fragility for the American experiment. Internet-enabled connectivity is dangerously amplifying an increasingly polarized national discourse in an era of mounting social and political instability. The resulting vulnerability was brought into painfully sharp focus on January 6. The stewardship of democracy is at grave risk. "
Jan 23rd 2021
EXTRACT: "To be sure, if cornered, any populist might resort to Trump’s endgame methods: trying to coerce elites into committing fraud to prevent a transfer of power, or deploying right-wing extremists on the ground to intimidate lawmakers. These desperate acts signaled Trump’s weakness. But it is important to note that most Republicans still did not disown Trump even when confronted with his blatant lawlessness on January 6. ... Other right-wing populists may well take notice of this fact. The recent events in the United States have shown that elites who are prepared to collaborate with authoritarians will tolerate quite a lot in the end. This ignominious precedent is especially likely to hold true in other countries where crony capitalism has implicated the business community in illegal behavior."