Discover the new GDP prototype that tracks inequality

In the early 1930s, the United States Senate enlisted a young economist named Simon Kuznets to determine how badly the economy had been ravaged by the Great Depression and if politicians were doing much to fix it. At the time, the government did not monitor the economy rigorously. In fact, for a long time the very concept of a single national entity known as an “economy” was alien to people, at least in the modern sense (for more, stay tuned Silver Planet “Summer School” episode released on July 20).

After much dull work, sifting through papers and compiling statistics, Kuznets and his team delivered their report to Congress in 1934. It was titled “National income, 1929-1932“, and it provided the federal government with the first comprehensive accounting system for measuring the economy. The report introduced America to a new concept: that you can assess the entire national economy with a single number. At the time, Kuznets called it “national income,” but it was a precursor to a concept we now call GDP (short for Gross Domestic Product).

The idea of ​​using a single number to measure the size of the economy immediately caused a stir. Suddenly, the country had a more scientific way of estimating economic growth, judging leaders and politicians on their economic performance, and deciding whether to change course. The number has been adopted by virtually every nation in the world. To this day, the number moves markets, helps countries prove their ability to repay loans and assess their ability to fight wars, and shapes the policies of governments and central banks. Kuznets finished win a Nobel Prize in part for helping to create it.

But in the very report to Congress in which Kuznets pioneered the measurement of GDP, he also cautioned against giving it too much weight. “The precious ability of the human mind to simplify a complex situation into a compact characterization becomes dangerous when left unchecked,” Kuznets warned in the report.

Kuznets was particularly concerned that this single measure, which only estimates the size of the economy, could eclipse the inequality seen within the economy. “Economic well-being can only be adequately measured if the personal distribution of income is known,” Kuznets wrote. However, to the chagrin of a long line economists, this single figure continues to dominate the conversation.

Almost a century after Kuznets pioneered the use of GDP, economists Thomas Blanchet, Emmanuel Saez and Gabriel Zucman are trying to revolutionize it. In a new article titled “Real-time inequality“, economists imagine a new type of GDP, which is not just a single number telling us about total economic growth, but a set of numbers telling us where the gains from this growth are going. They already have a working prototype which they have published onlineand this can provide important information about our current economy.

GDP, the remix

Gabriel Zucman is an economist at UC Berkeley and has worked for nearly a decade transforming government economic statistics – also known as “national accounts”. He says national accounts provide the public with valuable information about economic growth. However, says Zucman, “The big problem is that this data doesn’t tell you who benefit from economic growth.

America, of course, already has tons of data on inequality. The problem, Zucman says, is that it usually takes a year or two for that data to be updated. “It’s not enough to come two years after the political battle and say, ‘Look, this is what happened to inequality,'” Zucman said. “It’s too late.”

Their new project is an effort to solve this problem. By bringing together data from various official sources, Zucman and his colleagues have developed a method to more quickly calculate the economic situation of different income groups – such as the working class and the middle class. They hope this prototype will inspire the federal government to follow suit and soon “produce numbers on how income is growing for each social group at the exact time the Bureau of Economic Analysis releases its official GDP growth figures.”

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Zucman envisions a future where this data could inform and shape policy decisions. When considering policies like sending stimulus checks or giving tax breaks, Zucman says, policymakers and voters need to know things like “which groups need more support, or if the government can actually overspend, which could lead to inflation.”

The Great Recession versus the Pandemic Recession

To test their new “Real-Time Inequality” tool, Zucman and his colleagues are looking at economic history and using it to see how different income groups have fared in past recessions and recoveries.

After the Great Recession started in 2007, says Zucman, it took four years for GDP to return to its pre-crisis period. “But it took ten years for the bottom 50% of the income distribution – half the population – to recover and return to their pre-Great Recession levels. So there was a huge disconnect between GDP growth and income growth for most of the population.”

Compare that to the pandemic recession and recovery. It took 20 months for the bottom 50% to return to their pre-crisis income level. That was about twice as long as it took for the top 50% to recover. However, over the past year or so, it’s America’s poorer half that for once has improved its (relatively lean) position, with rising incomes helping to bring them closer to Americans. richer.

Benefiting from a tight labor market and generous government benefits, the bottom 50% had disposable income 20 percent higher in 2021 compared to 2019. This was completely unprecedented. Pandemic-era government benefits were rolled back in 2022, causing incomes to plummet, but America’s poorest half continued to see incomes rise faster than America’s top half, due to an extremely tight labor market (and perhaps, to some extent, wealthier workers leaning to push for pay raises to preserve their ability to work remotely).

According to Zucman’s Real-Time Inequality Tool, in the first quarter of 2022, the bottom 50% of earners saw their real incomes increase by 5.1% (after adjusting for inflation). The middle 40% of employees saw only a 1.6% increase. Meanwhile, the top ten percent and top one percent saw declines of 1.4% and 3.1%, respectively (largely due to the crash in the stock market and other markets of assets, where the wealthy invest their money disproportionately).

In other words, inequalities have decreased. This is an extraordinary change from the past 40 years, where the bottom saw very little revenue growth and the top saw massive gains.

As a kind of proof of concept of the political value of their tool, the White House jumped at the chance to highlight the gains for working-class Americans when Zucman and his team first released their inequality-focused GDP prototype earlier this year.

But there is also the flip side of wage increases for low-income Americans. Evidence suggests that this is one of the reasons why inflation has increased: in a tight labor market, companies have been forced to pay low-wage workers more and they have raised their prices to cover rising labor costs (in addition to energy and other energy costs). rise). Macroeconomic theory has long postulated that there is a trade-off between inflation and an extremely tight labor market and rising wages.

“Like everyone else, I don’t like inflation,” Zucman says. “But, listen, if that’s the price to pay for the gains of the groups that have been excluded from growth, let’s talk about it. I think the tool that we’re trying to develop is exactly what will make it possible to have a informed debate on these sorts of compromises.”

It’s damn clear, though, where the wind is blowing. The Federal Reserve is now raise interest rateswhich will likely end the windfall for low-income workers.

Interestingly, Simon Kuznets is not only famous for pioneering GDP. He is also famous for the “Kuznets curve. “It is an idea – informed by data observed by Kuznets in the 1950s – that as countries develop, inequality first increases, but then it peaks and begins to fall. American working class witnessed in recent months, if the past 40 years of American economic history is any indication, it is a pipe dream.

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