Re: Trade and Growth

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

On Sun, 6 May 2001, David Gleicher wrote:
> I'm curious to know what you see as the theoretical/analytic reason
> for this connection between growth and a more egalitarian
> distribution that you believe in so fervently?

I have not argued that growth improves income distribution, although
as a stylized fact I believe this is true over longish periods
(several decades).  I'd like someone knowing more economic history to
speak to this, but for periods of especially high growth I have the
impression that the pattern in the shortish run (a few decades) is to
super-enrich a few who ride the most recent boom.  Measured inequality
(e.g., by Gini coef) shd therefore rise.  There is also the famous
Kuznet's curve results, although I've lost track of how the debate is
shaking out on that.  Anyway, speaking impressionistically, it seems
that countries that experience long periods of sustained growth are
also more likely to have a robust middle-class.  This is all a matter
of stylized facts, not theoretical modeling.

All I have argued in the recent thread is that over long periods of
time (decades or centuries) we can find no single factor that has a
better correlation with standard measures of human welfare for the
``vast majority'' (as Nagarajan phrased it) than economic growth.  The
truth of the matter is that few people have even a remote clue how
different things were a hundred years ago for the average person in
the advanced industrialzed countries, and those who are most critical
of emphasizing the importance of growth for human welfare usually have
the least clue.  I find it laughable that so much of the criticism of
the effects of growth focuses on horizons little longer than a
business cycle or two.

However if you are recalling older posts of mine, I may well have
argued that growth has also been good for those at the bottom of the
income distribution.  Again this is simply a stylized fact, not a
theoretical necessity.  And the reasons for that are political as well
as economic.  But, for example, rich countries are much more likely to
afford real health care services for the very poor.  (The US, to its
shame, has yet to responsibly institutionalize health care for the
poor.)

> Also, if you take the bottom quintile, doesn't the US since 1970 or so
> qualify as a country that has grown over the past three decades with a
> decline in the real per capita income of the poor?

If you look at after-transfer income of the bottom 10% or 20%, I don't
think that's right.  But I don't have data at hand.  It is true that
there was a sharp decline in the wage rate for the bottom quintile of
wage earners that, if I recall correctly, didn't turn around until
well into the Clinton administration.  The meaning of that is of
course hard to pin down (how much of that reflects new entrants, etc),
and the source of it has been a matter of great debate in the US.
Certainly the data cannot be reasonably interpreted unless recent
immigrants are excluded.  (O/w a growing economy that drew in
relatively low-skill, low-wage immigrants to everyone's advantage
would look like a poor performer.)  My personal suspicion is that we
are experiencing a change in the composition of demand that is going
to put continual downward pressure on the relative and possibly
absolute wages of the least skilled.  As a policy matter, this
heightens the importance of crafting politically sustainable social
safety nets and of crushing the opposition to Social Security as well
as the efforts to destroy our public education system (e.g., through
unrestricted voucher schemes).

But back to the original conversation, I think that the US illustrates
well the claim that sustained growth is a welfare benefit for the vast
majority.  That is my core claim.  In addition, I think it illustrates
that sustained growth benefits even the poorest, and that the
income-polarizing effects of high-growth periods are temporary.
Obviously growth is not the only thing that matters, especially to
those who are least able to pariticipate in the economy (children,
long-term disabled, chronically ill, etc.) However just as a matter of
history, I see no other single factor that has been so responsible for
improving the welfare of the vast majority, both directly (by raising
the average material standard of living) and indirectly (by improving
the perceived affordability of social programs).

Alan Isaac