Sunday, April 13, 2008

America grows while Americans stagnate!

David Leonhardt draws attention to the remarkable fact median incomes have remained essentially stagnant for most families during the recent economic expansion. This should lay to rest a lot of debate surrounding the inclusivity of the economic growth in the new millennium.

According to the Census Bureau, in 2000 the median American family made about $61,000at the end of the previous economic expansion, whereas in 2007, at the end of the most recent expansion, the median family made even less - $60,500! This is the first economic expansion since the World War II, when the buying power of most American families actually declined. In other words, while America grew richer, Americans grew poorer!



Leonhardt traces this trend to the decline in the bargaining power of large sections of the workforce due to the technological trade and rise in global trade. The health care costs and the favorable tax concessions to the rich aggravated the problem. The internet and housing bubbles camouflaged the adverse effects of this phenomenon for some time. He writes, "the modern American economy distributes the fruits of its growth to a relatively narrow slice of the population. We don’t need another decade of evidence to feel confident about that conclusion."

Leonhardt calls for active government role in bringing growth back to all Americans. He writes about the income gains of the postwar period, "They were the product of a deliberate program to build up the middle class, through the Interstate highway system, the GI Bill and other measures." His prescription is for job-creating investments in biomedical research, alternative energy, roads, railroads and education.

This and other well documented literature, points to an important role for Governments in containing the ever widening inequality divide. This however is not an endorsement to go back to the bygone era of interventionist redistribution, but for adopting a more subtler approach that focuses on facilitating the achievement of outcomes rather than outcomes themseleves.

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