FOREHEAD GROWTH. Paul Krugman returns to the economics beat with an invaluable look at how our economy is growing:
Here�s what happened in 2004. The U.S. economy grew 4.2 percent, a very good number. Yet last August the Census Bureau reported that real median family income � the purchasing power of the typical family � actually fell. Meanwhile, poverty increased, as did the number of Americans without health insurance. So where did the growth go?
The answer comes from the economists Thomas Piketty and Emmanuel Saez, whose long-term estimates of income equality have become the gold standard for research on this topic, and who have recently updated their estimates to include 2004. They show that even if you exclude capital gains from a rising stock market, in 2004 the real income of the richest 1 percent of Americans surged by almost 12.5 percent. Meanwhile, the average real income of the bottom 99 percent of the population rose only 1.5 percent. In other words, a relative handful of people received most of the benefits of growth.
We should probably talk this one out for a moment. Growth is almost a misleading word for this phenomenon: When we think of growth, we imagine what happens to us during adolescence -- we get bigger. But imagine if all the growth happened in your forehead. Limbs, torso, weight -- all the exact same. But your forehead was now six inches long. Would you be excited about that change? Would you celebrate your newfound height? Would you categorize that as normal "growth"?
Yet that's what the commentariat does. Unused to analyzing anything more complicated than single, undifferentiated macro numbers, they look at big growth figures, smile, and wonder why the president isn't getting more plaudits for his supercalifragilisticexpialidocious economy. What they don't realize is that growth, which used to benefit us all, is now, in Krugman's words, a "spectator sport."
In fact, it's no longer just the middle class and the poor who're falling behind. The distribution has grown so uneven that the 95th percentile is making meager headway -- even the merely rich are falling behind. It's the richest of the rich making headway. But they now account for so much wealth and holdings that their acceleration can effortlessly outweigh everyone else's deterioration. Add in that the reliable income growth conveyors of yesterday, like education and hours worked, no longer heavily correlate with income increases (earnings dropped for college graduates in 2004) and you've got a real problem on your hands, one that's going to leave the average American feeling markedly insecure despite Chris Matthews' assurances that everything is hunky-dory. This may be growth, but it's a grotesque perversion of of the widely-beneficial expansions that we all hope for. Americans have noticed -- they say so on every poll. But GOP flacks and the reporters who love them are still playing catch-up.
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