The Federal Reserve Bank of Minnesota posts an article worth reading that contends that President John F. Kennedy’s 1963 line about a rising tide lifting all boats isn’t borne out by recent economic history. In recent decades, our economy has cranked out more stuff and more money, but that wealth has trickled up to float more yachts than life rafts:
Traditional theories of economic growth sidestepped questions of inclusion. Robert Solow, who served on Kennedy’s Council of Economic Advisers from 1961 to 1962, won a Nobel Prize for his theory of growth. In it, the factors that make a country’s GDP grow make each of its identical workers better off by the same amount. All the boats are the same and sit on an even tide by assumption.
…Economists typically define inclusion by the income distribution. In 2019, Solow himself argued that income inequality in the United States is “a topic you can’t ignore,” adding: “One of the ways in which the society has changed is, as everyone now knows, [we have] vastly more inequality than we used to have.” Indeed, since 1999, the annual income of a household at the 10th percentile has been stuck at $16,000, while the income of a household at the 90th percentile grew by 20 percent, from $165,000 to $201,000. Even among households whose incomes grew, the amount of that growth varies widely. “Inclusive growth means taking some of the real productivity growth that we’re experiencing and ensuring that it doesn’t all just trickle upward,” Autor said. Over the past 20 years, though, median household income grew by only half as much as the income of households in the 90th percentile [Andrew Goodman-Bacon, “The Myth of the Rising Tide,” Federal Reserve Bank of Minnesota, 2021.04.14].
Raising our GDP numbers doesn’t enrich those at the bottom of the economic scale, the folks who need a list the most, as much as it lifts the folks already at the top. Helping people at the bottom may depend more on cutting the chains of exclusion and inequality that anchor them to the bottom:
Economists have made progress on another argument for inclusive growth: Inclusion will actually create more growth. A concern among some who embrace the “rising tides” metaphor has been that trying to foster inclusion by redistributing resources, for example, will hamper economic growth by reducing incentives to strive for high incomes. “Income inequality,” wrote the late Harvard economist Martin Feldstein, “is not a problem in need of remedy.”
But better economic theory and statistical evidence clarify how exclusion and inequality act as a drag on the economy. To contribute to their fullest, people have to be able to invest in their own productivity. But “because the U.S. is so unequal at so many levels,” Autor said, “a lot of our citizenry is being under-invested in in terms of skills, in terms of health, in terms of safety. Not only is that morally unjust, it is also a wasted opportunity.”
Exclusion and inequality also mean that talented people can’t pursue their ideas, make discoveries, and expand knowledge. In Solow’s classic growth model, for example, the key determinant of prosperity is technology. “If it’s all about technological change,” Logan asks, “then why do we as a society not make investments that would lead to developing the intellectual and innovative capacity of the entire population?” Indeed, research by Michigan State University economist Lisa Cook shows that lynching led to fewer patents by Black inventors. When we do better on inclusion, we all do better economically [Goodman-Bacon, 2021.04.14].
When we pour resources into “economic development” in general, the economy continues to respond to and reinforce the market forces already in play, including the forces of racism, sexism, and other discrimination that marginalize lots of willing workers and innovators and their families. When we as a community turn our collective governing energies toward reducing discrimination and opening doors for marginalized groups, we create more opportunities for more people to unleash their creativity, increase their productivity and their earning and spending power, and participate fully in the economy.
Promoting economic growth doesn’t reliably lead to inclusion and equality. Promoting inclusion and equality more reliably leads to more inventors, more workers, more shoppers, and more economic growth.