Friday, July 14, 2006

Lop-sided Growth

Ezra Klein on the TAPPED blog riffs on Paul Krugman's look at the peculiar nature of the Bush recovery.

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"?

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