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The False Promise of GDP Growth

Tomorrow we expect to hear that U.S. GDP growth may reach between 3-4%, a dramatic rise over the most recent quarterly rates, which have been in the mid-2% range and reached a recent low of  0.5% in the fourth quarter of 2015. After rapid growth in the 4-5% range during the strong  recovery period of 2013-14, slow GDP growth was thought to be the norm. Now a faster growing GDP is being hailed as signs of a healthy economy, which will profit everyone. 

Not so fast. 

GDP represents the dollar value of all the goods and services produced during a given period. A mystery in the last decade is how GDP growth has become detached from wage growth. One explanation has been that outsourcing of production to workers in other countries has led to more products and profits but less employment here at home. This has certainly been part of the answer. But unemployment in the U.S. (and in much of Europe) is now low—very low in the U.S. and countries such as Germany—but wages have not risen appreciably. The graph below shows this.

Labor’s share of the nonfarm business sector; seasonally adjusted.

          1950’s    1960’s     1970’s   1980’s    1990’s     2000’s       2010’s

 By The New York Times | Source: Federal Reserve Bank of St. Louis

As labor’s share of the economy dropped, profit's share rose from 2% in 1984 to 16% in 2014. Corporations are making greater profits but labor is not benefitting from them.

As unemployment shrinks, wages are supposed to increase. It’s the law of supply and demand, and in terms of employment and wages, it’s called Phillips’ Curve by economists. So why isn’t it happening and is the reason something that nullifies this longstanding relationship?

We live by a lot of myths in our country, and one of these myths is that small businesses are the backbone of employment in the United States. That may have been true at one time but it no longer is. The graph below shows how the share of U.S. employment by larger companies has been growing steadily since 1985,


  Currently, companies with more than 10,000 workers employ more people than those with less than 50 workers. 



When very large companies—the Googles, Amazons and Microsoft’s of the world—own the job market, the employer is still able to control wages, even when there is low unemployment. 

Our national conversation about the economy and how well off the average American fares within it, is mistaken in at least two major ways: increasing GDP growth signals greater profits but not higher wages, and lower unemployment in a workforce environment that is dominated by a few very large employers is not going to improve wages according to traditional supply and demand principles.

More and more we are an economy skewed toward accumulation and preservation of wealth in a smaller and smaller number of individuals and of capital by a smaller and smaller number of multinational businesses. This makes many of our benchmark measures of the health of the economy misleading for workers although they are accurate for Wall Street and the owners of capital. This is not just an American phenomenon, although many of the iconic companies that signal this development are American owned, though China and some European countries are producing their own versions of them. The movement toward automation and robot workforces will only accentuate this trend.

If workers are interested in improving their own quality of life, based upon wages that reflect the growth of the economy, they will need to pay attention to other measures than GDP or corporate profits. Attention paid directly to wages is the only thing that will move the needle when it comes to workers earning more money.

Reader Comments (2)

Thank you Casey. You are bringing light to something that hurts so many people.

Wages are a major consideration.

The base concern is how do regular people get to share in a rich economy that has been rigged for a few very rich people. Regular folks create all the profit, rents and return to capital that the rich enjoy. We subsidize them every day through low paying, no benefit gig economy jobs. Through high rents and medical costs. And through the enormous profits taken by monopoly power and by the laws and tax structures that favor the rich.

The disparity in wealth and the absolute lack of wealth for 90% of the people is probably the major factor in keeping people poor, unsecure and afraid. Pikety's recent work and that of other economists demonstrates we are moving not just from being a society that is already more unequal than ancient feudal times or the Roman Empire but to one where the wealth forms ever increasing dynasties.

I wrote a brief description of wealth in the USA a few weeks ago,,, https://dandelionsalad.wordpress.com/2018/07/09/the-rich-are-only-rich-if-we-let-them-be-by-dariel-garner/ ... 100 Kids and 100 toys...Sounds like fun doesn'i it?

It will take more than watching the needle of wages to achieve even a modicum of fairness, caring and civility in our economy. It will take people rising up for democracy....real democracy not the sham democracy we live under.

It is possible, we have done it before.

July 26, 2018 | Unregistered CommenterDariel Garner

Everybody who reads this blog is amazingly rich by nearly every historical and world standard. I’m continually unimpressed by people comparing their immense wealth with the greater riches of others. The problem has never been how to make the rich poor by redistributing their money. That’s a dead end that will unquestioningly make many people much poorer. The problem is that there is a certain percentage of people who, through their own self-determination, continually make life choices which foolishly exhaust their wealth. If you give them $5000 today, they will be broke tomorrow and then get mad when someone isn’t there to give them another $5000. This “Tyranny of the Weak” is one of the primary reasons Socialism will never work. More jobs, more opportunity and more responsible spending is the way to help people become more wealthy. That’s why muscular GDP growth is important. In a vibrant economy, there is very little reason to not get a good job and start building wealth. Then we can start allocating our collective resources for those people without the physical, intellectual or psychological capacity to fend for themselves....the truly needy.

July 28, 2018 | Unregistered CommenterMark Wheeler

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