The US lags far behind its peers on “inclusive” economic growth

Boosting inclusive economic growth was one of the few issues on which Hillary Clinton and Donald Trump at least purported to agree. Clinton said she wanted to build a “growth-and-fairness economy,” emphasizing that “you can't have one without the other.” Donald Trump argued that “no one will gain more” from his America First Economic Plan proposals “than low-and-middle income Americans.” And Bernie Sanders based his entire campaign on the distributional battle between the very rich and the middle class.

Inclusive growth is a hotly debated topic in the global context as well. Consider Branko Milanovic and Christoph Lakner’s famous Elephant Curve (so named because of its shape). It reveals strong growth at the mean of the global income distribution (in the neighborhood of $5 to $15 a day), and among the top 1 percent (the truly rich), but identifies stagnation in the 80 to 85 percent region (which is where the bottom half of residents of most developed countries would fall.)

We know the United States faces challenges on the subject of inclusive growth. But how has the US performed compared to other rich countries? To answer these questions, we have to think about how we measure income growth. GDP per capita is usually the first metric people use for this purpose. Yet, growth in GDP per capita does not tell us anything about the extent to which growth is shared among the population.

On the other hand, the share of income going to the top 1 percent, a popular measure of the degree of inequality — used in Piketty’s groundbreaking Capital in the Twenty-First Century (2014), among other works — has the exact opposite problem. It only tells us how incomes are distributed, and only at the very top for that matter, but it does not reveal whether incomes are growing.

We have constructed our own database in order to combine measures of growth and equality. Using that information, we can then summarize trends in both the distribution and growth of incomes for different countries, all in one graph. To put the US experience in perspective we compare what happened in the US to the patterns of growth in three other rich countries: France, Norway, and the UK.

We compare the evolution of the income an individual needs to be right at the 10th percentile of the income distribution to the evolution of the income of an individual at the 90th percentile. We call these two groups the “poor” and the “rich.” We can then look at how much incomes grew for the poor and the rich in absolute terms as well as relative to each other — and thereby assess the extent to which growth was widely shared. We measure income after taxes and transfers, and adjust for differences in prices over time and across countries using inflation and purchasing power information. Our database can be accessed online, with more information on our exact measure and data for other countries.

A baseline, to get things started: the growth path of France

The first chart sets the scene for our analysis using data for France in 2010. On the horizontal axis we see the income of the poorest 10 percent. The chart shows that in France in 2010 the poor had an income of $12,643 (in 2011 prices) and that the income of the rich was $45,116 — that is, the rich had an income that was 3.57 times higher than that of the poorest 10 percent. (The dashed diagonal line in this chart shows the income levels of the rich and poor that would maintain a ratio of 3.57, if incomes of both groups changed.)

But, in fact, incomes in France have not marched in lockstep in that ratio. We now add all the available income data for France since 1978. France suffered through a recession in the early 1980s, leading to lower incomes for both the poor and the rich around 1984 — and to slightly higher inequality. The poor lost out in particular, causing the rich-poor income ratio to creep up to 4-1. After this, the economy recovered and incomes went up in particular for the poor. Since 1989, France has experienced a period of inclusive growth: The income ratio remained at roughly the 1989 level; both the poor and the rich gained over the following two decades.

Strong inclusive growth in Norway

The next chart adds the growth path of Norway to the picture. In the late 1970s, the incomes of the poor were quite comparable in France and Norway, but the incomes of the rich were considerably lower in Norway. As a result, inequality was substantially lower in Norway: The income ratio was below 3, as the chart shows.

Since then, Norway achieved tremendous economic progress. Incomes for the poor and for the rich grew strongly, and in 2010 both the rich and the poor Norwegians had overtaken the incomes of the rich and poor in France. Nonetheless, the income ratio between the poor and rich has barely changed in Norway since 1979 — economic growth in Norway lifted all boats. The ratio of the top 10 percent to the bottom 10 percent remained below 3-1.

Exclusive then inclusive: the growth path of the UK

The UK, now added in blue, is a different story. It is a play in two acts. From 1979 to 1991, the UK was on an “exclusive” growth path: The incomes of the poor stagnated while the incomes of the rich increased substantially. In turn, income inequality increased hugely in the UK — the growth path crossed the income ratio of 4 in the late 1980s and was getting close to 5-1.

But with the end of the Thatcher era, the growth path of the UK changed fundamentally. The result was that Act Two, lasting for two decades now, bears no resemblance to Act One. For these two decades the UK was on an inclusive growth path where both the poor and rich benefited from economic growth.

And now the bad news. Compared with recent history of inclusive growth in France, Norway, and the UK, the US experience is bleak, indeed. The US began the period, in 1979, with relatively high inequality, but also the highest income among both rich and poor. But the income of the poor actually decreased, in real terms, from 1979 into the mid-’80s, leading the ratio of rich-to-poor to spike past 5-1.

Of the four countries we examined, the incomes of the poor in the US rose by the smallest amount over the full period: from $11,048 to $11,288 in three decades, an average of 0.06 percent per year. And after a spell of growth from 1986 to 2000, real incomes for the poor fell again after 2000. Incomes for the rich went up by 0.83 percent on average per year across this period — not an outstanding score, but enough to substantially increase inequality.

Both at the 10 percent level and the 90 percent mark, the US has lost ground to other developed countries. While the rich Americans still have higher incomes than their counterparts in France, Norway, and the UK (the gap has shrunk markedly since 1979), the poor Americans are now poorer than the poor French. They are much poorer than the poor Norwegians. And they are only slightly richer than the poorest Brits.

Over all, our analysis discloses important differences across countries and over time in the extent of inclusive growth. Long periods of stagnating incomes can be a harsh reality — as witnessed by poor Americans over the entire period we studied and by poor Brits in the ’80s. Yet inclusive growth can be a reality as well. Examples of inclusive growth that stand out include France since the mid-’80s, the UK since the ’90s, and Norway in general. The UK example, meanwhile, shows there is nothing fixed about a growth trajectory. Perhaps the US can take some comfort from that example.

The differences we have identified across countries and time imply that increased globalization and technological change cannot be blamed as sole causes for rising inequality. Those forces work across borders and should affect all countries. The fact that other developed countries have been able to share the benefits of these market forces suggests that policy choices on the national level play a central role for boosting living standards. Policies can make a difference not just in growth levels, but also in who gets the benefits of that growth.

Max Roser, an economist, is the founder and project director of Our World in Data, a web publication that shows how global living conditions are changing. It is based at the Oxford Martin School, University of Oxford. Roser is also a senior fellow with the school’s Institute of New Economic Thinking. Find him on Twitter: @maxcroser

Stefan Thewissen is an economic researcher at the University of Oxford. He is affiliated with Nuffield College and is a fellow at the Institute for New Economic Thinking at the Oxford Martin School. His research on living standards can be found at www.stefanthewissen.com, and he is on Twitter: @ThewissenS

The Big Idea is Vox’s home for smart, often scholarly excursions into the most important issues and ideas in politics, science, and culture — typically written by outside contributors. If you have an idea for a piece, pitch us at thebigidea@vox.com.

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