The US Senate enlisted a young economist named Simon Kuznets to figure out how badly the economy had been ravaged by the Great Depression and whether policies were doing much to fix it. The government didn't do a good job of monitoring the economy back then. For a long time, the idea of a single, nationwide entity known as the economy was alien to people.
The report was delivered to Congress in 1934 after a lot of boring work. The first comprehensive accounting system to measure the economy was provided by it. America was introduced to a new concept of being able to size up the economy with a single number. It was called national income back then, but it was a progenitor of GDP today.
The idea of using a single number to measure the size of the economy was something that immediately caught on. The country had a more scientific way of estimating economic growth, to judge leaders and policies on their economic performance, and to decide whether they should change course. Every nation adopted the number. The number moves markets and helps countries prove their ability to repay loans and assess their ability to fight wars. They won a prize for helping to create it.
He warned against putting too much stock in the measurement of GDP in the report he gave to Congress. When not controlled, the human mind's ability to simplify a complex situation becomes dangerous.
This single metric, which only estimates the size of the economy, could overshadow the inequalities found within the economy. The personal distribution of income is needed to measure economic welfare. To a long line of economists, this single number dominates the discussion.
Four economists are trying to change the way GDP is used. In a new paper titled " Real-Time Inequality", the economists imagine a new kind of GDP, one that isn't simply a single number telling us about total economic growth, but a collection of numbers telling us where the gains from this growth are flowing Some important insights about our economy can be found in the prototype that they published online.
Gabriel Zucman is an economist at UC Berkeley who has been working to transform government economic statistics. The national accounts give the public valuable insights about the economy. The data doesn't tell you who is benefiting from economic growth.
There is a lot of data on inequality in America. Zucman says it takes a year or two for the data to be updated. Zucman says it's not enough to say, "Look, this is what happened to inequality." It's too late.
This is an effort to be fixed. Zucman and his colleagues have pioneered a method to compute in a more timely manner how different income groups are doing economically. They hope this prototype will encourage the federal government to produce numbers about how income is growing for each social group at the exact time when the Bureau of Economic Analysis releases its official GDP growth numbers.
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Zucman wants this data to inform and shape policy. Zucman says that policymakers and voters need to know things like which groups need more support, or whether the government may be overshooting, which could lead to inflation.
Zucman and his colleagues look back at economic history to see how different income groups fare in past recessions.
Zucman says it took four years for GDP to return to its pre-crisis level. It took ten years for half of the population to recover from the Great Recession. You had a huge discrepancy between how GDP was growing and how income was growing for most of the people.
Compare that to the economic downturn. It took 20 months for the 50 percent to get back to their pre-crisis income levels. It took the top half of the population to recover. Over the last year or so, it's been the poorer half of America that has been improving their position, with rising incomes helping push them closer to richer Americans.
Benefiting from a tight labor market and generous government benefits, the bottom 50 percent of the population had a 20 percent increase in disposable income. It wasn't something that had been done before. Pandemic-era government benefits were rolled back in 2022, but the poorer half of America has continued to see incomes grow faster than the top half of America due to a tight labor market.
The bottom 50 percent of income earners saw a 5.1% increase in their real incomes in the first quarter of 2022, according to Zucman's Real-Time Inequality tool. The majority of people saw an increase. The crash in the stock market and other asset markets led to a decline in the top ten percent and one percent.
In other words, the gap between rich and poor has been narrowing. In the past 40 years the bottom has seen very little income growth and the top has seen a lot of gains.
The White House jumped on the chance to highlight the gains for working class Americans when Zucman and his team first released their inequality focused GDP prototype earlier this year.
There's more to the wage surge for low income Americans. In a tight labor market, businesses have been forced to pay low-wage workers more, and they've been raising their prices to cover growing labor costs, which is one of the reasons why inflation has been increasing. There is a tradeoff between inflation and a tight labor market.
Zucman dislikes inflation like everyone else. Let's discuss if it's the price to pay for gains for groups that have been excluded from growth. I think the tool that we're trying to develop will allow for an informed debate about trade offs.
Where the wind is blowing is clear. The Federal Reserve is raising interest rates, which will end the bonanza for low income workers.
Simon Kuznets is also known for his contribution to GDP. He's well known for the Kuznets curve. According to data from the 1950s, it's an idea that as countries develop, inequality begins to decrease. If the past 40 years of American economic history is any indication, that is not a pipe dream.
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