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Monday, August 6, 2012

The Agenda: A Slowdown in Growth, an Increase in Income Inequality


The income stagnation of the last decade stems, in the simplest terms, from two factors: a slowdown in economic growth and a rise in inequality, which has concentrated the economy's modest gains among a small share of the population. In this post, I want to look at both factors in a bit more detail.

The economy's recent struggles arguably began in late 2001, when a relatively mild recession ended and a new expansion began. The problem with this new recovery was that it wasn't especially strong. From the fourth quarter of 2001 through the fourth quarter of 2007 (when the financial crisis began), the economy grew at an average annual rate of only 2.7 percent. By comparison, the average annual growth rate of both the 1990s and 1980s expansions exceeded 3.5 percent.

This mediocre expansion was followed by the severe recession and weak recovery brought on by the financial crisis. The combined result is that, in recent yea rs, the economy has posted its slowest 10-year average growth rates since the Commerce Department began keeping statistics in 1947:

In addition to slow growth, the bounty from the economy's growth has largely flowed to a small slice of the population: the affluent. Since 2000, no income group has done particularly well. Income in households that rely on wages has failed to keep pace with inflation, while in households that have large investment holdings the value of many of those holdings - both real estate and stocks - has fallen.

Over a longer term, though, the affluent have done extremely well. Since 1980, a household at the cutoff for the top 1/1,000th of earners - making about $1.5 million in 2010 - has received a pay increase of more than 100 percent, after adjusting for inflation. A household in the middle of the income distribution has received an inflation-adjusted raise of only 11 percent.

Related: Read all Agen da Posts