US poverty rate, actual and simulated, 1959 – 2012 (graph)
from David Ruccio
One of the points Thomas Piketty makes in his new book is that mainstream economists enshrined as “laws” of capitalist development certain “facts” that only had relevance during the immediate postwar decades.
These so-called laws included constant capital and labor shares and declining inequality. We now know they were no more than artifacts of a particular period of capitalist development for some countries (including the United States). Things began to change radically in the mid- to late-1970s for those same countries (again, including the United States).
The same is true, as it turns out, of the relationship between economic growth and poverty. As the Economic Policy Institute (pdf) explains,
Economic growth used to be associated with significant poverty reductions, but since the 1970s the benefits of aggregate growth for lowering poverty have largely stalled. The figure compares the actual poverty rate with a simulated poverty rate based on a model of the statistical relationship between growth in per capita gross domestic product (GDP) and poverty that prevailed between 1959 and 1973. The model forecasts poverty quite accurately through the mid-1970s. Since then, the actual poverty rate stopped falling and has instead fluctuated cyclically within 4 percentage points above its trough in 1973.
However, the simulated poverty rate shows that if the relationship between per capita GDP growth and poverty that prevailed from 1959 to 1973 (wherein poverty dropped as the country, on average, got richer) had held, the poverty rate would have fallen to zero in the mid-1980s. Therefore, broadly shared prosperity could have led to a near eradication of poverty in the United States, but it did not.
So, the next time someone exclaims that the solution to poverty is more economic growth, explain to them that trickle-down economics, even if it was valid grosso modo for the immediate postwar period, has not worked for those at the bottom of the distribution of income for many decades.
And it certainly doesn’t