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Tuesday, February 01, 2011

"The Great Decoupling"

Lane Kenworthy notes the decoupling of economic growth from median income growth in the early 1970s:

The great decoupling, Consider the Evidence: Tyler Cowen’s e-book The Great Stagnation offers a novel explanation of the slowdown in U.S. median income growth since the 1970s. ... Innovation has slowed. ... But I’m skeptical on two counts.

First, I’m not convinced that innovation has in fact slowed significantly. ... Computers are the engine of the postindustrial economy; they are the modern counterpart to steel, railroads, and the assembly line. Advances in computer hardware and software, their widespread dissemination, and their application to myriad tasks — automation and coordination of supply chains in manufacturing, record keeping and scheduling in services, and much much more — surely represent a massive improvement.

Second,... A key difference between the WW2-1973 period and the decades since then is that median income growth has become decoupled from economic growth. (Mark Thoma makes this point too.) The rate of economic growth has been lower in the recent era, but it’s nevertheless been decent. Yet median income growth has been very slow. This contrasts sharply with the prior period.

Here’s one way to see this (others here):

Thegreatdecoupling-figure1-version1[1]

...Median family income was $64,000 in 2007. Had it kept pace with GDP per family since the mid-1970s, it instead would have been around $90,000.

I’m all for helping to accelerate the rate of innovation. But the big change in recent decades lies in the degree to which economic growth lifts middle-class incomes. If we want to understand slow income growth, that should be our focus.

    Posted by on Tuesday, February 1, 2011 at 12:33 AM in Economics, Income Distribution, Productivity, Technology | Permalink  Comments (94)

          


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