Timothy Spurlin: Multiple pieces to the puzzle of our economy

Monday, November 25, 2019 - 6:05pm

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The Michigan Daily

We are officially less than one year away from the 2020 presidential elections, and voters across the country are watching candidates as they talk about critically important issues: health care costs, job opportunities and wages. One of the biggest splits among Democrats and Republicans, and even between different wings of the Democratic party, is the economy. 

Many Republicans and other supporters of President Donald Trump have been using the economy as proof that, despite being unconventional and constantly mired in controversy, Trump is successfully accomplishing the goals he set out to accomplish in 2016. Democrats, however, tell a different story — a story of wealth inequality and an economy that is only benefiting a small number of Americans.

The main disconnect comes from the fact that “the economy” is an ambiguous term — one whose definition changes depending on how you look at it. So both sides can technically be correct, but who is telling the more complete picture and how can we measure it?

Traditionally, measuring the health of the economy uses statistics surrounding gross domestic product and GDP growth, commonly called the growth rate. This simply tracks and measures GDP over time for the entire country, broken down into quarterly reports, to see how the economy as a whole is growing or shrinking. President Trump has been vocal about the success of the economy, and often uses the growth rate as his only evidence. Indeed, the growth rate in the U.S. has been steadily positive since Trump took office in 2017. Over his first term, the growth rate is about 3.1 percent — an impressive number to be sure, though much smaller than the 5 to 6 percent goal Trump promised while on the campaign trail. 

As it turns out, however, the picture of our economy’s health is actually more complicated than President Trump advertises. While total GDP may be up, that growth is almost entirely concentrated on the top-earners in the country and is not shared among the majority of Americans. This is the fundamental flaw in only observing the growth rate: GDP as a measure of the economy’s health only looks at total growth in the economy, and therefore paints an incomplete story. To find the whole story, we need to look at other indicators.

For example, one important statistic that impacts all Americans is income inequality. Income inequality is the measure of how wealth is divided among different percentile earners. Unfortunately, in the U.S., income inequality has become a serious problem. According to Bloomberg News, the richest 1 percent of earners in the U.S. are about to surpass the entirety of the middle class — meaning all of the middle class’s wealth combined will be less than the wealth of the top 1 percent. 

Economists use a figure called the Gini coefficient to measure changes in inequality in a country, and it is represented by a standardized coefficient from 0 to 1. The higher the Gini coefficient, the higher the income inequality in a nation (i.e. the higher percentage of wealth owned by the top earners). For the United States, the Gini coefficient has been steadily rising over the past few decades. In 1990, the US had a coefficient of 0.43, which has risen to 0.49 in 2018. This data backs up claims that for the majority of Americans, things are getting more unequal. Yes, GDP is growing, but primarily for the already wealthiest among us — and this should be a major alarm.

This is where most Democratic candidates come in. Almost all of the 2020 Presidential candidates have some sort of policy proposal to fight income inequality, but they all have different takes. Sen. Elizabeth Warren, D-Mass., has proposed one of the most ambitious wealth taxes in recent history, which would only apply to households making $50 million or more, with a 2-percent added tax on every dollar made over $50 million and 6 percent on every dollar made after $1 billion — something she claims will only affect roughly the top 75,000 households. A 2019 report from the University of California-Berkeley says that this could reasonably generate $2.75 trillion over a 10-year budgetary plan. Sen. Bernie Sanders, I-Vt., has a similar plan of taxing top earners, and nearly all of the frontrunning Democratic candidates support the idea of a wealth tax, with the notable exception of former Vice President Joe Biden.

That being said, income inequality is not the end-all, be-all statistic to measure the economy either. The unemployment rate has been falling steadily since the Obama administration according to the Bureau of Labor Statistics. Wage growth, which has been concerningly stagnant over the past 10 years, has finally started to increase. Inflation has been manageable and low interest rates have helped maintain the steady GDP growth. Regardless, the health of the U.S. economy cannot be accurately reflected using general statistics, and as the 2020 election heats up, voters will need to be more inclined to reflect on the numbers that are thrown around. 

Timothy Spurlin can be reached at timrspur@umich.edu.