By John Phelan
Center of the American Experiment
Between 1800 and 2016, the Gross Domestic Product (GDP) of the United States grew by 82,806% in real terms. This was a historically unprecedented explosion of income, wealth, and material well-being and its benefits have been experienced by all. Over the same period, the population of the US increased by 3,153%. Because the growth rate of the economy was so much greater than the growth rate of the population, GDP per capita increased by 2,449%.
As a result, not only are poor Americans today much better off than poor Americans of years ago, but the average American is better off than even the richest American of their great grandparents’ era. Simply put, a growing economy has made us all better off.
So, you have to be wary when someone tells you that you can only get better off by grabbing some of someone else’s piece of a fixed ‘pie’ of wealth. As the economist Milton Friedman put it, “Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”
If it was true that there was a fixed ‘pie’ of wealth or of income and that we could only get better off by taking some of someone else’s slice, you would expect to see the incomes of the poorest highest in states where the incomes of the rich are lowest. In other words, as the income of the rich rises, the incomes of the poor should fall.
But the data shows the exact opposite. In states where the very rich (the 95th percentile) have higher incomes, so do the less well off (the 20th percentile). In states like Maryland and New Jersey, where the rich have some of the highest household incomes in America, the poor also fare well compared to other states (ranking 2nd and 6th for 20th percentile incomes). The people in the 20th percentile haven’t been made better off by taking slices of ‘the rich’s’ pie, there is a just a bigger pie.
On average, states which saw the largest gains in household income for the top 5% also saw the largest gains in household income for the bottom 20%. The rich got richer, but so did the poor. Nobody had to be made worse off because the economy is a positive sum game, not a zero sum one.
We shouldn’t infer anything causal from this, at least not without much further work. The increase of the incomes of the top 5% might not be what is driving the increase in the household incomes of the bottom 20%. There might be something else driving both which we are missing. But one thing we can conclude is that making the rich poorer isn’t a way to make the poor richer.
John Phelan is an economist at the Center of the American Experiment.