Jan 10, 2013 at 7:25 pm
In work I’m doing for a paper on the relationship between inequality and growth, I was reminded about an underappreciated difference between our economy and those of other advanced economies: we consume a considerably larger share of our output than they do.
I’ll get to why this matters in a moment, but the evidence is in the figure below, from the OECD. The US share is about 72%; the average without the US is about 55% (there are two outliers—Greece on the high end and Luxembourg on the low end—exclude them and you’re still at 55%). That’s a big difference.
There are lots of reasons for these differences, many of which go beyond economics and into culture. Roughly speaking, when output per hour (productivity) grows, you can work more and buy more, or work less without being worse off. We tend towards the former; many of these other countries tend toward the latter.
But is there anything here that bears on inequality and growth? Well, maybe it’s this: in a country that has both a high consumption share and very high inequality, you might worry more about different propensities to consume across the income scale and their impact on growth. That is, since middle and lower income people are more likely to consume (vs. save) their marginal dollar, when high inequality diverts growth largely to the top of the pay scale, that should hurt growth here more than in countries whose GDP depends less on consumer spending.
It’s a testable hypothesis which maybe I’ll test unless one of you beats me to it!
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