By Lawrence Summers When I studied economics in graduate school a generation ago we were taught that it was a “stylised fact” that the US income distribution was very stable. We were shown that the fraction of the population in poverty tracked almost perfectly the performance of median family income over time and that productivity growth and average real wage growth moved together, with both declining sharply after the oil shocks of the 1970s. These observations led naturally to the conclusion that the main way of reducing poverty or increasing the incomes of middle income families was raising the rate of economic growth. Today, we have another generation’s worth of data including the experience of the information technology-driven re-acceleration of productivity growth in the 1990s. This experience forces a reassessment of the earlier economic orthodoxy. It can no longer plausibly be asserted that the income distribution is relatively static or that average wage growth tracks productivity growth. Indeed, in a recent paper on tax policy prepared for the Hamilton project, my collaborators and I concluded from Congressional Budget Office data that, since 1979, changes in income distribution had raised the pre-tax incomes of the top 1 per cent of the population by $664bn or $600,000 per family – an increase of 43 per cent. The remainder of this column can be read here (FT.com subscription required). Discussion from our guest economists is free.
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