LIMITATIONS OF ECONOMIC GROWTH

People may simply assume that higher national output and progrowth policies are good for the economy and all groups of people. Yet there are costs as well as benefits to economic growth. For example, production and consumption decisions involve trade-offs. A tradeoff occurs when people choose to use resources one way rather than another way. At times trade-offs associated with economic growth result in certain benefits going to one group of people at the expense of another.

Poverty and the Distribution of Income and Wealth

One problem often associated with a dynamic, growing economy is a widening income gap and wealth gap between groups of people. Historically economic growth has been the norm in the United States. President John F. Kennedy's famous statement that “a rising tide raises all boats” suggests that sustained economic growth will improve all people's well-being. Measurable income and wealth data in the United States challenge this assumption, however.

The income gap between America's richest and poorest citizens has increased steadily in recent decades, as shown in Table 8.6. Between 1970 and 2010 the percentage of money income received by the richest 20 percent of the population, identified in the table as the highest quintile, climbed from 43.3 percent to 50.2 percent. To put it another way, the richest 20 percent of the U.S. population earned half of all income in 2010. Conversely, the percentage of money income received by each of the four lower quintiles—the lower 80 percent of the population—declined during this 40-year period.[1]

The distribution of income in any given year can be illustrated on a Lorenz curve, as shown in Figure 8.4. The vertical axis of the graph shows the percentage of income divided into segments of 20 percent each. The horizontal axis shows the U.S. population, by the lowest 20 percent, then the lowest 40 percent, the lowest 60 percent, and so on. The points on the Lorenz curve, labeled A–E, shows the percentage of income each segment of the population receives. At point A, for example, the lowest (poorest) 20 percent of the population received just 3.3 percent of income in 2010. Point B shows that the lower 40 percent of the population received 11.8 percent of the income (3.3% þ 8.5%). Point C shows that the lower 60 percent of the population received 26.4 percent of the income (3.3% þ 8.5% + 14.6%). Point D shows that the lower 80 percent of the population received 49.8 percent of the income (3.3% þ 8.5% þ 14.6% þ 23.4%). The remaining 50.2 percent of income is earned by the richest 20 percent of the people, as shown at point E.

Table 8.6 Distribution of Money Income in the U.S. by Quintile, 1970–2010 (% earned by each quintile)

Income Quintile

1970

1980

1990

2000

2010

Lowest quintile

4.1

4.2

3.8

3.6

3.3

Second quintile

10.8

10.2

9.6

8.9

8.5

Third quintile

17.4

16.8

15.9

14.8

14.6

Fourth quintile

24.5

24.7

24.0

23.3

23.4

Highest quintile

43.3

44.1

46.6

49.8

50.2

Source: U.S. Bureau of the Census, “Table 694,” Statistical Abstract of the United States: 2012, 454; U.S. Bureau of the Census, “Table 3,” Current Population Reports, September 2011, 11.

The Lorenz Curve

Figure 8.4 The Lorenz Curve, 2010

The distribution of income has a major impact on who is considered poor or not poor in the United States. Even with detailed income data, poverty is difficult to measure, however. The U.S. Census Bureau says that poverty occurs when a family's income falls below the official poverty line. The poverty line, which the Census Bureau calls the poverty threshold, is the income level that separates the poor from the nonpoor. The government calculates the poverty line by multiplying a typical family's annual food budget times three, a formula that has changed little over the past half-century. The poverty line inches upward each year as price levels rise. In 2012 the Census Bureau determined that a family of two was poor if its annual money income dipped below $14,960; a family of four was poor if its annual income fell below $23,497; and a family of nine or more persons was poor if its annual income fell below $47,536. These numbers vary some depending on the actual composition of the household, such as the number of dependent children, grandparents, or other relatives.[2] The U.S. Department of Health and Human Services (HHS) uses a slightly different measure of poverty called poverty guidelines to determine eligibility for government assistance programs. A comparison of recent U.S. poverty thresholds (2012) and poverty guidelines (2013) is shown in Table 8.7.[3]

The poverty rate measures the percentage of Americans living in poverty. Over the past several decades the U.S. poverty rate has generally fluctuated between 12 percent and

Table 8.7 U.S. Poverty Thresholds and Guidelines, 2012–2013

Size of Family

Poverty Thresholds (Census) 2012

Poverty Guidelines (HHS) 2013

Size of Family

Poverty Thresholds (Census) 2012

Poverty Guidelines (HHS) 2013

1

$11,722

$11,490

6

$31,485

$31,590

2

$14,960

$15,510

7

$35,811

$35,610

3

$18,287

$19,530

8

$39,872

$39,630

4

$23,497

$23,550

9

$47,536

add $4,020 per person

5

$27,815

$27,570

Source: U.S. Department of Health and Human Services, “2013 Poverty Guidelines,” Federal Register, January 24, 2013; U.S. Bureau of the Census, “Preliminary Estimates of Weighted Average Poverty Thresholds for 2012,” January 18, 2013.

15 percent of the U.S. population. In the most recent 10-year period, the poverty rate climbed steadily from 12.1 percent in 2002 to 15 percent in 2011. During this same 10year period, the number of Americans falling below the poverty line climbed from 34.6 million people to 46.2 million people. Much of this dramatic rise in poverty was attributed to the negative effects of the Great Recession (2007–2009) on people's incomes. Historically the U.S. poverty rate has been higher for minorities than for the white, non-Hispanic population. In 2011, for example, the poverty rate for whites was 9.8 percent, while the poverty rates for blacks (27.6 percent) and Hispanics (25.3 percent) were significantly higher.[4]

In the United States the wealth gap between the rich and the poor is even greater than the income gap. A common measure of wealth in the United States is a household's net worth. Net worth is the difference between a household's gross assets and its liabilities. Assets are usually divided into two categories: financial assets and nonfinancial assets. Financial assets include stocks, bonds, retirement accounts, certificates of deposit, and a host of transaction accounts such as checking accounts, savings accounts, and money market deposit accounts. Nonfinancial assets include the value of items owned such as a house, a business, or even a car. A household's liabilities are its debts—the amount of money owed to others. For most households the largest liability is the amount owed on a home mortgage. In 2010 the net worth for many households plummeted due to falling housing prices (a drop in the value of a nonfinancial asset) and a drop in the value of securities such as stock and bonds (a drop in the value of financial assets). In 2010, the top 1 percent of Americans owned 34.5 percent of all wealth. The top 10 percent owned about 75 percent of all wealth. Conversely, in 2010 the bottom 50 percent of the American people owned just 1.1 percent of all wealth.[5]

Since the 1960s a comprehensive social welfare system has redistributed some of society's income and wealth to the needy, including those living in poverty. A major expansion of the nation's social programs, often called the Great Society programs, began during the presidency of Lyndon B. Johnson (1963–1969). Great Society programs expanded civil rights protections, educational opportunities, and the safety net of social programs. Several Great Society programs enacted or expanded during the 1960s included the food stamp program, Medicare, and Medicaid. Today's most important public assistance programs for the poor are Temporary Assistance for Needy Families (TANF), Supplemental

Despite the expansion of social programs since the 1960s, poverty remains a persistent economic problem in the United States

Despite the expansion of social programs since the 1960s, poverty remains a persistent economic problem in the United States.

Security Income (SSI), Medicaid, and the Supplemental Nutrition Assistance Program (SNAP)—formerly the food stamp program.

Environmental Stresses

For decades economists, sociologists, and scientists have warned that unbridled economic growth is unsustainable. In Small is Beautiful: Economics as if People Mattered (1973), E. F. Schumacher warned that the planet was on a “collision course” with economic collapse and that humanity must “begin to see the possibility of evolving a new life-style, with new methods of production and new patterns of consumption: a life-style designed for permanence.”[6] Schumacher, Rachel Carson (Silent Spring, 1962), Paul R. Ehrlich (The Population Bomb, 1968), Barry Commoner (The Closing Circle, 1971), and others challenged people to consider the costs and benefits of their economic choices. The environmental costs of economic growth generally concern environmental degradation, climate change, and resource depletion.

Some environmental degradation is an inevitable result of production. On the one hand, production creates the wide variety of goods and services needed to sustain life and provide for people's comforts. On the other hand, unbridled production fouled the air, water, and land with pollutants; created wastelands with strip mining, aggressive timbering overgrazing, and overplanting; and destroyed natural habitats with urban sprawl. Critics of growth also point to mounting evidence that inefficient production methods and unsustainable consumption have contributed to global warming. The 2009 UN conference on climate change in Copenhagen, Denmark, underscored the need to reduce toxic emissions into the atmosphere—a sentiment echoed by many world leaders who attended the Copenhagen Summit soon thereafter.

Another environmental cost of economic growth is resource depletion. Resource depletion occurs when resources are used in production but not replaced. Nonrenewable resources, including petroleum and natural gas, are consumed in the production process and cannot be reclaimed for further use. Further, nonrenewable resources are in finite supply. Renewable resources, such as forests, fish, and animals, can be replenished. Critics of economic growth have traditionally focused on the inevitable depletion of the world's finite supply of nonrenewable resources. Major international organizations, including the United Nations, have documented that resource depletion is taking place. Particularly troubling is the depletion of basic resources such as fresh water, arable soil, forests, and oceans. The World Resources Report: 20122013 focused on ways countries with limited resources could best meet the needs of growing populations, especially in the developing world.

  • [1] Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith, U.S. Bureau of the Census, “Table 3. Income Distribution Measures Using Money Income and Equivalence-Adjusted Income: 2009 and 2010,” (Current Population Reports, P60-239), Income, Poverty, and Health Insurance Coverage in the United States: 2010, (Washington, DC: U.S. Government Printing Office), 2011, 11; and U.S. Bureau of the Census, “Table 694. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households: 1970 to 2009,” Statistical Abstract of the United States: 2012, 454.
  • [2] DOC/U.S. Bureau of the Census, “Preliminary Estimates of Weighted Average Poverty Thresholds for 2012,” January 18, 2013
  • [3] U.S. Bureau of the Census, “Preliminary Estimate of Weighted Average Poverty Thresholds for 2012, January 18, 2013; and U.S. Department of Health and Human Services, “2013 Poverty Guidelines,” Federal Register (Washington, DC: HHS), January 24, 2013
  • [4] Council of Economic Advisors, “Table B-33: Median Money Income (in 2011 Dollars) and Poverty Status of Families And People, By Race, 2002-2011,” Economic Report of the President: 2013, 364; U.S. Bureau of the Census, “Table 2. Poverty Status of People by Family Relationship, Race, and Hispanic Origin, 1959–2010,” Current Population Survey: Annual Social and Economic Supplements; Thomas Gabe, Poverty in the United States: 2010 (Congressional Research Service, CRS Report for Congress), March 9, 2012, 1-3.
  • [5] Linda Levin, “Table 2: Share of Total Net Worth by Percentile of Wealth Owners, 1989–2010,” An Analysis of the Distribution of Wealth Across Households, 1989–2010 (Congressional Research Service: CRS Report for Congress), July 17, 2012, 4; Jesse Bricker, et. al., “Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin 98, no. 2 (June 2012): 1, 17, 77
  • [6] E. F. Schumacher, Small Is Beautiful: Economics as if People Mattered (New York: Harper & Row, 1973), 21.
 
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