The Scope of the Book
Our aim is to measure the effects of the GR on the level and distribution of household incomes in rich industrialized countries. In this section, we explain the three components of that statement in more detail.
First, how are the effects of the GR to be assessed? A common method of assessing effects is to compare observed outcomes with what would have happened were the change of interest not to have occurred. What is the counterfactual for assessing the impacts of the GR? One answer would be the distribution that would have prevailed if neither the boom nor the bust had happened, so 'potential GDP' had been on and had remained on a sustainable path. This and other possible counterfactuals are difficult to estimate with confidence. Hence we are left with the less satisfactory but feasible alternative of measuring changes relative to a baseline distribution for around 2007, while also looking at earlier years to consider outcomes for that year in the context of the previous trends.
The second component refers to the distribution of household income. Economic downturns generally reduce real incomes, and hence poverty rates are likely to increase when the low-income threshold is fixed in real income terms. An economic downturn may also change the dispersion of household incomes. So, we consider changes in real income levels, income inequality, and poverty rates. We are concerned with all income groups: the top, the bottom, and the middle.
How well off people are is measured throughout the book in terms of household income rather than using other indicators such as household consumption expenditure, material deprivation, happiness, or other measures of personal well-being. Income is not the only concept of interest, but it is commonly used and data are collected in a reasonably consistent manner across countries. As mentioned earlier, we consider all forms of money income and the household income total derived by aggregating income sources over all the individuals within each household. This focus distinguishes us from a narrower analysis, for example, of the impact of the GR on the distribution of earnings of employees. We are interested in the household circumstances of each worker, as well as the young, the old, and anyone else with no labour market earnings, and in all sources of income: investment income, social security benefits and other forms of non-labour income, as well as earnings.
The book is about changes in the distribution of household income, not the distributions of household wealth or debt, though we discuss aspects relating to financial assets at several points.
The leading option for the definition of household income is the one conventionally used in many countries' official income statistics, namely total household income including cash benefits received from the state and after the deduction of payments of direct taxes. This concept of 'net' or 'disposable' income is used in much of this book. The definition excludes realized capital gains and losses unless otherwise stated because data about them are not generally available.
There are arguments for using a wider definition of income, one that also includes the value of non-cash social benefits, as advocated by the Canberra Group (Expert Group on Household Income Statistics 2001) and, at the aggregate level, by the Commission on the Measurement of Economic Performance and Social Progress with its concept of 'adjusted household disposable income' (Stiglitz, Sen, and Fitoussi 2009). This non-cash income refers to 'goods and services such as education, housing, cultural and recreational services [that] may be provided [by governments] either free or at greatly reduced cost at the point of use' (Expert Group on Household Income Statistics 2001: 23). A wider definition of income could also take account of indirect taxes paid by households in addition to direct taxes. The relevance of these components of income is underlined by the reductions in a range of public services and increases in indirect taxation as part of governments' fiscal consolidation in a number of countries as an aftermath of the GR. Although the distributional impacts of these changes are potentially important, measures based on the wider definition of income are not available in our data sources.
Some economists have argued that household consumption expenditure is a better measure of living standards than is household income, at least in principle. There is evidence that consumption expenditure inequality tends to be lower than inequality of household income (Goodman and Oldfield 2004; Johnson, Smeeding, and Boyle Torrey 2005) and, moreover, that it has not changed as much as income inequality in the course of past recessions (Krueger etal. 2010). The standard explanation is that households' spending depends on their permanent income and to the extent that income changes in economic downturns (e.g. due to unemployment) are transitory rather than permanent, many households can smooth their consumption by borrowing, drawing on savings, or postponing durable purchases (Blundell, Pistaferri, and Preston 2008; Krueger et al. 2010). Establishing whether this also describes the case of the GR must await the availability of suitable data. Some preliminary calculations are provided for working-age households in the USA by Heath- cote et al. (2010). A more extensive study using data for the UK through to the end of 2009 by Crossley, Low, and O'Dea (2011) demonstrates that, relative to previous recessions, there has been a greater prevalence of cuts in households' non-durable expenditure than their durable expenditure.
The third component of our statement refers to rich countries. The countries we consider are all members of the Organisation for Economic Co-operation and Development (OECD). We provide a broad overview for 21 OECD countries and consider the experience of six of them in depth. We do not analyse the experience of emerging economies or countries from the developing world, nations that have had a very different experience. China, Brazil, and India 'weathered the economic storm relatively well', while GDP fell in only six African countries in 2009 (Keeley and Love 2010: 38-9). (The nature of the crisis around the world is summarized by Lane and Milesi-Ferretti 2011. See also UN Department of Economic and Social Affairs 2011.) OECD economies contracted significantly in the GR but, as we show, there is a diversity of experience among the countries we consider.
Our focus on the GR's distributional impact means that we do not consider the question of whether earlier changes in the distribution of income helped cause the GR, for example whether the boom was unsustainable in part because of what had happened to the distribution of incomes during that period. As noted by Atkinson and Morelli (2010) in their extensive review of inequality and banking crises over the last hundred years, this is a possibility that has been suggested by a number of commentators including former Chief Economists of the World Bank and the International Monetary Fund. Investigation of the topic is outside the remit of our book: see Atkinson and Morelli (2011) for further discussion.