The U.S. Bureau of Economic Analysis late last week released revised data showing that in the third quarter, the U.S. economy grew at an annual rate of 3.2 percent. This was deservedly celebrated as good news—growth was higher than previously reported, which means more economic activity and, with that, presumably, more jobs and better incomes. Yet that same data revealed nothing about how the economy is performing for people across the income spectrum.
New data released this week from economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman addresses this knowledge gap. Based on careful research that matches data on aggregate economic growth to individual incomes, the researchers show that between 1980 and 2014, on average, pre-tax income grew by 61 percent over that period, yet most of the U.S. population did not benefit from this growth. The bottom 50 percent of the population saw only a 1 percent growth in their pre-tax incomes (after adjusting for inflation) while those in the top 1 percent saw their incomes rise by 205 percent.
These Distributional National Accounts—developed by the three economists and co-collaborators working at the Paris School of Economics, the University of California-Berkeley, Oxford University, and Harvard University—provide policymakers and economists alike with a better way of understanding economic growth—one that directly connects the analysis of aggregate economic data with the real-life circumstances of individuals.
For generations, economists relied on very broad national income and product accounts to report on economic activity. These data—the National Income and Product Accounts—aggregate information from all the businesses, households, and governments across the economy to discern the total value of goods and services sold, the total incomes received, and what share comes from various sources, such as earnings, interest, rent, or government payments. The data also show how much the United States sells to other countries and buys from abroad.
This data is central to understanding how the U.S. economy works, but it is important to remember that policymakers more than a half-century ago made a choice about how to discern what was happening in the economy—one that did not take into consideration the consequences of economic growth on individuals but which suited the economic issues of the era. In the 1930s, in the wake of the Great Depression, the U.S. Commerce Department commissioned Nobel laureate Simon Kuznets to develop a set of national economic accounts. This was a time when promoting growth (and the jobs that come with it) was the nation’s priority. Prior to this, policymakers, business leaders, and families had to rely on a hodgepodge of data to infer what was going on in the economy.
Make no mistake, Kuznets’ National Income and Product Accounts have served their purpose over time and are among the most significant data developments of the 20th century. The data remain one of the most important tools that the Federal Reserve Board and other policymakers have to understand and manage the U.S. economy toward full employment. Historians credit the implementation of these accounts as one of the key reasons the United States so effectively marshaled economic resources to fight in World War II.
Today, there is a new data frontier—understanding what growth looks like for individuals and families throughout the U.S. economy amid growing income inequality. The data that underpins the new Distributional National Accounts can help policymakers understand why, even though the economy grew by 16 percent in the wake of the Great Recession, millions of Americans report that the economy is not working for them any better than it was amid the worst economic downturn since the Great Depression. Those millions of individual Americans and their families get it—most have not benefitted from more than seven years of growth. Distributional National Accounts enable policymakers to understand whether and how income inequality affects economic growth.