Sunday, August 31, 2008

More on Obamanomics

Returning to Barack Obama's plan for the economy, the International Herald Tribune has an article today asking "Is history siding with Obama's economic plan?" It's sort of a surprising article actually, because it highlights two trends that don't immediately seem to correspond to one another in the way highlighted:
1. Annual Growth: "Data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats."
2. Income Inequality: "Over the entire 60-year period, income inequality trended substantially upward under Republican presidents but slightly downward under Democrats, thus accounting for the widening income gaps over all." In other words, income inequality has trended slightly downward at times when economic growth was highest, instead of upward.

What this reminds me of is something I've noticed in recent articles about Brazil. As you might know, the Brazilian economy has been growing by leaps and bounds in recent years. It is the second largest economy in the Americas, after the US (yes, ahead of Canada), and the eighth largest in the world. It also has one of the highest rates of income inequality in the world. In order to address this, the current President Luiz Inácio Lula da Silva has begun a program of cash transfers known as Bolsa Familia. The result is that something like 23 milion Brazilians have indeed moved up in the class hierarchy, and the country's measurement on the Gini coefficient has dropped from 0.6 to 0.56.

In fact, it is possible that the growing economy and declining inequality are working off one another. The Economist notes: "A sense that Brazil is becoming a little more equal makes for a healthier kind of capitalism, in which the people buzzing around above São Paulo in helicopters attract less opprobrium. Brazil's billionaires appear on magazine covers and are celebrated for their skill rather than lampooned for their greed, which is new. In turn, “young entrepreneurs are realising that you don't have to be born rich or have political connections to raise capital,” says Antonio Bonchristiano of GP Investments, a private-equity firm." As a possible result, worker productivity has risen by 4.2%.

So there might be a point to Obama's interest in addressing income inequality instead of worrying about recession. To be blunt, the US is not in a recession, but Americans feel like it is. The reason for this is that, as the economy has grown, the average person's wages have not kept up with it at all. People have kept themselves afloat by taking on credit card debt, but debt is not as good an incentive as opportunity to work harder or invest more. I don't like Obama's nods towards protectionism (which I suspect are just pandering anyway); but perhaps addressing the income gap will actually stimulate growth instead of slowing it. And, conversely, it's possible that all the tax cuts for the rich aren't actually stimulating the economy all that much.

In other words, it's fairly easy to see why a growing economy could help reduce income inequality. But, it's also possible that reducing income inequality will help to stimulate the economy.

The Herald concludes: "The two Great Partisan Divides combine to suggest that, if history is a guide, an Obama victory in November would lead to faster economic growth with less inequality, while a McCain victory would lead to slower economic growth with more inequality. Which part of the Obama menu don't you like?"


gregvw said...

Are you using the definition of recession where the GDP exhibits negative growth for two consecutive quarters?

rufus said...

Ja wol. I could be wrong, but I don't think that's happened yet. However, I'm also saying that it doesn't really matter since the average income has been lousy for some time now.