A new study concludes that speedy economic growth without an accompanying rise in income transfers fails to help low-income households. The study, conducted by Lane Kenworthy, a professor at the University of Arizona, looked at low and middle income households in 17 countries between 1979 and 2005 and found that in countries with increased growth but no boost in income transfers, low-income households saw little benefit.
However, in countries where programs benefiting the poor accompanied growth, living standards for the poor increased. The Financial Times reports:
“Growth does not automatically trickle down to the bottom,” said James Plunkett, secretary to Resolutions’s Commission on Living Standards.
The study looked not just at what happened to post-tax incomes during periods of faster and slower growth but also the effects of the transfer of a variety of benefits of cash or near-cash benefits.
All of the countries that saw living standards rise for lower income groups – the UK, Norway, Sweden, Finland and Denmark – had programmes in place when economic activity was strong that benefited low-earning households.
However, in countries that had few or no transfer programmes in place during high-growth periods – the US, Canada and Switzerland – low-earning households saw little benefit. This finding means “that as a general rule, growth has not trickled down to low income households through wages or employment”, the report concludes.
Last week, Rep. Paul Ryan, the chairman of the House Budget Committee, released a response to the Congressional Budget Office’s recent report on income inequality. In it, Ryan advocates for a growth-centered strategy to helping the poor, exactly the kind of strategy the report rejects. As Ezra Klein notes, not only would Ryan’s plan fail to help the poor, it would actually increase inequality. The top 1 percent of income earners would save $350,000 under the plan while the bottom 20 percent would lose $393.