Tuesday, 9 July 2013

Rising tides lift all boats

I've been thinking about something else Prof John Quiggin said in his keynote address last week to the NZAE annual conference. Along with his other criticisms of microeconomic reform, in passing he had a swipe at how 'trickle down' economics had been discredited, as had the idea that 'rising tides lift all boats'. I suppose the central questions he was thinking about were whether deregulation, liberalisation and the dividends from economic growth benefitted the many or the few: presumably he was saying, the few.

And yet the evidence is that good economic conditions benefit both the better placed and the more marginalised. The graph below shows the unemployment rate in the US for everyone (the red line) and for black people (the blue line). The shaded bits are recessions. It's taken straight from the St Louis Fed's excellent (and free)  FRED database of US and international data.

Quiggin may be right in one sense - things aren't the same for everyone. The black unemployment rate is systematically higher than the national one: as a rough rule of historical thumb, the black unemployment rate is twice the national average. In that sense, I suppose, you could say that 'trickle down' hasn't brought peace and plenty in equal measures to everyone: economic and social outcomes remain a lot better for some groups than others, and for very long periods of time.

But the 'rising tide' argument is harder to dismiss. It's very clear from the graph that when overall economic conditions improve, the unemployment rate falls for everyone. Indeed, if you really want to make a dent in unemployment rates for minorities or the more disadvantaged in society, by far the best way is to make it easy for the economy to grow at a fast rate for a sustained period. The long boom of the Clinton years was the longest peace-time business expansion in America's history, and it led to the lowest rate of black unemployment in a generation (I went back on FRED as far as I could, which was 1972). You can think what you like about Bill Clinton, but the growth that occurred on his watch produced a large gain in minority group welfare.

The same is likely to be true here, too. Currently our unemployment rate for Europeans is 4.7%, for Asians 6.9%, for Maori 15.0%, and for Pacific people 15.2%. The only thing in the short to medium term that will bring all those rates down, and close the gaps between them, is a period of sustained economic growth: the rising tide will do its work.

You could always read the graph the other way - that in recession, the black unemployment rate rises much more than the overall national one (certainly in absolute terms, though in percentage terms they behave similarly). That's true, too. It's another reason, by the way, for countries to think long and hard about the austerity route. Or better still for countries to stick to responsible, sensible macropolicy, so that the austerity route never needs to be taken.

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