Listen to anyone talking about Occupy Wall Street and inevitably, rising inequality will emerge as one of the main concerns. And, rightfully so. The United States now has income inequality levels on par with countries like Mexico and Argentina.
While a growing body of research documents the many negative effects of economic inequality, these impacts are not reflected in any national accounting measure. Fortunately, though, there is progress on the state level.
We’ve written before on how Maryland adopted a new accounting measure called the Genuine Progress Indicator (GPI), which gauges sustainable economic growth instead of just gross state product. A new post by the director of the GPI, Sean McGuire, details exactly how income inequality affects the GPI. McGuire goes through the variables that are taken into account when calculating the GPI and reveals that income inequality is by far the biggest factor influencing the GPI because income inequality drags down the overall value of personal consumption. In the GPI calculations, large gains by just a few members of society reflect negatively on overall economic well-being and genuine progress. Intuitively, this makes sense.
It is the inclusion of things like income inequality that makes the GPI is a more complete measure of economic well-being than Gross Domestic Product (GDP) calculations. GDP looks mainly at the output of goods and services produced during a certain time period and measures growth by consumption levels. So, increased consumption equals increased GDP, which in turn is reported as economic growth even though unemployment and poverty levels remain high.
The GPI, on the other hand, includes many other measures beyond consumption. In incorporates 26 factors in three categories: economic, social and environmental. It takes into account positives, including the value of production in the home and community volunteering, which are not counted in GDP measurement, as well as various negatives, including income inequality, environmental degradation and the social costs of crime and divorce. As a result, the GPI numbers lag behind the state’s gross product and in the past few years, have stalled while the gross product has increased.
A big reason the GPI has stalled is income inequality. Income inequality negatively impacts the GPI because it brings down the over all progress calculation. The GPI accounting starts with the Adjusted Personal Consumption, which is a reflection of how many people are participating consumers. The equation is simple:
Adjusted Personal Consumption= Personal Consumption Expenditures/ Income Inequality
If just a small number of wealthy citizens benefits, the Adjusted Personal Consumption will grow more slowly due to higher levels of income inequality. If personal consumption rises in a way that benefits many people, the Adjusted Personal Consumption will grow more quickly because income inequality will be a smaller number.
Once the Adjusted Personal Consumption is calculated, every “cost” indicator, such as crime or pollution, is subtracted and every “value, ” such as home production or volunteer work, is added. The higher the Adjusted Personal Consumption, the higher the GPI starting point. Because Maryland’s income inequality grew to $40.4 billion in 2010, it brought down the overall Adjusted Personal Consumption level. If Maryland had income inequality levels on par with 2000, the Adjusted Personal Consumption level would start at a much higher level and the overall GPI would have increased 4.15 percent, as opposed to the actual increase of only 0.25 percent.
Accurately measuring the state of the economy by including accounting measures beyond GDP provides a more complete picture of overall economic well-being. The Maryland GPI shows the impact that income inequality has on progress. Given that the income of the top 1 percent grew 275 percent over the last three decades, can you imagine what a national GPI would show?