Return to growth must benefit all – not just the rich

Economists love measuring things. We love ranking things even more -- economists even produce rankings of one another. The biggest quantity economists measure (and rank) is a country's economic growth. But what is "growth", and why the obsession with it?

Economists try to measure the total value output of the economy in a given year.

So imagine Ireland only produces TVs. If, last year, Ireland produced 100 TVs, and this year Ireland produces 105 TVs, then the economy has "grown" by 5pc in one year. If in the next year the economy produces only 100 TVs again (let's pretend there was a TV bubble), the economy "shrank" by just under 5pc.

So far so boring. You've just spent three years measuring TVs. Who cares?

Well, you should care. The fact that more people have more income, either from increased wages or increase borrowing, means they can buy more TVs, which means the guy who makes the TVs might hire more people, and the lady who sells the TVs might hire more people, reducing the unemployment rate.

The reverse is clearly true when demand for TVs goes down. Inventories of TVs go up, the profits of the TV makers and sellers go down, and people start getting laid off, no longer paying income taxes and instead drawing the dole.

Growth is a virtuous cycle. The opposite of growth is a vicious cycle. So we should measure, and care, about growth.

But now let's say there are 10 people in the economy, and say the 10th guy is 10 times richer than the other nine. Say his income went up, and he bought all the extra TVs for his many, many mansions. The other nine people are relatively worse off. This is an unequal society.

According to the growth statistic, the economy is doing much better. But on the ground, when the bottom nine guys look out the window, it doesn't look much better, does it?

So we must be careful when thinking about growth without thinking about distribution.

Across the developed world over the past 30 years, increases in the top 10pc have far exceeded increases in the middle 10pc.

The top 1pc has done much better than the top 10pc, and the top 0.1pc has pulled very far away from the rest of the top 1pc.

Much of the "growth" we've seen is just very rich people getting richer. But does this matter? If the absolute level of income is going down for nine out of 10 people, then surely the economy must be doing worse?

The recent results of the Survey on Income and Living Conditions in Ireland show that, between 2009 and 2010, the bottom 90pc of the population experienced large drops in their disposable income, while the top 10pc actually experienced an increase. Remember, from 2009 to 2010 the unemployment rate went from just under 12pc to just over 14pc, and the economy shrank by more than 7pc.

Inequality distorts the growth picture massively. Growth does not magically lift everyone out of poverty, nor does it automatically increase the living standards of everyone without large redistributive efforts by the government.

Relative to many developed countries, in Ireland we actually do a lot of redistribution toward the poorer segments of society, but clearly when the economy experiences a downturn as severe as the one we've just experienced, and one segment of the population actually improves its position relative to the rest of society, we must pay attention.

In particular, we need to think carefully about the role of distribution -- who gets what -- and growth, how much more or less "what" gets made.

Luckily we have talented people who study this connection, particularly in UCD and the ESRI. We need to hear more from them.

Otherwise next year's measured growth might just be one guy buying 10 new TVs.

Published in the Irish Independent.