“Shared prosperity” is a common phrase in current development policy discourse. Its most widely used operational definition—the growth rate in the average income of the poorest 40% of a country’s population—is a truncated measure of change in social welfare. A related concept, the shared prosperity premium—the difference between the growth rate of the mean for the bottom 40% and the growth rate in the overall mean—is similarly analogous to a measure of change in inequality. This article reviews the relationship between these concepts and the more established ideas of social welfare, poverty, inequality, and mobility. Household survey data can be used to shed light on recent progress in terms of this indicator globally. During 2008–2013, mean incomes for the poorest 40% rose in 60 of the 83 countries for which we have data. In 49 of them, accounting for 65% of the sampled population, it rose faster than overall average incomes, thus narrowing the income gap. In the policy space, there are examples both of “pre-distribution” policies (which promote human capital investment among the poor) and “re-distribution” policies (such as targeted safety nets), which when well-designed have a sound empirical track record of both raising productivity and improving well-being among the poor.
Shared Prosperity: Concepts, Data, and Some Policy Examples
Francisco H. G. Ferreira, Emanuela Galasso, and Mario Negre
Assessments in Education
Hans Henrik Sievertsen
Assessments like standardized tests and teacher evaluations are central elements of educational systems. Assessments affect the behaviour of students, teachers, parents, schools, and policymakers through at least two channels: The information channel and the incentive channel. Students use the information to adjust study effort and to guide their course selection. Schools and teachers use information from assessments to evaluate teaching quality and the effectiveness of the applied methods. Educational programs use information from assessment results to sort students in educational programs and employers use the results as signals of productivity in their hiring decisions. Finally, policymakers use assessments in accountability systems to reward or penalize schools, and parents use information from assessment results to select schools. The incentive channel is a natural consequence of the information channel: Students are incentivized to work hard and do well in assessments to get access to educational programs and jobs. Teachers and schools are incentivized to do well to receive rewards or avoid punishments in accountability systems. The information channel is important for ensuring the most efficient human capital investments: students learn about the returns and costs of effort investments and about their abilities and comparative advantages. Teachers and schools learn about the most effective teaching methods. However, because of the strong incentives linked to assessments, both students and teachers might focus on optimizing assessment results at the cost of learning. Students might for example select tracks that maximize their grades instead of selecting tracks aligned with their interests and comparative advantages. Understanding the implications of assessments for the behaviour of students, parents, teachers, and schools is therefore necessary to achieve the overall goals of the educational system. Because education affects lifetime earnings, health, and well-being and assessments play an important role in individuals’ educational careers, assessments are also important for efficiency and equity across domains. Biases in assessments and the heterogeneity in access to assessments are sources of inequality in education according to gender, origin, and socioeconomic background. Finally, because assessment results also carry important consequences for individuals’ educational opportunities and in the labor market, they are a source of stress and reduced well-being.
Racial Inequality Across Income Volatility and Employment
Michael Carr and Bradley L. Hardy
Volatility is an under-explored facet of economic insecurity, and it further helps to characterize otherwise omitted nuance in the economic situation facing many socioeconomically disadvantaged groups. Defined as a measure of short-run intragenerational mobility, standard measures of volatility leverage panel data in order to estimate higher moments of the growth rate of earnings or income, most often as variance transformations. Broadly, volatility can arise from one of two sources: instability in earnings among the continuously employed due to variable hours, hourly earnings, or salary changes; and/or instability in employment. The current literature shows that while both sources play an important role in the level of volatility for both men and women, trends are similar whether or not employment instability is accounted for, with overall declines in volatility for women and a largely flat trend for men over the last 40 years. The overall flat trend in volatility for men does seem at odds with other evidence that shows falling labor force participation for working-age men, and for Black men in particular. The link between these two processes—earnings changes over short periods of time and weekly or monthly snapshots of employment and labor force participation—remains largely absent from the literature because the most commonly used panel data sets are unable to capture within-year fluctuations in employment instability. Whether declining labor force participation for men increases or decreases volatility depends on whether there is a bifurcation in employment where some men are consistently employed over longer time horizons and some are not employed at all, or if declines in labor force participation at a point in time reflect increasing instability in employment over time. If the latter is true, then volatility could increase and could result in notably different trends in volatility over time by both race and gender.
The Macroeconomics of Stratification
Stratification economics, which has emerged as a new subfield of research on inequality, is distinguished by a system-level analysis. It explores the role of power in influencing the processes and institutions that produce hierarchical economic and social orderings based on ascriptive characteristics. Macroeconomic factors play a role in buttressing stratification, especially by race and gender. Among the macroeconomic policy levers that produce and perpetuate intergroup inequality are monetary policy, fiscal expenditures, exchange rate policy, industrial policy, and trade, investment, and financial policies. These policies interact with a stratification “infrastructure,” comprised of racial and gender ideologies, norms, and stereotypes that are internalized at the individual level and act as a “stealth” factor in reproducing hierarchies. In stratified societies, racial and gender norms and stereotypes act to justify various forms of exclusion from prized economic assets such as good jobs. For example, gendered and racial stereotypes contribute to job segregation, with subordinated groups largely sequestered in the secondary labor market where wages are low and jobs are insecure. The net effect is that subordinated groups serve as shock absorbers that insulate members of the dominant group from the impact of negative macroeconomic phenomena such as unemployment and economic volatility. Further, racial and gender inequality have economy-wide effects, and play a role in determining the rate of economic growth and overall performance of an economy. The impact of intergroup inequality on macro-level outcomes depends on a country’s economic structure. While under some conditions, intergroup inequality acts as a stimulus to economic growth, under other conditions, it undermines societal well-being. Countries are not locked into a path whereby inequality has a positive or negative effect on growth. Rather, through their policy decisions, countries can choose the low road (stratification) or the high road (intergroup inequality). Thus, even if intergroup inequality has been a stimulus to growth in the past, it is possible to choose an equity-led growth path.
Disability and Economic Development
While definitional and measurement problems pose a challenge, there is no doubt that disability affects a noticeable share of the population, the vast majority of whom live in low- and middle-income countries (LMICs). The still comparatively scarce empirical data and evidence suggests that disability is closely associated with poverty and other indicators of economic deprivation at both the country and—if with slightly greater nuance—at the individual/household level. There is also a growing body of evidence documenting the sizeable additional costs incurred by persons with disabilities (PwDs) as a direct or indirect consequence of their disability, underlining the increased risk of PwDs (and the households they are part of) falling under the absolute poverty line in any given LMIC. Looking ahead, there remains considerable scope for more evidence on the causal nature of the link between disability and poverty, as well as on the (cost-)effectiveness of interventions and policies attempting to improve the well-being of PwDs.
Economic Development in Spain, 1815–2017
Leandro Prados de la Escosura and Blanca Sánchez-Alonso
In assessments of modern-day Spain’s economic progress and living standards, inadequate natural resources, inefficient institutions, lack of education and entrepreneurship, and foreign dependency are frequently blamed on poor performance up to the mid-20th century, but no persuasive arguments were provided to explain why such adverse circumstances reversed, giving way to the fast transformation that started in the 1950s. Hence, it is necessary to first inquire how much economic progress has been achieved in Spain and what impact it had on living standards and income distribution since the end of the Peninsular War to the present day, and second to provide an interpretation. Research published in the 2010s supports the view that income per person has improved remarkably, driven by increases in labor productivity, which derived, in turn, from a more intense and efficient use of physical and human capital per worker. Exposure to international competition represented a decisive element behind growth performance. From an European perspective, Spain underperformed until 1950. Thereafter, Spain’s economy managed to catch up with more advanced countries until 2007. Although the distribution of the fruits of growth did not follow a linear trend, but a Kuznetsian inverted U pattern, higher levels of income per capita are matched by lower inequality, suggesting that Spaniards’ material wellbeing improved substantially during the modern era.
Equality of Opportunity in Health and Healthcare
Florence Jusot and Sandy Tubeuf
Recent developments in the analysis of inequality in health and healthcare have turned their interest into an explicit normative understanding of the sources of inequalities that calls upon the concept of equality of opportunity. According to this concept, some sources of inequality are more objectionable than others and could represent priorities for policies aiming to reduce inequality in healthcare use, access, or health status. Equality of opportunity draws a distinction between “legitimate” and “illegitimate” sources of inequality. While legitimate sources of differences can be attributed to the consequences of individual effort (i.e. determinants within the individual’s control), illegitimate sources of differences are related to circumstances (i.e. determinants beyond the individual’s responsibility). The study of inequality of opportunity is rooted in social justice research, and the last decade has seen a rapid growth in empirical work using this literature at the core of its approach in both developed and developing countries. Empirical research on inequality of opportunity in health and healthcare is mainly driven by data availability. Most studies in adult populations are based on data from European countries, especially from the UK, while studies analyzing inequalities of opportunity among children are usually based on data from low- or middle-income countries and focus on children under five years old. Regarding the choice of circumstances, most studies have considered social background to be an illegitimate source of inequality in health and healthcare. Geographical dimensions have also been taken into account, but to a lesser extent, and more frequently in studies focusing on children or those based on data from countries outside Europe. Regarding effort variables or legitimate sources of health inequality, there is wide use of smoking-related variables. Regardless of the population, health outcome, and circumstances considered, scholars have provided evidence of illegitimate inequality in health and healthcare. Studies on inequality of opportunity in healthcare are mainly found in children population; this emphasizes the need to tackle inequality as early as possible.
Childcare and Children’s Development: Features of Effective Programs
Jo Blanden and Birgitta Rabe
Governments around the world are increasingly investing resources for young children, and universal provision of early childhood education and care (ECEC) has become widespread. Children’s development is affected by the investments they receive both within and outside the household. A simple theoretical framework predicts that the provision of public childcare will improve children’s development if it offers more stimulation than the care it replaces. Generally, carefully designed studies show that the provision of early childcare is beneficial, especially for children from disadvantaged backgrounds. This is in line with expectations that the alternative care experienced by children from less affluent, less educated, and immigrant backgrounds is likely to be of lower quality. Interestingly, however, studies show that the children who would benefit the most are least likely to receive care, providing a challenge for policy makers. Some programs, such as the $5-per-day childcare in Quebec, have negative effects and therefore may be of poor quality. However, comparing results across programs that vary in several dimensions makes it difficult to separate out the ingredients that are most important for success. Studies that focus on identifying the factors in ECEC that lead to the greatest benefit indicate that some standard measures such as staff qualifications are weakly linked to children’s outcomes, whereas larger staff–child ratios and researcher-measured process quality are beneficial. Spending more time in high-quality childcare from around age 3 has proved to be beneficial, whereas the effect of an increase in childcare for younger children is particularly sensitive to each program’s features and context.
Gene–Environment Interplay in the Social Sciences
Rita Dias Pereira, Pietro Biroli, Titus Galama, Stephanie von Hinke, Hans van Kippersluis, Cornelius A. Rietveld, and Kevin Thom
Nature (one’s genes) and nurture (one’s environment) jointly contribute to the formation and evolution of health and human capital over the life cycle. This complex interplay between genes and environment can be estimated and quantified using genetic information readily available in a growing number of social science data sets. Using genetic data to improve our understanding of individual decision making, inequality, and to guide public policy is possible and promising, but requires a grounding in essential genetic terminology, knowledge of the literature in economics and social-science genetics, and a careful discussion of the policy implications and prospects of the use of genetic data in the social sciences and economics.
Race and the Economics Professoriate in the United States
Gregory N. Price
In 1894, W. E. B. Dubois completed coursework for a doctorate in economics at the University of Berlin, and in 1921, Sadie Alexander was the first Black American to earn a doctorate in economics at the University of Pennsylvania. Notwithstanding these rare early accomplishments by Black Americans in economics, there seems to be a more than one century “color line” in the hiring of Black economists in the United States academic labor market. The persistence of Black economist underrepresentation in economics faculties in the United States suggests that a color line constraining the hiring of Black economics faculty endures. In general, and in particular among economics doctorate–granting institutions in the United States, when sorting them by the number of Black Americans on the economics faculty, the median economics department has no Black economics faculty. Findings from the extant literature on the hiring and representation of Black economists suggest that the underrepresentation of Black PhD economists in economics faculties is consistent with, and conforms to, a history of racially discriminatory employment exclusion. This color line could be constraining the production of economics knowledge that can inform public policies that would reduce racial inequality and improve the material living standards of Black Americans in the United States. Future research on the underrepresentation of Black PhD economists in economics faculties in the United States could potentially benefit from accounting for unobservables that may matter for the supply and demand of Black PhD economists. This includes, but is not limited to, what is not observed about individual PhD economist mentoring experiences and parental occupational backgrounds.
Poverty and Social Policy in the United States
James P. Ziliak
The interaction between poverty and social policy is an issue of longstanding interest in academic and policy circles. There are active debates on how to measure poverty, including where to draw the threshold determining whether a family is deemed to be living in poverty and how to measure resources available. These decisions have profound impacts on our understanding of the anti-poverty effectiveness of social welfare programs. In the context of the United States, focusing solely on cash income transfers shows little progress against poverty over the past 50 years, but substantive gains are obtained if the resource concept is expanded to include in-kind transfers and refundable tax credits. Beyond poverty, the research literature has examined the effects of social welfare policy on a host of outcomes such as labor supply, consumption, health, wealth, fertility, and marriage. Most of this work finds the disincentive effects of welfare programs on work, saving, and family structure to be small, but the income and consumption smoothing benefits to be sizable, and some recent work has found positive long-term effects of transfer programs on the health and education of children. More research is needed, however, on how to measure poverty, especially in the face of deteriorating quality of household surveys, on the long-term consequences of transfer programs, and on alternative designs of the welfare state.
Human Capital Inequality: Empirical Evidence
Brant Abbott and Giovanni Gallipoli
This article focuses on the distribution of human capital and its implications for the accrual of economic resources to individuals and households. Human capital inequality can be thought of as measuring disparity in the ownership of labor factors of production, which are usually compensated in the form of wage income. Earnings inequality is tightly related to human capital inequality. However, it only measures disparity in payments to labor rather than dispersion in the market value of the underlying stocks of human capital. Hence, measures of earnings dispersion provide a partial and incomplete view of the underlying distribution of productive skills and of the income generated by way of them. Despite its shortcomings, a fairly common way to gauge the distributional implications of human capital inequality is to examine the distribution of labor income. While it is not always obvious what accounts for returns to human capital, an established approach in the empirical literature is to decompose measured earnings into permanent and transitory components. A second approach focuses on the lifetime present value of earnings. Lifetime earnings are, by definition, an ex post measure only observable at the end of an individual’s working lifetime. One limitation of this approach is that it assigns a value based on one of the many possible realizations of human capital returns. Arguably, this ignores the option value associated with alternative, but unobserved, potential earning paths that may be valuable ex ante. Hence, ex post lifetime earnings reflect both the genuine value of human capital and the impact of the particular realization of unpredictable shocks (luck). A different but related measure focuses on the ex ante value of expected lifetime earnings, which differs from ex post (realized) lifetime earnings insofar as they account for the value of yet-to-be-realized payoffs along different potential earning paths. Ex ante expectations reflect how much an individual reasonably anticipates earning over the rest of their life based on their current stock of human capital, averaging over possible realizations of luck and other income shifters that may arise. The discounted value of different potential paths of future earnings can be computed using risk-less or state-dependent discount factors.
Developmental Origins of Health Inequality
Gabriella Conti, Giacomo Mason, and Stavros Poupakis
Building on early animal studies, 20th-century researchers increasingly explored the fact that early events—ranging from conception to childhood—affect a child’s health trajectory in the long-term. By the 21st century, a wide body of research had emerged, incorporating the original fetal origins hypothesis into the developmental origins of health and disease. Evidence from Organization for Economic Cooperation and Development (OECD) countries suggests that health inequalities are strongly correlated with many dimensions of socioeconomic status, such as educational attainment, and that they tend to increase with age and carry stark intergenerational implications. Different economic theories have been developed to rationalize this evidence, with an overarching comprehensive framework still lacking. Existing models widely rely on human capital theory, which has given rise to separate dynamic models of adult and child health capital within a production function framework. A large body of empirical evidence has also found support for the developmental origins of inequalities in health. On the one hand, studies exploiting quasi-random exposure to adverse events have shown long-term physical and mental health impacts of exposure to early shocks, including pandemics or maternal illness, famine, malnutrition, stress, vitamin deficiencies, maltreatment, pollution, and economic recessions. On the other hand, studies from the 20th century have shown that early interventions of various content and delivery formats improve life course health. Further, given that the most socioeconomically disadvantaged groups show the greatest gains, such measures can potentially reduce health inequalities. However, studies of long-term impacts as well as the mechanisms via which shocks or policies affect health, and the dynamic interaction among them, are still lacking. Mapping the complexities of those early event dynamics is an important avenue for future research.
The Indian Economy After Independence
The Indian Union, from the time of independence from British colonial rule, 1947, until now, has undergone shifts in the trajectory of economic change and the political context of economic change. One of these transitions was a ‘green revolution’ in farming that occurred in the 1970s. In the same decade, Indian migration to the Persian Gulf states began to increase. In the 1980s, the government of India seemed to abandon a strategy of economic development that had relied on public investment in heavy industries and encouraged private enterprise in most fields. These shifts did not always follow announced policy, produced deep impact on economic growth and standards of living, and generated new forms of inequality. Therefore, their causes and consequences are matters of discussion and debate. Most discussions and debates form around three larger questions. First, why was there a turnaround in the pace of economic change in the 1980s? The answer lies in a fortuitous rebalancing of the role of openness and private investment in the economy. Second, why did human development lag achievements in income growth after the turnaround? A preoccupation with state-aided industrialization, the essay answers, entailed neglect of infrastructure and human development, and some of that legacy persisted. If the quality of life failed to improve enough, then a third question follows, why did the democratic political system survive at all if it did not equitably distribute the benefits from growth? In answer, the essay discusses studies that question the extent of the failure.
Economic Penalties Based on Neighborhood, and Wealth Building
Rowena Gray and Raymond Kim
Building wealth over lifetimes became possible for a broader span of the population in developed countries over the 20th century compared to any time in history. This was driven by more people having the capacity to save because of the expansion of middle-class jobs and education, access to highly developed financial markets, and government support for real estate investment. Housing wealth remains the dominant wealth-building vehicle for those outside the top decile of the income distribution. This, coupled with the high and growing level of residential segregation and local allocation of public goods in countries such as the United States, drives the unequal ability of individuals to build wealth depending on neighborhood of origin and residence. Segregated neighborhoods are drawn along racial and class lines, and while much progress has been made, historical and structural factors such as the legacy of slavery have contributed to the difficulty of fully closing the Black–White wealth gap. More generally, children who grow up in lower-status areas are significantly less likely to rise up the wealth and status ladder, and this is driven by a variety of disadvantages in those neighborhoods. These include higher levels of pollution; worse public services, especially education; and fewer prospects for jobs and training. Some of these can be changed by moving individuals and families to better neighborhoods, while the effects of a polluted environment on the development of 0- to 5-year-olds have long-lasting and often irreversible consequences. These factors have kept the “American Dream” of equality of opportunity and the ability to save and build wealth as individuals and households out of reach for significant portions of society. There is renewed interest in infrastructure investments and place-based policies to address this opportunity gap, which, due to its scale, is beginning to be recognized as having negative implications for the aggregate economy. Economists should maintain their focus on these important questions and continue to improve data sets as the range of assets in which people can build and store wealth grows.
Variations in the Adoption of Healthcare Innovation: A Literature Review
Marisa Miraldo, Katharina Hauck, Antoine Vernet, and Ana Wheelock
Major medical innovations have greatly increased the efficacy of treatments, improved patient outcomes, and often reduced the cost of medical care. However, innovations do not diffuse uniformly across and within health systems. Due to the high complexity of medical treatment decisions, variations in clinical practice are inherent to healthcare delivery, regardless of technological advances, new ways of working, funding, and burden of disease. In this article we conduct a narrative literature review to identify and discuss peer-reviewed articles presenting a theoretical framework or empirical evidence of the factors associated with the adoption of innovation and clinical practice. We find that variation in innovation adoption and medical practice is associated with multiple factors. First, patients’ characteristics, including medical needs and genetic factors, can crucially affect clinical outcomes and the efficacy of treatments. Moreover, differences in patients’ preferences can be an important source of variation. Medical treatments may need to take such patient characteristics into account if they are to deliver optimal outcomes, and consequently, resulting practice variations should be considered warranted and in the best interests of patients. However, socioeconomic or demographic characteristics, such as ethnicity, income, or gender are often not considered legitimate grounds for differential treatment. Second, physician characteristics—such as socioeconomic profile, training, and work-related characteristics—are equally an influential component of practice variation. In particular, so-called “practice style” and physicians’ attitudes toward risk and innovation adoption are considered a major source of practice variation, but have proven difficult to investigate empirically. Lastly, features of healthcare systems—notably, public coverage of healthcare expenditure, cost-based reimbursement of providers, and service-delivery organization, are generally associated with higher utilization rates and adoption of innovation. Research shows some successful strategies aimed at reducing variation in medical decision-making, such as the use of decision aids, data feedback, benchmarking, clinical practice guidelines, blinded report cards, and pay for performance. But despite these advances, there is uneven diffusion of new technologies and procedures, with potentially severe adverse efficiency and equity implications.
Earnings Inequality in Latin America: A Three-Decade Retrospective
Manuel Fernández and Gabriela Serrano
Latin American countries have some of the highest levels of income inequality in the world. However, earnings inequality have significantly changed over time, increasing during the 1980s and 1990s, declining sharply in the 2000s, and stagnating or even increasing in some countries since 2015. Macroeconomic instability in the region in the 1980s and early 1990s, as well as the introduction of structural reforms like trade, capital, and financial liberalization, affected the patterns of relative demand and relative earnings across skill-demographic groups in the 1990s, increasing inequality. Significant gains in educational attainment, the demographic transition, and rising female labor force participation changed the skill-demographic composition of labor supply, pushing the education and experience premiums downward, but this was not enough to counteract demand-side trends. At the turn of the 21st century, improved external conditions, driven by China’s massive increase in demand for commodities, boosted economies across Latin America, which began to grow rapidly. Growth was accompanied by a positive shift in the relative demand for less-educated workers, stronger labor institutions, rising minimum wages, and declining labor informality, a confluence of factors that reduced earnings inequality. In the aftermath of the global financial crisis, particularly after the end of the commodities price boom in 2014, economic growth decelerated, and the pace of inequality decline stagnated. There is extensive literature documenting and trying to explain the causes of recent earnings inequality dynamics in Latin America. This literature is examined in terms of themes, methodological approaches, and key findings. The focus is on earnings inequality and how developments in labor markets have shaped it.
What Drives HIV in Africa? Addressing Economic Gender Inequalities to Close the HIV Gender Gap
Aurélia Lépine, Henry Cust, and Carole Treibich
Ending HIV as a public health threat by 2030 presents challenges significantly different to those of the past 40 years. Initially perceived as a disease affecting gay men, today, HIV disproportionately affects adolescents and young women in Africa. Current strategies to prevent HIV mostly rely on using biomedical interventions to reduce the risk of infection during risky sex and to address that biologically; women are more vulnerable to HIV infection than men. Ongoing policies and strategies to end the AIDS epidemic in Africa are likely to fail if implemented alone, given they fail to address why vulnerable young women engage in risky sexual behaviors. Evidence strongly suggests economic vulnerability, rather than income level, is a primary driver of women's decision to engage in commercial and transactional sex. By viewing HIV through the lens of structural gender inequality, poverty, and use of risky sexual behaviors to cope with economic shocks, a new explanation for the HIV gender gap emerges. New and promising approaches to reduce HIV acquisition and transmission by protecting women from economic shocks and increasing their ability to participate in the economy have proven effective. Such interventions are vital to break the pattern of unequal HIV transmission against women and if HIV is to be beaten.
Measuring the Distributional Impact of Taxation and Public Spending: The Practice of Fiscal Incidence Analysis
Taxation and public spending are key policy levers the state has in its power to change the distribution of income determined both by market forces and institutions and the prevailing distribution of wealth and property. One of the most commonly used methods to measure the distributional impact of a country’s taxes and public spending is fiscal incidence analysis. Rooted in the field of public finance, fiscal incidence analysis is designed to measure who bears the burden of taxes and who receives the benefits of government spending, and who are the gainers and losers of particular tax reforms or changes to welfare programs. Fiscal incidence analysis can be used to assess the redistributive impact of a fiscal system as a whole or changes of specific fiscal instruments. In particular, fiscal incidence analysis is used to address the following questions: Who bears the burden of taxation and who receives the benefits of public spending? How much income redistribution is being accomplished through taxation and public spending? What is the impact of taxation and public spending on poverty and the poor? How equalizing are specific taxes and government welfare programs? How progressive are spending on education and health? How effective are taxes and government spending in reducing inequality and poverty? Who are the losers and winners of tax and welfare programs reforms? A sample of key indicators meant to address these questions are discussed here. Real time analysis of winners and losers plays an important role in shaping the policy debate in a number of countries. In practice, fiscal incidence analysis is the method utilized to allocate taxes and public spending to households so that one can compare incomes before taxes and transfers with incomes after them. Standard fiscal incidence analysis just looks at what is paid and what is received without assessing the behavioral responses that taxes and public spending may trigger on individuals or households. This is often referred to as the “accounting approach.” Although the theory is quite straightforward, its application can be fraught with complications. The salient ones are discussed here. While ignoring behavioral responses and general equilibrium effects is a limitation of the accounting approach, the effects calculated with this method are considered a reasonable approximation of the short-run welfare impact. Fiscal incidence analysis, however, can be designed to include behavioral responses as well as general equilibrium and intertemporal effects. This article focuses on the implementation of fiscal incidence analysis using the accounting approach.
Economic Growth in the United States, 1790 to 1860
In the early 21st century, the U.S. economy stood at or very near the top of any ranking of the world’s economies, more obviously so in terms of gross domestic product (GDP), but also when measured by GDP per capita. The current standing of any country reflects three things: how well off it was when it began modern economic growth, how long it has been growing, and how rapidly productivity increased each year. Americans are inclined to think that it was the last of these items that accounted for their country’s success. And there is some truth to the notion that America’s lofty status was due to the continual increases in the efficiency of its factors of production—but that is not the whole story. The rate at which the U.S. economy has grown over its long history—roughly 1.5% per year measured by output per capita—has been modest in comparison with most other advanced nations. The high value of GDP per capita in the United States is due in no small part to the fact that it was already among the world’s highest back in the early 19th century, when the new nation was poised to begin modern economic growth. The United States was also an early starter, so has experienced growth for a very long time—longer than almost every other nation in the world. The sustained growth in real GDP per capita began sometime in the period 1790 to 1860, although the exact timing of the transition, and even its nature, are still uncertain. Continual efforts to improve the statistical record have narrowed down the time frame in which the transition took place and improved our understanding of the forces that facilitated the transition, but questions remain. In order to understand how the United States made the transition from a slow-growing British colony to a more rapidly advancing, free-standing economy, it is necessary to know more precisely when it made that transition.