Economic Growth: A Necessary but Not Sufficient Condition

Vigorous economic growth is not a panacea for all social problems, but it is an important precondition for achieving the goals presented in this report. Only a strong economy will generate a supply of jobs that complements much-needed investments in children and young people. A vigorous economy is also vital to the peculiarly American system of employment-related social welfare protection. To benefit from work-based "credits" and social insurance, one must first gain access to them. Providing sufficient access requires generating enough jobs for the working-age population.

There is a clear relationship between the pace of economic growth and the reduction of poverty rates. Slow growth during the 1973-83 decade increased poverty rates by 4.5 percentage points and reduced by about 20 percent the share of the total national income that the poorest fifth of the population received. A stagnant economy leaves our social welfare system with unmanageable "zero sum" choices. Any addition to the standard of living for one group must come from a reduction in the living standard of another group. Strong economic performance makes it much easier to meet one set of social needs without reneging on other commitments.

For all these reasons, a solid social welfare policy for the United States depends on a sound economy. Unfortunately, between 1973 and the mid-1980s the U.S. experienced higher than normal rates of unemployment, stagnant real wages per worker, and sluggish productivity. Annual productivity increases, which had averaged 3.3 percent between 1947 and 1965 and 2.5 percent between 1966 and 1973, slowed to less than one percent between 1974 and 1982. After rising throughout the postwar years, wages adjusted for inflation stopped growing and in some cases actually declined from 1973 through the mid-1980s.

Economic stagnation created greater inequality among Americans in terms of their lifetime prospects for material well-being. Following the early 1970s, fewer jobs paid enough for their holders to afford a middle-class standard of living. Those who had already attained such a standard often could not keep up, while those who had not attained it had to struggle harder and more often failed.

In the past two or three years there has been some improvement in economic conditions. Real output and productivity have grown at a brisk pace, and the depreciation of the U.S. dollar against the yen and several European currencies has helped spark a recovery in exports. Job growth has been substantial and unemployment is relatively low. Demographic forces portend tight labor markets in the future.