Economic growth, inequality, and well-being

Abstract

In advanced industrial societies, rising levels of inequality have contributed strongly to the observed gap that has emerged between per capita income and the Index of Sustainable Economic Welfare (ISEW), which in its current versions is known as the Genuine Progress Indicator (GPI). Yet the ISEW/GPI approach to measuring the social costs of inequality has been criticized as ad hoc. The present paper reviews the literature on this topic and efforts to resolve it based on the construction of indicators grounded in: (a) a classical utilitarian ethical framework; and (b) empirical evidence on the relationship between income and well-being. In the United States, after-tax income per capita grew at an annual rate of 1.7% between 1979 and 2011. A growth rate of 1.2% per year arises when income is adjusted to account for the social costs of inequality. The most common adjustment used in ISEW/GPI studies yields a similar growth rate despite much smaller subtractions from baseline income.