The Role of the Poor in Economic Growth: Overcoming Supply and Demand Constraints

Economic growth is a complex interplay of demand and supply. While supply constraints can significantly hinder growth, the contribution of the poor is crucial, particularly in addressing demand shortfalls. This article explores how the poor can and should contribute to economic growth, highlighting both historical and current perspectives.

Understanding GDP and Demand

Consumer spending and investment are pivotal drivers of economic growth, as measured by GDP (Gross Domestic Product). GDP tracks the sales of new, not yet used goods and services to final users. Almost every transaction in the economy, whether it is a household purchasing electricity or an individual buying a hot water heater, is a two-sided affair, where both buyers and sellers participate. The poor, often categorized as a situational and heterogeneous group, play a significant role in this two-way market dynamic.

Demographic Impact on Demand

In 2012, the U.S. economy was operating at 94% of its potential capacity, facing sluggish demand. This resulted in a GDP growth rate of only 2.25%, falling short of the 3.2% potential by approximately 150 billion dollars. On average, every 113,000 dollars added or subtracted from GDP demand added or subtracted approximately 57,000 dollars in wages and salaries. This demonstrates the significant impact that even small economic changes can have on job creation and wage growth.

While some of this poor demand was due to cautious spending and over-saving, there was a considerable shortfall that needed to be addressed. The bottom tenth of the population, whether as individuals, households, small businesses, or local governments, had a significant influence on GDP demand, contributing to as much as 113,000 dollars in changes. Addressing this shortfall through contributions from all demographic groups was crucial to achieving the necessary GDP growth.

Solving the Supply Constraint

According to the Congressional Budget Office (CBO), in the decade from 2019 to 2029, the U.S. is forecasted to operate near full capacity, with GDP growing at a rate below 2% per year. This means that not only is the economy already operating close to its capacity but also that we must focus on growing demand rather than just sending out more money. To fill the remaining capacity, we need to increase not just demand but also our supply capabilities.

In 2022, the CBO forecasted that U.S. GDP will be running at 100% capacity, nearly achieving full employment with a 4.6% unemployment rate. However, the actual GDP growth rate is expected to be 1.6%, significantly lower than the potential 3.2%. This means that the economy will miss out on a substantial amount of economic activity, approximately 316 billion dollars. This "miss" is irreversible, as there is no mechanism for catching up lost growth.

Based on the CBO's forecast of 152.8 million full-time equivalent employees, filling the demand gap would require adding another 2.4 million employees. While this is no small feat, expanding the workforce to 156.2 million would reduce the unemployment rate to a near-zero 3%. However, this would lead to a recruiter's nightmare, making it extremely challenging to find new candidates.

Including the Poor in the Growth Strategy

To achieve economic growth, we need to widen our net and include almost anyone, regardless of economic status. Poor individuals have much to gain as demand exceeds supply, making them valuable participants in the growth process. Their contributions can significantly impact job creation and overall economic stability.

Conclusion

Everyone, including the poor, counts. The message from both 2012 and 2022 is clear: every GDP transaction is crucial to future capacity. As we move forward, we need to address demand constraints and understand that jobs and wages are created by aggregate economic activity. The economic trends and federal budgets must be carefully managed to ensure that income changes do not have adverse effects. By working together, we can achieve robust and inclusive economic growth.