“A rising tide lifts all boats.” This phrase, attributed to John F. Kennedy but actually coined by a regional New England chamber of commerce, is a common way to express the notion that economic growth is by definition good for all. It’s certainly an appealing metaphor, and when thought of literally appears unassailably true. But is it?
A recent study from the National Bureau of Economic Research and reported by the Washington Post, suggests not. In an earlier era, the basis for this “rising tide” analogy was that growing businesses generate more jobs and higher wages, which help the people who have those jobs. However, experience in the past few decades has shown that business growth does not necessarily translate to growth in either jobs or wages, and corporate profits have grown markedly faster than wages for workers. Another rationale for the rising tide lifting all boats arose in an era where, thanks to the prevalence of defined contribution retirement plans like 401(k), the majority of households own stock. Corporate profits are returned to shareholders in the form of dividends and higher stock prices. One way to increase profit is to raise prices. Such higher prices that could hurt consumers should be offset if those same consumers were also shareholders.
Again, facts trump theory. Using data from several US government sources, researchers found that because consumption and equity ownership are unequally distributed, rising prices serve to shift resources from low- and middle-income individuals to the wealthy. Lower income consumers pay far more in the higher prices than they get from any equity increase. The net effect of this reverse Robin Hood effect was a shift in 3% of national household income from poor to rich in 2016.
Think about that the next time a pharma company jacks up the price of an Epi-Pen or some other life-saving drug. Watch how much higher the corporate yacht floats.