Economists don't have an exact way of calculating economic growth potential but it is clearly related to the amount and quality of the factors of production. The most important factors are labor, capital equipment and technology. Tim Taylor reviews a study from the Cato Institute which suggests that it will become increasingly hard for the US economy to increase its growth rate. The number of hours worked per capita are not growing, and the rate of savings and investment in physical capital has been declining. The productivity of labor had been rising, along with a rise in the quantity of schooling, but the growth in education has been flat since its peak in 1970. There is a potential for new technologies to increase the productivity rate, but productivity seems to have peaked despite an increase in the number of workers engaged in science, technology and mathematics.
The rate of economic growth can have an impact on a nation's standard of living. The rule of 70 provides an useful way of looking at the relationship between the economic growth rate and living standards. If we divide the growth rate into 70 we can determine how many years it will take the economy to double in size. For example, it will take 70 years for the economy to double at 1% and 35 years to double at a 2% growth rate. Consequently, one of the implications of a slower growth rate is that living standards will not grow at the rate to which many western nations have become accustomed. That in turn raises some interesting questions.
In recent years most of the growth in national income has gone to those in the top income brackets. If that trend continues the standard of living for the majority of Americans will remain stagnant. On the other hand, the rate of economic growth does have an impact on politics. If we assume that our polity differs primarily on the importance of social welfare programs and tax rates, a high rate of economic growth makes it easier to maintain social welfare programs without raising taxes. A slow rate of economic growth, however, leads to the kind of politics that we are currently experiencing. Those with modest incomes are concerned about a loss of funding for social welfare programs, and those with high incomes worry about a potential increase in their taxes. Much of the political noise about budget deficits in rich nations is between those who are concerned about the erosion of social welfare programs and those who don't want to pay for them.
Global warming raises another interesting question about economic growth. If we decide to lower the global economic growth to deal with the potential harm from global warming, we will have to decide how the burden of slower global growth will be shared. Some believe that living standards are already very high in the rich countries, and that we should allocate future economic growth to poor countries. It has been very difficult for nation states, who place national interest above other factors, to make decisions about the management of the global economy. It is also not clear that nation states have to ability to make these decisions. Large multinational corporations make most of the decisions that affect the global economic growth rate and where that growth will occur. They will continue to make investments where they see the most opportunity for growth and profits. Slower economic growth in rich nations may already have been determined by their investment strategies. The political divide in rich nations between those who support social welfare programs, and those who favor lower taxes, may be with us for some time. This will test the ability of nation states to operate in world where the economy has been globalized.
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