The Formula For Economic Growth
Published: June 27, 2017
Economic growth increases when more people work more productively. However, economic growth has slowed in the last decade, as increases in productivity and hours worked have fallen to fractions of their previous rates. Returning to rapid economic growth will require policies that encourage individuals to rejoin the workforce and businesses to invest in physical capital.
Discussion Questions
- How can we encourage productivity among workers?
- What are some examples of technology that have improved productivity among workers?
- Why might some people choose not to participate in the labor force?
Additional Resources
- John Taylor argues for policy reforms to promote economic growth in “Can We Restart The Recovery All Over Again?”
- In “Slow economic growth as a phase in a policy performance cycle,” John Taylor discusses the reasons and policies behind our poor economic performance
- Read “A Recovery Waiting to Be Liberated” by John Taylor to learn about the policies that can speed up our economic growth
- Watch John Taylor’s testimony before the Financial Services Committee concerning monetary policy
- In an interview with Bloomberg's Kathleen Hays, John Taylor discusses the global financial instability and roles the central banks play
- Read “Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis” by John B. Taylor to learn more about the 2007-2008 financial crisis
Economic growth has been slow for the last decade.
To understand why, it helps to consider the factors that cause growth rates to change.
Economic growth comes from upticks in productivity AND increases in the total number of hours worked in the economy.
When more people work more productively, the economy grows.
Productivity increases when workers produce more than they did before. This occurs either because workers obtain higher levels of education or because companies invest in physical capital like tools, factories, and equipment that enable employees to increase their output.
Recently though, productivity has grown at only a quarter of its historical pace, largely due to reduced investment. Economic growth has lagged as a result.
And the percent of people working today is much lower than previously expected. Even after taking into account the Baby Boomers retiring, there are millions of able-bodied adults who are no longer participating in the workforce.
Getting back to our historical level of growth is possible, but it will require policies that encourage people to rejoin the workforce AND policies that spur more investment in education and the tools that help make workers more productive.