Archive for October, 2015

The Importance of Economic Growth

October 28, 2015 3 comments

The decline in economic growth in the United States is the most serious economic problem facing the country (see my previous post here on this subject) and it should be the top economic priority for the voters in the presidential election which is approaching. To see why, the following example is instructive.

Consider two economies. One grows at two percent per year (the slow-growth economy) and one grows at three percent per year (the fast-growth economy). Their growth rates “only” differ by 1 percent but this difference turns out to be very large when viewed over many years. The table below illustrates the relative sizes of each economy.  In the table, the entries are the extent to which the three-percent economy exceeds the two-percent economy in size over several time periods.

5 Years: 5.0%

10 Years: 10.25%

25 Years: 27.6%

50 Years: 62.87%

100 Years: 165.28%

So after five years, the fast-growth economy is 5% larger in size than the slow-growth economy.  After ten years, the difference is over ten percent, and at the end of a century, the fast-growing economy is over one and one half times as large as the slow-growing economy.  And remember – GDP is a measure of the size of aggregate incomes in the economy so what we are really seeing is how much lower incomes will be when the growth rate of an economy falls by one percent.  Simply put, the differences are staggering in size over long periods of time. The high-growth value of 3 percent was not chosen arbitrarily. This is the growth rate of the U.S. over the hundred-year period ending at the onset of the last U.S. recession.

The next election for President of the United States is a crucial one for the future welfare of U.S. residents. If nothing is done to restore economic growth to its historical average of three percent, there will be huge income losses in store for U.S. citizens.

Categories: Economic Growth
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A blog by John B. Taylor

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