How Can We Increase GDP Growth (And Job Creation) ?

(The chart above is from cnsnews.com.)

GDP growth is one of the best signs of how an economy is doing, and a healthy economy grows at about a 3% rate. Unfortunately, the U.S. economy has not seen a 3% growth rate for 10 straight years -- a record period.

How can we boost the GDP and job creation (which can only happen in a healthy economy)? Josh Bivins has studied the problem for the Economic Policy Institute. He dismisses Trump's idea of cutting taxes for corporations, because corporations already are experiencing record after-tax profits, and adding to those after-tax profits will not spur them to invest more in the economy (boosting production and creating jobs). Only one thing can boost GDP and sustain a rising productivity -- an increase in the demand for goods and services.

How can we increase demand and boost GDP? Bivins says we must do three things:
1. Increase public investment (in programs that help Americans)
2. Raise worker wages
3. Keep the interest rate low

His study is rather lengthy, but well worth the time for those interested in economic policy. I post below only the conclusion of his report:

The casualties of the Great Recession and subsequent slow recovery have been many. The most important are obviously those workers and families that have suffered from the loss of jobs and declining wages and incomes. But another casualty of the Great Recession is a deceleration of productivity growth. Given that productivity growth provides the ceiling on how fast potential living standards can rise, it is crucially important to not accept a lower rate of productivity growth if it can be fixed by policy.

And one key driver of slow productivity growth in recent years can be fixed: the remaining shortfall between aggregate demand and the economy’s productive potential. Running the economy far below potential for a long time has led to insufficient investment to sustain rapid productivity growth. One way to close this accumulated investment gap is, of course, to simply have fiscal policymakers boost public investment. And this should indeed be a response.

But another crucial response is to ensure that the labor market and wider economy run hot enough to force businesses to boost investment simply to meet growing demand. When this is done, policymakers also need to keep the recovery strong until real wages begin consistently rising. From a policy perspective this means keeping interest rates low and not prematurely raising them due to misguided fears of inflation. The inflationary impact of a pick-up in real wages is likely to be quite muffled by the faster investment and productivity growth that will follow.

As with all macroeconomic predictions, this one about productivity rising to meet wage growth could be wrong. But the downside risk of being wrong is relatively small; a couple of years of above-target price inflation as wages push up costs. Given the many years of below-target inflation, one hesitates to even call this a “downside” of a policy that has the economy going for growth. The downside risk of reining in demand before we even test the virtuous cycle of rising wages leading to rising productivity growth, however, is enormous. The decline in potential output for 2017 between what was forecast in 2007 and what is estimated now is almost $2 trillion. If half of this—$1 trillion—could be clawed back through a policy that runs the economy hot and leads to higher productivity growth, it will be an extraordinarily consequential policy choice.