It's important to study how an economy grows, meaning what or who are the participants that make an economy move forward. In the United States, economic growth is driven oftentimes by consumer spending and business investment.
If consumers are buying homes, for example, home builders, contractors, and construction workers will experience economic growth. Businesses also drive the economy when they hire workers, raise wages, and invest in growing their business.
A company that buys a new manufacturing plant or invests in new technologies creates jobs, spending, which leads to growth in the economy. Other factors help promote consumer and business spending and prosperity. Banks, for example, lend money to companies and consumers. As businesses have access to credit, they might finance a new production facility, buy a new fleet of trucks, or start a new product line or service. The spending and business investments, in turn, have positive effects on the companies involved.
However, the growth also extends to those doing business with the companies, including in the above example, the bank employees and the truck manufacturer. In this article are a few of the measures that are often employed to increase and promote economic growth. Tax cuts and tax rebates are designed to put more money back into the pockets of consumers.
Ideally, these consumers spend a portion of that money at various businesses, which increases the businesses' revenues, cash flows , and profits. Having more cash means companies have the resources to procure capital, improve technology, grow, and expand. All of these actions increase productivity, which grows the economy. Tax cuts and rebates, proponents argue, allow consumers to stimulate the economy themselves by imbuing it with more money. Various personal income tax brackets were lowered as well.
As with any stimulus used to spur economic growth, it's often difficult to pinpoint how much growth was created by the stimulus and how much was generated by other factors and market forces. Deregulation is the relaxing of rules and regulations imposed on an industry or business. It became a centerpiece of economics in the United States under the Reagan administration in the s, when the federal government deregulated several industries, most notably financial institutions.
Many economists credit Reagan's deregulation with the robust economic growth that characterized the U. Proponents of deregulation argue tight regulations constrain businesses and prevent them from growing and operating to their full capabilities. This, in turn, slows production and hiring, which inhibits GDP growth. However, economists who favor regulations blame deregulation and a lack of government oversight for the numerous economic bubbles that expanded and subsequently burst during the s and early s.
Many economists cite that there was a lack of regulatory oversight leading up to the financial crisis of Subprime mortgages , which are high-risk mortgages to borrowers with less-than-perfect credit, began to default in The mortgage industry collapsed, leading to a recession and subsequent bailouts of several banks by the U.
New regulations were implemented in the years to follow that imposed increased capital requirements for banks, meaning they need more cash on hand to cover potential losses from bad loans. Infrastructure spending occurs when a local, state, or federal government spends money to build or repair the physical structures and facilities needed for commerce and society as a whole to thrive. Infrastructure includes roads, bridges, ports, and sewer systems. Economists who favor infrastructure spending as an economic catalyst argue that having top-notch infrastructure increases productivity by enabling businesses to operate as efficiently as possible.
For example, when roads and bridges are abundant and in working order, trucks spend less time sitting in traffic, and they don't have to take circuitous routes to traverse waterways.
Additionally, infrastructure spending creates jobs as workers must be hired to complete the green-lighted projects. Because workers can move from place to place, regions need to improve their livability, or quality of life, as a way to keep the talent they have and draw in new talent, also.
As the mix of skills and occupations becomes increasingly important to the economic well-being of regions, quality-of-life factors increasingly influence economic development. Financial capital. Investment drives growth.
Increased private investment — made in response to existing markets or emerging opportunities — creates new jobs, which increase local income, which leads to greater local demand for goods and services, which in turn leads to more private sector investment and continues the cycle of growth. Increased productivity means fewer resources — labor, material and equipment — are used to produce the same or more output. The unused resources are freed up for other productive purposes, and this drives economic growth.
Productivity improvements can yield higher wages, profits and levels of capital investment. Businesses in a region can capitalize on efficiencies and productivity advantages to specialize in goods and services for sale to buyers in their own geographic area and for trade with other regions. Economists often say that without growth it will be impossible to address income inequality. The more economic activity being created, they say, the more room people have to move up the economic ladder and perform to their full potential.
And proposals for addressing inequality, such as raising taxes on the rich, are often nixed because some economists say such prescriptions might reduce economic growth. That might mean raising taxes on the rich, or increasing tax credits for the working poor or middle class. Redistribution could be achieved by providing better educational or job opportunities for the disadvantaged, without worrying about the downsides of such government spending.
It could also mean providing a basic income for the poor, something the Dutch city of Utrecht is about to test. Without growth, said Gordon, the Northwestern economist, if the country wanted to add those programs within its existing budget, it would have to cut something else or raise taxes.
This goes for paying Social Security and Medicare, too, which are funded through taxes. As the population ages and more people receive Social Security, the economy needs to grow so their benefits can be paid for, he said. Of course, this assumes that the country has a political system that can adequately tax people.
Yet as long as the economy grows at the same rate the population does, it could continue to pay for programs like pre-K. In , the U. Doing so just might mean shifting dollars around from other areas, or raising taxes. The future of programs such as Social Security, in which benefits for the older generation are funded by the payments of a larger younger generation, is already tenuous.
After economic growth slowed from four percent to two percent, Sweden redesigned its state-based pension provision in , for example, requiring workers to make certain contributions, rather than just promising them benefits. For most economists, the idea of focusing on something other than GDP growth is heresy.
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