Economic Growth and Policy in the Nineties

Article excerpt

Government projections call for

economic growth in 1992-96 of 3 1/4 percent a

year. The determinants of long-run growth

are demographics and productivity. Both of

these can be influenced by public policy. A

long-term approach is needed to economic

policies that reward private initiative,

increase national saving and strengthen our

ability to compete successfully in the global

market place. Policy priorities therefore are

to prevent reacceleration of inflation,

maintain open markets to international trade and

investment, improve educational and health

standards, and reduce the federal deficit

while promoting domestic saving and

private capital formation.

MY REMARKS address some of the major economic policy issues that face the nation in the years ahead. Policy covers a lot of ground, both micro- and macroeconomic, so my approach is necessarily selective.

Government policies bear heavily on the specific issue of credit supply in the current economic expansion now under way. More broadly, policies we pursue will be crucial in addressing the issue of a potential shortage of global financial capital during the 1990s. Let me begin, then, with a review of this nation's growth trends and what the government projects out to the mid-1990s. Then we can examine the assumptions and reasoning behind the numbers, including policy requirements and what this Administration aims to achieve.

A LONG-RUN PERSPECTIVE

Real GNP growth in the U.S. has averaged 3.1 percent during this century -- a ninety-year span covering a wide variety of economic conditions. In the post-World War II period, growth averaged 3 1/4 percent. And during the most recent economic expansion, growth averaged a respectable 3 1/4 percent from late 1982 to mid-1990.

Against this background of our economic performance over extended periods, what can we reasonably expect in the years ahead? Projections by the federal government call for a modest and durable economic expansion, one that is consistent with progress in steadily reducing unemployment and keeping inflation subdued and on a gradually declining path. The base case forecast of the Administration has growth about 3 1/2 percent during 1992, slowing to a 3 percent path by 1995-96, and averaging a solid 3 1/4 percent over the five-year period.

UNDERLYING DETERMINANTS OF GROWTH

Now let's look at some of the factors underlying these numbers. At bottom, the determinants of a nation's long-run economic growth are demographics and productivity. Many factors in turn influence these critical growth determinants, including public policies. The key demographic elements, growth in population and labor force participation rates, are influenced partly by public policy. For example, immigration policy affects population growth, while tax policy and the social security earnings test affect participation rates. Productivity improvement depends primarily on capital formation, education and training, and technological change, which are particularly subject to the influence of policy. Both monetary and fiscal policies affect consumer decisions to spend or save and influence business decisions to invest in physical capital, R & D, to enter the export business, or to move production facilities off shore.

Two important demographic trends are embodied in the government's growth projections for the 1990s: a slowdown in population growth and a maturing of the workforce. The civilian labor force will increase at a slower pace in the years ahead, compared with growth during the late 1980s. The slowdown stems from lower growth in the working-age population and in the female participation rate. Because the gap between male and female participation rates has rapidly narrowed, we anticipate an attenuation of that process. …