Policies for Long-Run Economic Growth: A Summary of the Ban

Article excerpt

The potential rate of economic growth in the industrialized countries is now only half what it was in the 1960s. Growth of world saving and productivity has also declined, suggesting continued low economic growth in the future. If these trends persist, standards of living in the industrialized countries will improve only marginally. This prospect has generated proposals for reversing the growth slump of the past two decades.

To explore policies to increase growth, the Federal Reserve Bank of Kansas City invited distinguished central bankers, academics, and financial market participants to a symposium entitled "Policies for Long-Run Economic Growth." The symposium was held August 27-29, 1992, in Jackson Hole, Wyoming. In opening comments, Federal Reserve Chairman Alan Greenspan underscored the importance of the topic by emphasizing the role of long-term forces in shaping short-term economic developments. "It has become ever more apparent...that what policy needs most at this stage are models that effectively tie down the developing long-term forces impinging on our economies. For unless we have some insight into how current short-term aberrations will evolve into the long term, our overall policy posture will surely prove inadequate."

Throughout the symposium, most participants agreed that economic policymakers should pay more attention to long-run growth. But participants disagreed on specific policies to promote growth. While some of the participants, mostly from the United States, advocated government programs to increase growth, other participants emphasized increased reliance on free and open markets.

This article summarizes the papers presented at the symposium and the discussions they stimulated. The first section of the article reviews evidence on the growth slowdown and discusses traditional and new theories of economic growth. The second section examines economic policies to promote growth. The third section provides a synthesis of the issues from the perspective of overview panelists and others with a broad outlook.

THE ECONOMIC GROWTH SL0WDOWN: EVIDENCE AND THEORY

To set the stage for a discussion of policies to promote growth, the symposium began by examining the causes of the growth slowdown and the contributions of new economic theories in explaining economic growth. Participants disagreed about the relative importance of various possible causes of the growth slowdown but agreed that economic theory had advanced considerably in recent years in explaining patterns of long-term economic growth.

EVIDENCE

In a panel discussion, Michael Darby, Horst Siebert, and Kumiharu Shigehara addressed the causes of slower economic growth. Darby questioned the extent to which long-term growth had actually declined in the United States because he felt measures of growth were biased. While the other participants acknowledged the measurement problem, they viewed the growth slowdown as real. Siebert, focusing primarily on Germany, emphasized a wide variety of structural, supply-side, and other forces. Shigehara, focusing on countries belonging to the organization for Economic Cooperation and Development (OECD), suggested that structural problems, not supply factors, explained the bulk of the slowdown.

Darby argued that much--if not all--of the economic growth slowdown in the United States was an illusion stemming from faulty measurement. Estimating the real value of a country's output has become more difficult as the share of services and high-tech goods in GDP has grown. For example, price changes are difficult to disentangle from quality changes in the high-tech sector. Official statistics likely overstate price increases of many high-tech goods, while underestimating improvements in quality. While increased quality of a good should be reflected in real GDP, a price change should not. Likewise, in the service sector, output is often measured by hours of input without accounting for possible increases in productivity. …