CRS Issue Statement on Productivity and Long-Term Growth

Craig K. Elwell
Specialist in Macroeconomic Policy

Marc Labonte
Specialist in Macroeconomic Policy

The rate of long-term growth is the salient measure of the nation's ability to steadily advance its material living standard. It is a measure of economic performance that transcends the short-run factors that lie behind the booms and busts of the business cycle and reveals the economy's ability to steadily advance its level of output over the span of generations. Faster growth is generally more desirable than slower growth, because it affords the economy a broader array of future economic choices and allows people to consume more than what would otherwise be possible. 

The pace of economic growth is likely to be a matter of particular importance in the decades just ahead as the economy confronts the need to effect unprecedented generational transfers of income to pay for the retirement of the baby-boom generation. A larger economic pie makes such transfers easier for the economy to bear. In addition, a large accumulation of foreign debt stemming from a long succession of large trade deficits will mean that there will also be a growing future need to make debt service payments to foreign creditors. The burden of these transfers on future workers will be less if long-term growth is faster. 

The long-run trend rate of growth is attributable mostly to growth in the labor force and growth in average labor productivity. Of particular importance is productivity growth, because it allows greater production of goods and services without additional work. 

Some of productivity growth is due to technological advances. The factors that drive technological progress are not well understood, and it is unclear what policies might best be pursued to encourage it. The rate of technological progress may depend on the resources devoted to education and to research and development. Some of productivity growth is due to increases in the stock of capital available to the labor force. With a larger capital stock, workers can produce more with the same effort. Human capital investment, in the form of education and training, may also raise worker productivity. The skill level of the labor force will also depend in part on the mix of skilled and unskilled workers who immigrate. 

Capital investment is usually financed by borrowing, and it is an important use to which saving is put. The banking and financial system plays the central role in channeling saving to finance capital investment. The federal government influences the availability of saving through the budget: deficits decrease saving and surpluses increase saving. Some domestic capital investment is also financed by borrowing from foreigners. 

The overarching economic policy question is "Can and should the economy's long-term growth rate be accelerated by economic policy?" In a largely private-market economy such as the United States, there is a strong presumption that market forces by themselves will deliver the optimum growth rate. However, due to problems of fully incorporating some types of benefits into the prices attached to activities such as research and development and education, markets can underallocate resources to these endeavors, leading to slower than optimal economic growth. In these instances of market failure, there could be scope for economic policy to improve the economy's long-term growth rate.


Date of Report: July 9, 2010
Number of Pages: 3
Order Number: IS40369
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