CFDP 1149

Can We Grow Faster?


Publication Date: April 1997

Pages: 25


It is essential to distinguish between limits on national output and limits on its rate of growth. In the short run if output is below potential, demand stimulus can temporarily increase output and employment, with growth rates that cannot be sustained once the economy reaches full employment, potential output. This barrier is commonly called the NAIRU. The paper discusses the possibility that the economy can reach lower unemployment rates than previously thought, without increasing inflation. As to raising the sustainable rate of growth of potential output, the paper discusses skeptically various proposals: fiscal austerity, tax cuts, downsizing government. Many proposals can at best raise the level of output, not its sustainable growth; many can do neither; some are perverse. Government policies to raise national saving, private and public investment in tangible and human capital, science and technology are the best hopes, but the payoffs are likely to be slow