The Growth of Growth: Factors Which Enable Economic Expansion

 By Jessica and Reid

Economic growth is widely regarded as one of the most important goals for a country to aim towards. It creates jobs, increases wages, and creates more things to buy—so how do we go about making it happen, and what factors are most important in doing so? According to Blanchard, the sources of economic growth are capital accumulation and technological progress, with technological progress being the more key long-term factor (232). This is due to the nature of decreasing returns to capital. There comes a point where more capital simply does not have a significant effect. The first riding mower can make a large difference in the speed a golf course can be mowed, but the forty-first is unlikely to be much more important than the fortieth. Therefore, Blanchard continues by stating that “Sustained growth requires sustained technological progress…the economy’s rate of growth of output per person is eventually determined by its rate of technological progress” (232-233). More efficient tools allow workers to work more effectively, improving the rate at which things are accomplished without needing to buy a larger number of tools or hire a larger set of workers. There is no similar effect of diminishing returns as there is with capital since technological improvements improve tools for each worker rather than simply giving workers more tools that they might not need or want.

The idea that technology is key to economic growth is widely known, and the subject of much focus. An article for the Wall Street Journal exuberantly praises the transformative impact of technology, stating that “Not labor, not capital, but technology has been the single greatest driver of economic growth since the Industrial revolution…Nearly all wealth in the world has been created since the rise of industry” (Yu) This technological progress, however, is expected to come as a result of global turmoil and conflict. The article focuses heavily on the tech race—not mere incremental improvements, but direct efforts by countries to outpace each other in the field of technological progress, catapulting the world forward. Yu cites technological marvels such as putting a person on the moon and creating the internet as a result of the previous Cold War tech race, both of which had major positive impacts on the economy. She then wonders where the next tech race could take us. Despite Yu’s expectations for conflict-driven technological progress remaining in the future, for now, efforts to improve technology are certainly not stalled in the present. Automation provides an interesting field combining both capital and technological prowess by allowing the capital to work itself. In an article for the New York Times, Ben Cassleman notes that “The push towards automation goes far beyond the restaurant sector… 43 percent of businesses said they expected to reduce their workforces through new uses of technology.” This is an intense shift, both a swift motion of technological progress and heavy investment into new capital. Logically, economic growth will follow. However, it isn’t entirely good news for workers. Cassleman couches the bad news with a positive spin, stating that “Automation may harm specific workers, but if it makes the economy more productive, that could be good for workers as a whole.” Jobs that can be replaced by automation certainly result in increased efficiency, as the number of workers goes down but the product remains the same, but that is still increasing unemployment. 

The above diagram illustrates the impact of new technological developments on economic growth (Marmer).

There are factors outside of technology and capital that are relevant to economic growth. Stephen Knack, in his essays, describes a broad range of influences such as life expectancy, property rights, and terms-of-trade shifts. The two he focuses on most, however, are a democracy—where he finds that an intermediate amount of civil liberties and political rights are most beneficial to growth—and inflation, where he finds that at levels higher than 20% growth is impaired. Inflation logically causes uncertainty about the value of money in the future that deters savings and investment, which will naturally hinder the growth of the economy. His findings on democracy are interesting, as they suggest that the harshest dictatorships need to allow more civil liberties to grow, yet the freest democracies lose some efficiency as well. Additionally, in direct news about the United States’ economic growth, the Biden administration and the Conference Board both predict around 3% growth in the coming year. This is heavily influenced by what both identify as another major factor towards economic growth—stability. Economic stability allows general access to essential life resources, including financial resources, housing, food, and secure jobs. In the case of the two aforementioned sources, the more immediate effects of the Ukraine crisis are examined, identifying instability as a source of higher inflation and a strain on energy prices and food. The CNBC article additionally notes spikes in oil prices, which can be a notable hindrance to the economy and its growth.  As expressed by the aforementioned sources, some factors that determine the efficiency of economic growth include technological advancement, especially those that influence production, democracy in relation to civil and political rights, and macroeconomic stability. 

Works Cited

Blanchard, Olivier. Macroeconomics. 7th ed., Pearson, 2016. 

Casselman, Ben. “Pandemic Wave of Automation May Be Bad News for Workers.” The New York Times, The New York Times, 3 July 2021, https://www.nytimes.com/2021/07/03/business/economy/automation-workers-robots-pandemic.html.

Economic Forecast for the US Economy - The Conference Board. https://www.conference-board.org/research/us-forecast. 

Franck, Thomas. “White House Sees Strong GDP Growth in 2022 despite Inflation Risks.” CNBC, CNBC, 21 Apr. 2022, https://www.cnbc.com/2022/04/21/white-house-sees-strong-gdp-growth-in-2022-despite-additional-economic-risks.html. 

Knack, Stephen. "Determinants of Economic Growth." Southern Economic Journal, vol. 65, no. 1, July 1998, pp. 185+. Gale Academic OneFile, link.gale.com/apps/doc/A21034141/AONE?u=taco36403&sid=bookmark-AONE&xid=2dc86207. Accessed 27 Apr. 2022.

Marmer, Max. “A Look at How Technology Is Reshaping the Global Economy.” Medium, Medium, 13 Feb. 2018, https://maxmarmer.medium.com/a-look-at-how-technology-is-reshaping-the-global-economy-c716c4681e06. 

Yu, Shirley. “Opinion | The World Is in Crisis, and That's Good for the Economy.” The Wall Street Journal, Dow Jones & Company, 22 Apr. 2022, https://www.wsj.com./articles/world-in-crisis-and-good-for-economy-growth-gdp-recession-inflation-technology-innovation-semiconductors-china-taiwan-ukraine-starlink-musk-11650634091

Technology and Economic Development (and War)

By Yadira & Logan

Our team read the article The impact of information technology on postwar US economic growth. The paper highlighted the crucial role that IT played in economic growth for the United States between 1947 and 2010. The Bureau of Economic Analysis provided a significant amount of industry-level data, but they also made modifications building off Jorgenson, Ho, and Kevin Stiroh’s work to derive their industry-level production account produced input and output tables which included 86 industries – 6 IT producing, 41 IT using, 40 non IT using. They found that information technology producing (IT) industries accounted for only 1.7% of value-added in the US economy during the post-war period (1947-2010). However, they contributed 7.6% of postwar econ growth and 32.8% of postwar productivity growth. This shows that the IT industry boosted worker productivity far above the money that was invested into it. This is a great example of how technological development leads to economic growth. 

Current Views 

Recently, the popular discussion about technology and economic growth has shifted to that of a “new Cold War.” With Russian military aggression becoming harder for the West to ignore, and an increasing (perceived or real) threat from China to the Western, democratic world order it is widely believed that both sides of a Western-Russian/Chinese axis will drastically increase investments in technologies. Global economic growth may increase long-term thanks to this renewed commitment. This assumption is based on past performance. In 1900 global GDP was $3.4 trillion (adjusted to 2011 USD) in 2020 global GDP was $112.7 trillion. During that time the global population increased by about 5 fold by productivity increased by about 33 fold. Technology is the force behind this leap. The first Cold War produced the technology that kick-started the internet and the information age we live in today. The author of the recent Wall Street Journal article The World is in Crisis and that is Good for the Economy argues that without geopolitical tensions between autocratic states like China and Russia the US would not have focused on bringing chip production back within its borders and thus would have invested less than it has in the last few years. China’s growing independent technological research in areas such as Artificial Intelligence could also spur competition in the US and other Western Democracies.

How it applies to what we have learned in class

At a basic level, we understand that if the global population grows, the global economic output should grow as well because more people will be working and buying goods. However, we have seen that since the early 1900s global GDP has grown faster than the population. Technology explains this extra growth. Each worker can, in theory, become more productive and earn more (for themselves or others) with the same level of resources. This relationship between productivity and growth can be captured by the Output per worker- Capital per worker graph we studied in class. If we follow along one of the curves we see that the more capital you supply to a worker the higher their output which makes intuitive sense. But we also notice that at high levels of capital per worker we get diminishing returns to productivity. When we improve our technology, however, we shift this output function up resulting in a new function wherever output-capital pairing is higher. Thus, with the same resources as before we have grown the economy.

Citations

Blanchard, O. (2016). Macroeconomics (7th ed.). Pearson. 

Jorgenson, D. W., Ho, M. S., & Samuels, J. D. (2016). The impact of Information Technology on postwar US economic growth. Telecommunications Policy, 40(5), 398–411. https://doi.org/10.1016/j.telpol.2015.03.001 

Yu, S. (2022, April 22). Opinion | the world is in crisis, and that's good for the economy. The Wall Street Journal. Retrieved April 25, 2022, from https://www.wsj.com/articles/world-in-crisis-and-good-for-economy-growth-gdp-recession-inflation-technology-innovation-semiconductors-china-taiwan-ukraine-starlink-musk-11650634091

The Modified Philips Curve (Expectations Augmented)

 “Finding Philips, The American economy”, a 2017 article from The Economist, discussed the probability of the Philips Curve phenomenon appearing and giving economists a reliable prediction of where the unemployment rate and inflation will be in the future. Although the 2017 economy draws questions about the relevancy of the Philips Curve, the article noted pushback from economists who believe the Philips Curve is still useful in understanding the correlation of expected inflation and the unemployment rate. But an examination of expected inflation has found that it has created self-fulfilling prophecies and challenges the Fed’s ability to fulfill its inflation goals (2017).

A CNN 2022 news report seems to give a new life to the Philips Curve. The current 3.6% unemployment rate has dropped near the pre-pandemic rate of 3.5% while inflation and wages are rising higher (2022). The working inverse relationship between the two factors reassures Sal Guatieri, a senior economist at BMO noted in the CNN article, who calls this “great news for the economy” (2022). Having this predictive model allows the Fed, whose dual goal is “maximum sustainable employment” and “price stability”, to confidently craft a monetary policy to guide the economy (2020).

The difference between the 2017 economy and the 2022 economy that led to pendulum swings in economists’ belief in the Philips Curve seems to be the ability of the Fed to set inflation expectations. Kristie M. Engemann, writing for the Federal Reserve Bank of St. Louis, quoted the Fed chairman Jerome Powell, who explained that the Fed has isolated inflation from unemployment with its intentional targeting and set the public expectations of inflation (2020). Given the two case studies and Chairman Powell’s explanation, we can see that inflation expectations seem to be a crucial factor in whether inflation and the unemployment rate are correlated. The lynchpin in setting inflation expectations appears to be the Fed because when extraneous variables (i.e. the Ukraine-Russia war) happen, the public’s confidence in prices is shaken and the Philips Curve appears stronger.

Unemployment Rate and Inflation, FRED

Works Cited:

Engemann, M. Kristie. “What is the Philips Curve (and Why Has It Flattened)?” Federal Reserve Bank of St. Louis, 14 Jan. 2020. https://www.stlouisfed.org/open-vault/2020/january/what-is-phillips-curve-why-flattened. Accessed 11 Apr. 2022.

"Finding Phillips; The American economy." The Economist, vol. 423, no. 9045, 17 June 2017, p. 69(US). Gale Academic OneFile, link.gale.com/apps/doc/A495623706/AONE?u=taco36403&sid=bookmark-AONE&xid=7c10fc1d. Accessed 14 Apr. 2022.

Tappe, Anneken. "American added 431,000 jobs in March, bringing the unemployment rate to a new pandemic low" CNN, 1 April, 2022. https://www.cnn.com/2022/04/01/economy/us-march-jobs-report/index.html. Accessed 11 Apr. 2022.