research about economic growth

The impact of research output on economic growth by fields of science: a dynamic panel data analysis, 1980–2016

• Published: 28 March 2020
• Volume 123 , pages 945–978, ( 2020 )

Cite this article

• Tânia Pinto 1 &
• Aurora A. C. Teixeira   ORCID: orcid.org/0000-0002-3191-5217 2  

1929 Accesses

33 Citations

10 Altmetric

Explore all metrics

Whether research output significantly impacts on economic growth, and which research areas/fields of science matter the most to improve the economic performance of countries, stand as fundamental endeavors of scientific inquiry. Although the extant literature has analyzed the impact of research output on economic growth both holistically and by field, the impact of academic knowledge as a capital good (hard and social sciences) versus a final good (medical and humanities) has been largely neglected in analyses involving large sets of countries over a broad period of time. Based on a sample of 65 countries over 36 years (1980 to 2016), and employing system GMM dynamic panel data estimations, four main results are worth highlighting: (1) holistic research output positively and significantly impacts on economic growth; (2) both the academic knowledge of scientific areas that most resemble capital goods (physical sciences, engineering and technology, life sciences or social sciences) or final goods (base clinical, pre-clinical and health or arts and humanities) foster economic performance; (3) the global impact of research output is particularly high in the fields of engineering and technology, social sciences, and physics; and (4) the impact of research output on economic growth occurs mainly through structural change processes involving the reallocation of resources towards the industrial sector.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Subscribe and save.

• Get 10 units per month
• Download Article/Chapter or eBook
• 1 Unit = 1 Article or 1 Chapter
• Cancel anytime

Price includes VAT (Russian Federation)

Instant access to the full article PDF.

Rent this article via DeepDyve

Institutional subscriptions

Source : Authors’ elaboration

Similar content being viewed by others

Research output and economic growth in technological laggard contexts: a longitudinal analysis (1980–2019) by type of research

Quantity and quality of research output and economic growth: empirical investigation for all research areas in the MENA countries

Twenty-first century macro-trends in the institutional fabric of science: bibliometric monitoring and analysis.

Australia, Belgium, Chile, Czech Republic, Denmark, Estonia, Germany, Greece, Iceland, Ireland, Japan, Luxembourg, Netherlands, Norway, Portugal, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey.

The perils associated with having many instruments related to observation are well documented in the literature. As noted by Roodman ( 2009 , 139), “[s]imply by being numerous, instruments can overfit instrumented variables, failing to expunge their endogenous components and biasing coefficient estimates towards those from non-instrumenting estimators.”. An additional problem with instrument proliferation is that it impairs the Hansen test, providing implausibly perfect p values of 1.000, and thus failing to reject the null of joint instrument validity. The Sargan test is not as vulnerable to instrument proliferation but requires homoscedastic errors for consistency, which cannot be assumed in the system GMM context (Roodman 2009 ).

In order to address the issue of instrument proliferation, which typically affects system GMM estimations (Roodman 2009 ), we restricted the number of instruments by limiting the number of lags of the endogenous variables entering the instrument set, so that the number of instruments does not (largely) exceed the number of groups. Such a ‘rule of thumb’ has been followed by other authors in this area of research, namely Laverde-Rojas and Correa ( 2019 ).

Aksnes, D. W., Langfeldt, L., & Wouters, P. (2019). Citations, citation indicators, and research quality: An overview of basic concepts and theories. SAGE Open . https://doi.org/10.1177/2158244019829575 .

Article   Google Scholar  

Antonakis, J., Bendahan, S., Jacquart, P., & Lalive, R. (2014). Causality and endogeneity: Problems and solutions. In D. V. Day (Ed.), The oxford handbook of leadership and organizations (pp. 93–117). New York: Oxford University Press.

Google Scholar  

Antonelli, C., & Fassio, C. (2016). Academic knowledge and economic growth: are scientific fields all alike? Socio-Economic Review, 3, 537–565.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economics Studies, 58 (2), 277–297.

Article   MATH   Google Scholar  

Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error component models. Journal of Econometrics, 68, 29–51.

Audretsch, D. B., Bozeman, B., Combs, K. L., Feldman, M., Link, A. N., Siegel, D. S., Stephan, P., Tassey, G., Wessner, C. (2002). The economics of science and technology. Journal of Technology Transfer , 27 , 155–203.

Australian Academy of Science (2015). The importance of advanced physical and mathematical sciences to the Australian economy (downloaded on 6 September 2018 from www.chiefscientist.gov.au ).

Bacon, F. (1620). Novum Organum Scientiarum. In The Novum organon, or a true guide to the interpretation of nature (G. W. Kitchin, Trans.). Oxford: Oxford University Press (1855).

Balconi, M., Brusoni, S., & Orsenigo, L. (2010). In defence of the linear model: An essay. Research Policy, 39 (1), 1–13.

Barro, R. J., & Lee, J. W. (2013). A new data set of educational attainment in the world, 1950–2010. Journal of Development Economics, 104, 184–198.

Benneworth, P. (2015). Tracing how arts and humanities research translates, circulates and consolidates in society. How have scholars been reacting to diverse impact and public value agendas? Arts and Humanities in Higher Education, 14 (1), 45–60.

Bhullar, M. P. S., & Kaur, M. S. (2014). Analysis of role of knowledge management in economic growth. International Journal of Emerging Research in Management and Technology, 3 (5), 29–33.

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel-data models. Journal of Econometrics, 87 (1), 115–143.

Bodman, P., & Le, T. (2013). Assessing the roles that absorptive capacity and economic distance play in the foreign direct investment-productivity growth nexus. Applied Economics, 45 (8), 1027–1039.

Bond, S., Hoeffler, A., Temple, J. (2001). GMM estimation of empirical growth models, C.E.P.R. Discussion Papers, No. 3048. University of Bristol, Bristol, UK.

Buenstorf, G., & Heinisch, D. P. (2020). When do firms get ideas from hiring PhDs? Research Policy, 49 (3), 103913.

Bush, V. (1945). Science—The endless frontier . Washington, DC: US Government Printing Office.

Book   Google Scholar  

CEBR (2016). Engineering and economic growth: A global view, A report by CEBR for the Royal Academy of Engineering (downloaded on 12 September 2018 from https://www.raeng.org.uk/publications/reports/engineering-and-economic-growth-a-global-view ).

Coccia, M. (2019). Why do nations produce science advances and new technology? Technology in Society, 59, 101–124.

De Moya-Anegón, F., & Herrero-Solana, V. (1999). Science in America Latina: A comparison of bibliometric and scientific-technical indicators. Scientometrics, 46, 299–320.

De Solla Price, D. J. (1963). Little science, big science . New York: Columbia University Press.

Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: policies and ethnic divisions. The Quarterly Journal of Economics, 112 (4), 1203–1250.

EBRD (2019). Introducing the EBRD Knowledge Economy Index , European Bank for Reconstruction and Development (EBRD), London.

Evans, P. (2000). Are innovation-based endogenous growth models useful? (downloaded on 5 September 2018 from http://economics.sbs.ohiostate.edu/pdf/evans/twoss31.pdf ).

Feldman, M.P., Link, A.N., & Siegel, D. (2002). The Economics of Science and Technology. An Overview of Initiatives to Foster Innovation, Entrepreneurship, and Economic Growth.

Frank, C., & Nason, E. (2009). Health research: measuring the social, health and economic benefits. CMAJ: Canadian Medical Association Journal, 180 (5), 528–534.

Frantzen, D. (2000). Innovation, international technological diffusion and changing influence of R&D on productivity. Cambridge Journal of Economics, 24 (2), 193–210.

Gabardo, F. A., Pereima, J. B., & Einloft, P. (2017). The incorporation of structural change into growth theory: A historical appraisal. Economia, 18 (3), 392–410.

Gibson, A. G., & Hazelkorn, E. (2017). Arts and humanities research, redefining public benefit, and research prioritization in Ireland. Research Evaluation, 26 (3), 199–210.

Greene, W. H. (2018). Econometric analysis (8th ed.). Pearson: New York University.

Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others. The Quarterly Journal of Economics, 114 (1), 83–116.

Hart, P. W., & Sommerfeld, J. T. (1998). Relationship between growth in gross domestic product (GDP) and growth in the chemical engineering literature in five different countries. Scientometrics, 42 (3), 299–311.

Hatemi-J, A., Ajmi, A. N., El Montasser, G., Inglesi-Lotz, R., & Gupta, R. (2016). Research output and economic growth in G7 countries: new evidence from asymmetric panel causality testing. Applied Economics, 48 (24), 2301–2308.

Holm, P., Jarrick, A., & Scott, D. (2015). The value of the Humanities. In Humanities world report 2015 , chapter 2 London: Palgrave Macmillan.

Hosang, M. (2014). Venture capital investment in the life sciences in Switzerland. Chimia, 68 (12), 847–849.

Howson, T., & Davies, G. (2018). From mind to market: Innovation insights from the welsh life sciences and health ecosystem. In Proceedings of the European conference on innovation and entrepreneurship, ECIE (vol. 2018, pp. 309–318).

Inglesi-Lotz, R., Balcilar, M., & Gupta, R. (2014). Time-varying causality between research output and economic growth in US. Scientometrics, 100, 203–216.

Inglesi-Lotz, R., Chang, T., & Gupta, R. (2015). Causality between research output and economic growth in BRICS. Quality & Quantity, 49, 167–176.

Inglesi-Lotz, R., & Pouris, A. (2013). The influence of scientific research output of academics on economic growth in South Africa: An autoregressive distributed lag (ARDL) application. Scientometrics, 95, 129–139.

Jaffe, K., Caicedo, M., Manzanares, M., Gil, M., Rios, A., Florez, A., et al. (2013). Productivity in physical and chemical science predicts the future economic growth of developing countries better than other popular indices. PLoS ONE, 8 (6), 1–10.

Jin, J. C. (2009). Economic research and economic growth: Evidence from East Asian economies. Journal of Asian Economics, 20 (2), 150–155.

Jin, J. C. (2010). Research publications, economic growth and causality: Japan’s experience. Pacific Economic Review, 15 (5), 666–673.

Jin, J. C., & Jin, L. (2013). Research publications and economic growth: evidence from cross-country regressions. Applied Economics, 45 (8), 983–990.

Kumar, R. R., Stauvermann, P. J., & Patel, A. (2016). Exploring the link between research and economic growth: an empirical study of China and USA. Quality & Quantity, 50 (3), 1073–1091.

Laverde-Rojas, H., & Correa, J. C. (2019). Can scientific productivity impact the economic complexity of countries? Scientometrics, 120 (1), 267–282.

Lee, L. C., Lin, P. H., Chuang, Y. W., & Lee, Y. Y. (2011). Research output and economic productivity: A Granger causality test. Scientometrics, 89 (2), 465–478.

Leydesdorff, L., & Wagner, C. (2009). Macro-level indicators of the relations between research funding and research output. Journal of Informetrics, 3 (4), 353–362.

Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22 (1), 3–42.

Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107 (2), 407–437.

Missio, F., Jayme, F., Jr., & Oreiro, J. L. (2015). The structuralist tradition in economics: methodological and macroeconomics aspects. Revista de Economia Política, 35 (2), 247–266.

Mokyr, J. (2018). The past and the future of innovation: Some lessons from economic history. Explorations in Economic History, 69, 13–26.

Moral-Benito, E. (2012). Determinants of economic growth: A Bayesian panel data approach. The Review of Economics and Statistics, 94 (2), 566–579.

Muller, S. M. (2019). Reply to “Research incentives and research output”: a caution on quantity incentives and the use of economic models for higher education policy. Higher Education, 78 , 1129–1138.

Ntuli, H., Inglesi-Lotz, R., Chang, T., & Pouris, A. (2015). Does research output cause economic growth or vice versa? Evidence from 34 OECD countries. Journal of the Association for Information Science and Technology, 66 (8), 1709–1716.

O’Mahony, M., & Timmer, M. P. (2009). Output, input and productivity measures at the industry level: The EU KLEMS Database. Economic Journal, 119 (538), F374–F403.

OECD/WTO. (2019). Aid for trade at a glance 2019: Economic diversification and empowerment . Paris: OECD Publishing. https://doi.org/10.1787/18ea27d8-en .

Perilla Jimenez, J. R. (2019). Mainstream and evolutionary views of technology, economic growth and catching up. Journal of Evolutionary Economics, 29 (3), 823–852.

Quatraro, F. (2009). Innovation, structural change and productivity growth: Evidence from Italian regions, 1980–2003. Cambridge Journal of Economics, 33 (5), 1001–1022.

Quatraro, F. (2010). The economics of structural change in knowledge . New York: Routledge.

Reid, G. (2014). Why should the taxpayer fund science and research? . UK: NCUB—National Centre for Universities and Businesses.

Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94 (5), 1002–1037.

Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98 (5), S71–S102.

Roodman, D. (2009). Practitioners’ corner: A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71 (1), 135–158.

Rosenberg, N., & Birdzell, L. E. (1990). Science, technology and Western miracle. Scientific American, 263 (5), 42–54.

Rosenberg, N., & Nelson, R. R. (1994). American universities and technical advance in industry. Research Policy, 23 (3), 323–348.

Saviotti, P. P., & Pyka, A. (2004). Economic development by the creation of new sectors. Journal of Evolutionary Economics, 14 (1), 1–35.

Schot, J., & Steinmueller, W. E. (2018). Three frames for innovation policy: R&D, systems of innovation and transformative change. Research Policy, 47 (9), 1554–1567.

Schumpeter, J. A. (1912). The theory of economic development (10th ed.). New Brunswick: Transaction Publishers.

Schumpeter, J. A. (1942). Capitalism, socialism and democracy (3rd ed.). London: George Allen and Unwin.

Silva, E. G., & Teixeira, A. A. C. (2011). Does structure influence growth? A panel data econometric assessment of ‘relatively less developed’ countries, 1979–2003. Industrial and Corporate Change, 20 (2), 457–510.

Sjöö, K., & Hellström, T. (2019). University–industry collaboration: A literature review and synthesis. Industry and Higher Education, 33 (4), 275–285.

Solarin, S. A., & Yen, Y. Y. (2016). A global analysis of the impact of research output on economic growth. Scientometrics, 108 (2), 855–874.

Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70 (1), 65–94.

Stephan, P. (1996). The economics of science. Journal of Economic Literature, 34 (3), 1199–1235.

Teixeira, A. A. C. (2014). Evolution, roots and influence of the literature on National Systems of Innovation: a bibliometric account. Cambridge Journal of Economics, 38 (1), 181–214.

Teixeira, A. A. C., & Fortuna, N. (2011). Human capital, R&D, trade, and long-run productivity testing the technological absorption hypothesis for the Portuguese economy, 1960–2001. Research Policy, 39 (3), 335–350.

Teixeira, A. A. C., & Mota, L. (2012). A bibliometric portrait of the evolution, scientific roots and influence of the literature on University-Industry links. Scientometrics, 93 (3), 719–743.

Teixeira, A. A. C., & Queirós, A. S. S. (2016). Economic growth, human capital and structural change: A dynamic panel data analysis. Research Policy, 45 (8), 1636–1648.

Vinkler, P. (2008). Correlation between the structure of scientific research, scientometric indicators and GDP in EU and non-EU countries. Scientometrics, 74 (2), 237–254.

Weinberger, J. (1976). Science and rule in Bacon’s Utopia: An introduction to the reading of the New Atlantis. American Political Science Review, 70 (3), 865–885.

Wolff, E. N. (2003). What’s behind the rise in profitability in the US in the 1980s and the 1990s? Cambridge Journal of Economics, 27 (4), 479–499.

World Bank. (2017). World development indicators . Washington, DC: World Bank.

Yasgül, Y. S., & Güris, B. (2016). Causality between research output in the field of biotechnology and economic growth in Turkey. Quality & Quantity, 50, 1715–1726.

Download references

Author information

Authors and affiliations.

CEF.UP, Faculty of Economics, University of Porto, Porto, Portugal

Tânia Pinto

CEF.UP, Faculty of Economics, University of Porto, INESC Tec, OBEGEF, R. Dr. Roberto Frias, 4200-464, Porto, Portugal

Aurora A. C. Teixeira

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Aurora A. C. Teixeira .

See Table  5 .

Rights and permissions

Reprints and permissions

About this article

Pinto, T., Teixeira, A.A.C. The impact of research output on economic growth by fields of science: a dynamic panel data analysis, 1980–2016. Scientometrics 123 , 945–978 (2020). https://doi.org/10.1007/s11192-020-03419-3

Download citation

Received : 13 October 2019

Published : 28 March 2020

Issue Date : May 2020

DOI : https://doi.org/10.1007/s11192-020-03419-3

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Research output
• Fields of research
• Economic growth
• Human capital
• Structural change
• Dynamic panel data
• System GMM estimation
• Find a journal
• Publish with us
• Track your research

Economic Growth

• Financial markets
• Macroeconomics
• Monetary policy

EPI’s research on economic growth assesses how policymaking and economic institutions either help or hinder efforts to ensure that the U.S. economy is operating at full employment and to generate sustainable growth in average living standards as rapidly as possible.

By Content:

Slowing job growth makes clear that the fed has waited too long to cut interest rates, prices have fallen in key sectors since inflation peaked in 2022, breaking down the south’s economic underperformance : rooted in racism and economic exploitation : part two, tight labor markets are essential to reducing racial disparities and within the purview of the fed’s dual mandate, economic performance is stronger when democrats hold the white house, don’t wait on wage growth—the fed should cut rates at this week’s meeting, if you must argue about the economy over thanksgiving dinner, at least get the facts right, rooted in racism and economic exploitation : the failed southern economic development model, a retrospective look at inflation : which predictions were wrong or right, and what remains unclear, debt ceiling deal ‘work requirements’ would hurt low-wage workers, fuel corporate greed, the industrial policy revolution has begun, but another is still needed : industrial policy and policies to rebalance labor market power are complements, not substitutes, lessons from the inflation of 2021–202(), even with today’s slowdown, profit growth remains a big driver of inflation in recent years : corporate profits have contributed to more than a third of price growth, recent banking failures add another reason to halt interest rate hikes, what to watch on jobs day : upward revisions in employment expected after record two-year job growth, the fed should stand pat on further interest rate hikes at this week’s meeting : inflation is easing even as the labor market remains strong, inflation should not change how policymakers respond to recession, inflation is easing : fed should slow rate hikes, the fed and a smooth macroeconomic transition to a cleaner u.s. economy, recent data indicate that a “soft landing” is still in reach—the fed should try to secure it : ignoring disinflation signs heightens risk of recession, inflation, minimum wages, and profits : protecting low-wage workers from inflation means raising the minimum wage, the 2021 census report highlights how government relief measures played a vital role in reducing poverty, august cpi data will likely show a second straight month of overall price declines : new interest rate hikes may be harmful, 2021 census data preview : a growing economy and government relief measures matter for earnings, incomes, and poverty, will secular stagnation return the stakes for current economic debates and fiscal policy, rising inflation is a global problem : u.s. policy choices are not to blame, what to watch on jobs day : can wage growth normalize without substantially higher unemployment, not a recession—yet : the fed’s overly aggressive interest rate hikes increase risk of recession, inflation is no excuse for inaction on needed tax reforms and investments, the value of the federal minimum wage is at its lowest point in 66 years.

This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser. To learn more about cookies, click here .

• Economics & Finance
• Foreign Policy
• Domestic Policy
• Health & Science
• All Publications

Policies to Promote Economic Growth in the United States

Table of Contents

John w. diamond, george r. zodrow, share this publication.

• Download PDF
• Print This Publication

Diamond, John and George Zodrow. 2021. Policies to Promote Economic Growth in the United States . Policy brief: Recommendations for the New Administration. 01.23.21. Rice University’s Baker Institute for Public Policy, Houston, Texas.

This brief is part of a series of policy recommendations for the administration of President Joe Biden. Focusing on a range of important issues facing the country, the briefs are intended to provide decision-makers with relevant and effective ideas for addressing domestic and foreign policy priorities. View the entire series at www.bakerinstitute.org/recommendations-2021 .

Introduction

The question of whether the United States is likely to continue on the robust growth path of earlier years or whether economic growth is likely to decelerate or even enter an extended period of “secular stagnation” is of critical importance to future living standards. In this policy brief, we examine: (1) the role of technology in promoting productivity growth, (2) the relationship between labor markets and economic growth, including the importance of human capital accumulation and the role of immigration; and (3) the effects of fiscal policy, including both expenditure and tax reform, on the prospects for growth. 1

Advances in Technology and Economic Growth

The effects of advances in technology on economic growth are highly controversial, with a huge chasm between the views of the “techno-optimists” and the “technopessimists.” The techno-pessimists argue that recent technological advances, such as artificial intelligence (AI) and information communication technologies, are not as transformative as earlier revolutionary general purpose technologies—such as the steam engine, electricity, and the internal combustion engine—so that the slowdown in productivity growth experienced over the past 50 years is likely to continue. By comparison, the “techno-optimists” argue that recent and future productivity and growth-enhancing developments in AI, robotics, and digitally connected sensors will, after a lag of undetermined length, spark a new era of technology-induced increases in productivity that will lead to significantly faster economic growth. Indeed, this view has led to concerns that such increases in productivity will eventually be so dramatic and will occur so rapidly that they will significantly increase unemployment over time, leading to often-discussed concerns about the “future of work” and prospects for significant and persistent unemployment.

The evidence thus far can be broadly interpreted in two ways. On the one hand, the largely tepid growth in productivity despite significant technological advances over most of the last 50 years is consistent with the techno-pessimist story. On the other hand, the argument that significant amounts of time may be required before technological advances are translated into productivity gains, but such gains could eventually be significant (Hubbard, forthcoming) strikes us as quite plausible. Moreover, the fact that recent significant technological advances have not been rapidly translated into large productivity gains suggests that problems with increasing unemployment will develop slowly. This in turn increases the likelihood that, over time, technological advances will, as they have with technological advances in the past, lead not only to productivity growth and increases in aggregate wealth and living standards but also to increases in employment attributable to the creation of many complementary and new jobs, many of which will be robot-assisted and some of which may not yet even be envisioned—results that will mitigate employment concerns, especially if the transition is lengthy and gradual. Moreover, declines in the size of the labor force due to aging of the population (and perhaps to reduced immigration) should also help limit the problems associated with technology-induced job losses.

Our view is that this debate about the implications of technological advances for economic growth suggests two broad directions for public policy. First, the United States should promote future productivity growth by facilitating increased innovation, including in AI, robotics, and digital sensors. Expanded government support for research and development (R&D), especially basic research, is appropriate. In particular, recent declines in real federal R&D spending are extremely troubling, as are recent proposals to further cut such spending. In addition, the provision in the recently enacted Tax Cuts and Jobs Act (TCJA) that will require five-year amortization of R&D expenses— rather than the long-standing treatment of immediate expensing—seems singularly misguided. (The maintenance of the incremental R&D credit is also appropriate, given the positive externalities associated with such investment.)

Second, we can limit technology-induced job losses by significantly augmenting existing policies for retraining, ongoing education, increasing mobility, and income support during the transition between jobs—consistent with the often-expressed theoretical arguments that changes that improve aggregate welfare but cause individual losses should be accompanied by compensation for those losses. The United States currently provides such assistance for trade-related job losses under the Trade Adjustment Assistance (TAA) program, but the TAA program is minuscule in comparison to the losses suffered. It should be expanded and better designed, applying more generally to job displacement including that associated with technological advances, and provide funds for lifelong learning and training programs and workforce development.

Labor and Economic Growth

Increasing labor productivity is clearly of critical importance to maintaining economic growth. Cunha (forthcoming) argues that the key to improving the skills of the labor force, especially at the lower end of the income distribution, is to promote college readiness among children who grow up in low-income households and to improve the matches between college-ready, low-income students and colleges; he stresses that college readiness requires investments in children at a very early age, coupled with parental education. This implies that resources in the United States should be focused on both education designed to enhance cognitive skills and the development of socio-emotional skills at early (preschool) ages for low-income children—rather than the enactment of expensive non-means-tested proposals for tuition-free college at two-year colleges and all public universities. Providing college-ready low-income students with better guidance regarding opportunities at more selective institutions, especially information about the application process and available financial aid, would also generate large returns.

Another way to expand the labor force is through immigration. For example, Borjas (forthcoming) argues that admitting high-skill immigrants is the policy most likely to increase economic growth, especially if such immigrants have positive external effects on the productivity of native workers. We would add two caveats or extensions. First, the children of immigrants have relatively higher rates of upward income mobility, which suggests that a policy focusing on admitting high-skill immigrants may exclude some individuals who would ultimately be highly productive members of society. Second, some anecdotal immigrant success stories suggest that the externalities generated by immigrants may be quite large in some cases. For example, more than 40% of Fortune 500 companies in 2017 were founded or cofounded by an immigrant or the child of an immigrant, with an immigrant share of 57% for the top thirty-five companies in that group. This suggests strongly that cutbacks in immigration at a time of concern about future economic growth prospects are counterproductive.

Fiscal Policy and Economic Growth

Finally, tax and expenditure policy can have significant effects on economic growth. For example, as stressed by Feldstein (forthcoming), an important issue limiting growth prospects in the United States is the unsustainable nature of current fiscal policy—although the present environment of extremely low interest rates and inflation has reduced the urgency of addressing this issue in comparison to previous years. Feldstein makes a persuasive case for raising revenues by reducing tax expenditures and enacting a carbon tax, as well as reducing entitlement spending to control deficits and increases in the national debt. In Diamond and Zodrow (forthcoming), we argue that implementing a carbon tax, even neglecting its considerable benefits in terms of reducing carbon emissions and other pollutants, would either have small negative effects on economic growth or actually increase growth, and would not necessarily have a regressive impact on the distribution of income, depending on how the revenues from the tax are used.

Additional tax reforms, especially for the taxation of business income, would also be conducive to growth. For example, we would complete the movement to a cashflow tax with expensing at the business level that was partially enacted under the TCJA, including eliminating all deductions for interest expenses. With full expensing, the corporate income tax rate could be raised somewhat—to around 25%— although concerns about both the mobility of firm-specific capital that generates economic rents and income shifting should preclude further increases. The provisions limiting tax avoidance under the TCJA should also be enhanced.

In summary, continued robust economic growth in the United States will, among many other things, require policies that encourage rapid technological innovation and increases in productivity, encourage increases in the stock of human capital, promote investment while reducing debt, and maximize economic efficiency, including minimizing the distortions caused by the tax system. The discussions in Diamond and Zodrow (forthcoming) provide an insightful and provocative roadmap for achieving these critical objectives.

1. For wide-ranging discussions of these issues, see John W. Diamond and George R. Zodrow, Prospects for Economic Growth in the United States , Cambridge University Press, forthcoming, 2021. The volume will include all papers cited in this policy brief: Glenn Hubbard, “The $64,000 Question: Living in the Age of Technogical Possibility or Showing Possibility's Age?”; Flávio Cunha, “Human Capital and Long-Run Economic Growth”; George Borjas, “Immigration and Economic Growth”; and Martin Feldstein, “The Future of Economic Growth in the United States.”

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.

Related Research

Baker Briefing: How Is the Economy Really Doing?

Baker Briefing: Why the US Federal Deficit Keeps Climbing

Why Property Tax Caps Are Not to Blame for Houston’s Budget Deficit

What is economic growth?

Growth is good: personal growth, portfolio growth, and economic growth too. But measuring economic growth for an entire country is a lot harder than knowing whether you have more money in your bank account today than you did yesterday. You’ve probably seen articles about GDP and other economic statistics; these are tools from the realm of macroeconomics to measure whether an economy is growing or shrinking.

Understanding whether an economy is getting bigger or smaller is important not only to economists but also to public- and private-sector leaders, as well as to individuals. That’s because economic growth usually indicates that people and businesses are earning and spending more and generally feeling better off. If it’s stalled, or if an economy is contracting, companies will spend less and maybe even cut jobs. People will earn and spend less, too, leaving them feeling worse off.

How is economic growth measured?

Economic growth is difficult to measure accurately. Counting the number of televisions manufactured in a country is one thing. But once we get into services or intangible products  such as intellectual property or research output, things get a little muddled. As a result, economists have traditionally turned to gross domestic product (GDP) as an indicator of an economy’s growth or recession. As we’ll see, this is an imperfect index metric by which to judge an economy’s overall health.

What is GDP?

GDP is the monetary value of goods and services a country produces in a certain period. Traditionally, GDP has been considered the best indicator of a country’s economic growth because it accounts for the country’s entire economic output, including goods and services sold both domestically and internationally.

Economists distinguish between nominal and real GDP. These are calculated slightly differently: real GDP takes into account the effects of inflation , whereas nominal GDP does not. Real GDP is generally considered a more accurate gauge.

In recent years, economists have questioned whether GDP is the best measure of growth . GDP was never intended to be an index metric to represent the overall performance of an economy. And increasingly, GDP seems less and less reflective of economic realities. For one thing, analysis by the McKinsey Global Institute  has shown that in recent decades the historical link between the growth of net worth and the growth of GDP has been disrupted . Economic growth in advanced economies over the past two decades has been tepid at best, while balance sheets and net worth have tripled in size.

GDP seems even less useful when you think about everything it doesn’t take into account, for instance, all the things we use and do, especially online, that we don’t pay for —such as maps, email, messaging, video conferencing, and more. Nor does GDP take into account unpaid labor, including child or elder care and domestic chores. Finally, GDP doesn’t include the environmental costs of production or, crucially, disposal. It boils down to this: if something doesn’t have a price attached, it doesn’t get measured in GDP. And ultimately, that means an inaccurate measure of an economy’s growth and overall health.

Learn more about our Financial Services and Public & Social Sector  practices, and the McKinsey Global Institute .

What are some alternative metrics indicating economic growth?

A more holistic measure is needed to get a better sense of an economy’s growth and prospects. This measure needs to account for domestic labor, free online goods and services, and the environmental costs of doing business. It also needs to account for intangible assets such as software and other intellectual property. The COVID-19 pandemic seems to have accelerated the shift  toward dematerialization in economies. Dematerialization refers to a general reduction, over time, in the amount of raw materials—or tangible assets—needed for economic functions. Tangible assets are things such as cement, telephone poles, copper wire, and tractors. Intangible assets, on the other hand, are things such as intellectual property, software programs, data sets, and other digital assets. Over the past 25 years, the investment share of intangibles has increased by 29 percent.

“You wouldn’t run a company just by looking at cash flow and profit and loss,” says economist Diane Coyle on McKinsey Global Institute’s Forward Thinking podcast . “You need to understand what’s happening to the balance sheet, as well. . . . It’s just the same for any national or subnational economy, you need to know what the assets are that you have and how they will generate prosperity in the future.”

Introducing McKinsey Explainers : Direct answers to complex questions

But what measurements should populate this balance sheet? Some economists suggest using the Human Development Index , which tracks key dimensions of human achievement, including life expectancy and quality of life, education levels, and standard of living. Others suggest the Inclusive Wealth Index , which measures wealth using countries’ natural, manufactured, human, and social capital.

But perhaps, according to Coyle, we should look beyond the numeric metrics used in the past. The pandemic has shone a light on uneven distributions of unpaid work  happening in the home. And the climate crisis  is causing increasingly frequent wildfires, droughts, and other unpredictable climate events , as well as biodiversity loss , which could hit agricultural productivity and food supply chains.

“It’s not just about measurement,” Coyle says. “It’s about how you think about things.”

What is productivity?

There are several types of productivity in economics. Labor productivity is pretty much the same as productivity at your desk. It’s a measure of how much gets done according to a specific unit, like one hour’s work, or one dollar. For countries, it’s frequently calculated as a ratio of GDP per total hours worked. Labor productivity growth is crucial  to increased wages and standards of living, and it helps increase the purchasing power of consumers.

Economists measure other types of productivity, too. Capital productivity is a measure of how well capital is used to generate output such as goods and services. (Capital productivity and labor productivity are frequently considered together as an indicator of a country’s overall standard of living.) And material productivity is measured as the amount of economic output generated per unit of materials consumed.

Learn more about our Operations  practice.

What’s the relationship between economic growth, productivity, and a changing labor market?

Over the past 50 years, the world economy expanded sixfold  and average per capita income almost tripled. These unprecedented results were powered by rapid population growth—which expanded the number of workers—and a healthy increase in labor productivity.

But looking ahead, this unprecedented economic growth will slow dramatically if we don’t improve productivity. That’s because population growth is slowing, which means the labor force is shrinking relative to the overall population. If there are fewer overall workers contributing to the economy, each worker’s productivity will have to increase for GDP growth to stay on track. McKinsey Global Institute research on the future of productivity and growth after the COVID-19 crisis , focused on the United States and Europe, found that some firms responded boldly to the pandemic, acting in ways that have the potential to increase productivity in the years ahead. If corporate action broadens, particularly in large sectors, and demand is robust, there is potential to accelerate annual productivity growth by about one percentage point by 2024. But the economic shock of the pandemic and the response of companies could exacerbate long-run structural drags on demand. It is notable that about 60 percent of estimated productivity potential comes from companies prioritizing efficiency over output growth—through automation, for instance. If productivity gains aren’t reinvested in growth that drives jobs and incomes, we risk a widening inequality gap .

Learn more about our Public & Social Sector  practice.

How can economic growth help increase racial economic parity?

Economic growth can create opportunities to right historical wrongs, if policy makers and business leaders foster more inclusive economies and societies. McKinsey research shows that existing economic inequality, especially in the United States , demonstrates the economic growth potential for African Americans, Latinos, and other traditionally marginalized groups.

McKinsey research has demonstrated an estimated $220 billion annual disparity  between wages earned by Black Americans in practice and what those wages would be in a scenario of full parity, with Black representation across occupations matching the Black share of the population, and the elimination of racial pay gaps. Achieving full parity would boost total Black wages by 30 percent and draw approximately one million additional Black workers into employment. Just by addressing the wage disparities described in our research, an estimated two million Black Americans would enter the middle class for the first time.

Racial parity in the labor market could mean a potential 40 percent rise in Black consumer spending . The combination of racial income parity and expanded access to goods and services in Black communities could unlock some $700 billion in value, to be shared by companies and Black households.

Latinos in the United States reckon with similar inequalities. McKinsey research has shown that Latinos are collectively underpaid by $288 billion  a year. If full income parity were achieved, Latinos could spend an extra $660 billion annually, Latino-owned businesses could generate an extra $2.3 trillion in total annual revenue, and 735,000 new businesses could be created, supporting 6.6 million new jobs. Finally, Latinos’ annual flow of net wealth from one generation to the next could be $380 billion higher.

McKinsey research findings suggest several starting  points to address inequities of the labor market:

• diversify hiring and promotions, plus improve the workplace experience for different groups of employees
• strengthen educational pathways
• improve the quality of jobs disproportionately held by Black and Latino workers today
• prepare for the future of work by creating opportunities for upskilling or education for Black and Latino workers whose jobs are subject to disruption by automation and business-model disruptions
• help people, including formerly incarcerated individuals, excluded from work enter the labor market
• consider how to expand opportunities across industries and geographies

What is sustainable, inclusive growth?

Rapid economic growth over the last 50 years has helped sustain and create jobs around the world, which propels consumer spending and creates a tax base to support infrastructure, healthcare, and social services. As a result, in recent decades hundreds of millions of people have lifted themselves out of poverty and lived healthier, longer lives  than ever before. But as we’ve seen, there is much progress to be made toward inclusive economies and societies.

As businesses emerge from COVID-19 crisis, the challenge is clear: How can we build a future that delivers sustainable, inclusive growth ? The first step is setting down some basic definitions.

• In growth , we include the ambition of increased prosperity and well-being, including economic-profit growth for companies, GDP growth for nations, and measures such as life satisfaction for citizens derived in part from dignity of work. (We also recognize that measurable definitions of well-being are still evolving.)
• In inclusion , we consider equality of opportunity and broad-based progress of outcomes for all—especially sufficiency of living standards—and the narrowing of inequalities among genders, ages, ethnicities, family backgrounds, and places of residence.
• In sustainability , we aim for environmental resilience, which starts with reducing climate risk but also includes much broader preservation of natural capital as well as intergenerational fairness, all considered in terms of economic and societal costs and benefits.

Done right, these three goals can be a self-reinforcing combination . Here’s how:

• Growth supports inclusion by creating meaningful jobs , lifting incomes, and correcting labor-market imbalances.
• Growth enables sustainability by encouraging investment .
• Greater inclusion and sustainability promote growth through new demand and investment opportunities.
• India could more than quadruple  its renewable energy capacity by 2030, potentially generating  $90 billion in GDP and supporting  around two million jobs in 2030.
• Globally, more inclusive healthcare could add $12 trillion  to global GDP growth in 2040.
• Sustainability reinforces both inclusion and growth through two cross-cutting benefits of the energy transition: lower costs that make energy more accessible, and more resilient and productive lives .

But achieving this virtuous circle will require addressing three main counteracting forces:

• Rising inequality. Growth affects inclusion through skill-biased inequality , exacerbated by COVID-19 and the rise of the knowledge-based economy. As things stand now, almost all growth in labor demand  could occur in high-wage occupations.
• Unchecked resource consumption and emissions.
• In the energy transition, developing countries and those with large fossil fuel sectors could be disproportionately affected , as could lower-income households .

To address the challenges of achieving sustainable, inclusive growth, business leaders and policy makers will need to learn the lessons of the pandemic. Multiple experiments are needed, as well as unprecedented speed in scaling successful ones, and broad participation across sectors and actors.

For more in-depth exploration of these topics, see McKinsey’s “ Employment and Growth ,” “ Strategy & Corporate Finance Insights ,” “ Risk & Resilience Insights ,” “ Sustainable, Inclusive Growth ,” and “ Future of America ” collections. Learn more about the McKinsey Global Institute —and check out McKinsey Global Institute–related job opportunities if you’re interested in working at McKinsey.

Articles referenced include:

• “ Can long-term global growth be saved? ,” McKinsey Global Institute , January 1, 2015, James Manyika , Jonathan Woetzel , Richard Dobbs, Jaana Remes, Eric Labaye, and Andrew Jordan
• “ The economic state of Black America: What is and what could be ,” McKinsey Global Institute , June 17, 2021, Shelley Stewart III , Michael Chui , James Manyika , JP Julien , Dame Vivian Hunt, Bob Sternfels , Jonathan Woetzel , and Haiyang Zhang
• “ The economic state of Latinos in America: The American dream deferred ,” December 9, 2021, Lucy Pérez , Bernardo Sichel , Michael Chui , and Ana Paula Calvo
• “ The future of work after COVID-19 ,” McKinsey Global Institute , February 18, 2021, Susan Lund, Anu Madgavkar , James Manyika , Sven Smit , Kweilin Ellingrud , and Olivia Robinson
• “ Is GDP the best measure of growth? ,” McKinsey Global Institute , January 1, 2015, Richard Dobbs, James Manyika , Jaana Remes, and Jonathan Woetzel
• “ Our future lives and livelihoods: Sustainable and inclusive and growing ,” October 26, 2021, Bob Sternfels , Tracy Francis , Anu Madgavkar , and Sven Smit
• “ Will productivity and growth return after the COVID-19 crisis? ,” McKinsey Global Institute , March 30, 2021, Jan Mischke , Jonathan Woetzel , Sven Smit , James Manyika , Michael Birshan , Eckart Windhagen , Jörg Schubert , Solveigh Hieronimus , Guillaume Dagorret, and Marc Canal Noguer

Want to know more about economic growth?

Related articles.

Is GDP the best measure of growth?

Sustainable, Inclusive Growth

Can long-term global growth be saved?

What is economic growth? And why is it so important?

The goods and services that we all need are not just there – they need to be produced – and growth means that their quality and quantity increase..

Good health, a place to live, access to education, nutrition, social connections, respect, peace, human rights, a healthy environment, and happiness. These are just some of the many aspects we care about in our lives.

At the heart of many of these aspects that we care about are needs for which we require particular goods and services . Think of those that are needed for the goals on the list above – the health services from nurses and doctors, the home you live in, or the teachers who provide education.

Poverty, prosperity, and growth are often measured in monetary terms, most commonly as people’s income. But while monetary measures have some important advantages, they have the big disadvantage that they are abstract. In the worst case, monetary measures – like GDP per capita – are so abstract that we forget what they are actually about: people’s access to goods and services.

The point of this text is to show why economic growth is important and how the abstract monetary measures tell us about the reality of people’s material living conditions around the world and throughout history:

• In the first part, I want to explain what economic growth is and why it is so difficult to measure.
• In the second part, I will discuss the advantages and disadvantages of several measures of growth, and you will find the latest data on several of these measures so that we can see what they tell us about how people’s material living conditions have changed.

What are these goods and services that I’m talking about?

Have a look around yourself right now. Many of the things you see are products that were produced by someone so that you can use them: the trousers you are wearing, the device you are reading this on, the electricity that powers it, the furniture around you, the toilet that is nearby, the sewage system it is connected to, the bus or car or bicycle you took to get where you are, the food you had this morning, the medications you will receive when you get sick, every window in your home, every shirt in your wardrobe, and every book on your shelf.

At some point in the past, many of these products were not available. The majority did not have access to the most basic goods and services they needed. A recent study on the history of global poverty estimates that just two centuries ago, roughly three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.” 1

Let’s look at the history of the last item on that list above, books.

A few centuries ago, the only way to produce a book was for a scribe to copy it word-for-word by hand. Book production was a slow process; it took a scribe about eight months of daily work to produce a single copy of the Bible. 2

It was so laborious that only very few books were produced. The chart shows the estimates of historians. 3

But then, in the 15th century, the goldsmith Johannes Gutenberg combined the idea of movable letters with the mechanism that he knew from the wine presses in his hometown. He developed the printing press. Gutenberg developed a new production technology, and it changed things dramatically. Instead of spending months to produce one book, a worker was now able to produce several books a day.

As the printing press spread across Europe, book production soared. Books, which were previously only available to a tiny elite, became available to more and more people.

This is one example of how growth is possible and what economic growth is : an increase in the production of goods and services that people produce for each other.

A list of goods and services that people produce for each other

Before we get to a more detailed definition of economic growth, it’s helpful to remind ourselves of the astonishingly wide range of goods and services that people produce. I think this is helpful because measures of economic output can easily become abstract. This abstraction means we easily lose the mental connection to the goods and services such measures actually talk about.

This list of goods and services isn’t meant as a definitive list, but it helped me to think about the relevance of poverty and growth: 4

At home: Light in your home at night; the sewage system; a shower; vacuum cleaner; fridge; heating; air conditioning; electricity; windows; a toilet – even a flush toilet; soap; a balcony or a garden; running water; warm water; cutlery and dishes; a hut – or even a warm apartment or house; an oven; sewing machine; a stove (that doesn’t poison you ); carpet; toilet paper; trash bags; music recordings or even online streaming of the world’s music and film; garbage collection; radio; television; a washing machine; 5 furniture; telephone; a comfortable bed, and a room for one’s own.

Food: The most fundamental need is to have enough food. For much of human history, a large share of people suffered from hunger , and millions still do .

But we also need to have a richer and more varied diet to get all of the nutrients we need. Unfortunately, billions still suffer from micronutrient deficiency .

Also, think of clean drinking water; reliable markets and stores with a wide range of available goods; food that rarely poisons you (pasteurized milk, for example); spices; tea and coffee; kitchen utensils and practical ingredients (from a bag of flour to canned soups or a yogurt); chocolate and sweets; fresh fruit and vegetables; bread; take-away food or the possibility to go to a restaurant; ways to protect your food from spoiling (from the cold chain that delivers the goods to the cellophane to wrap it with); wine or beer; fertilizer ( very important); and tractors to work the fields.

Knowledge: Education from primary up to university level; books; data that allows us to understand the world around us; newspapers; vocational training; kindergartens; and scientific knowledge to understand ourselves and the world around us.

Infrastructure: Public transportation with buses, subways, and trains; roads; paved roads; airplanes; bridges; financial services (including bank accounts, ATMs, and credit cards); cities; a network of competent workers that can help you to fix problems; postal services (that delivers fast); national parks; street cleaning; public swimming pools (even private pools); firefighters; parks; online shopping; weather forecasts; and a waste management system.

Tools and technologies: Pencils, ballpoint pens, and paper; lawnmowers; cars; car mechanics; bicycles; power tools like drills (even battery-powered ones); a watch; computers and laptops; smartphones (with GPS and a good camera); being able to stay in touch with distant friends or family members (or even visiting them); GPS; batteries; telephones and mobiles; video calls; WiFi; and the internet right here.

Social services: Caretakers for those who are disabled, sick, or elderly; protection from crime; non-profit organizations financed by the public, by donations or by philanthropies; insurance (against many different risks); and a legal system with judges and lawyers that implement the rule of law.

There is also a wide range of transfer payments, which in themselves are not services (they are transfers) but which become more affordable as a society becomes more prosperous: sick leave and disability benefits; unemployment benefits; and being able to help others with a regular donation of some of your income to an effective charity . 6

Life and free time : tents; travel and holidays; surfboards; skis; board games; hotels; playgrounds; children’s toys; courses to learn hobbies (from painting to musical instruments or courses on the environment around us); a football; pets; the cinema, theater or a music concert; clothes (even comfortable and good-looking ones that keep you warm and protect you from the rain); shoes (even shoes for different purposes); shoe repair; the contraceptive pill and the ability to choose if and when to have children; sports classes from rock climbing to pilates and yoga; cigarettes (not all goods that people produce for each other are good for them); 7 a musical instrument; a camera; and parties to celebrate life.

Health and staying well: Dentists; antibiotics; surgeries; anesthesia; mental health care from psychologists and psychiatrists; vaccines; public sewage; a haircut; a massage; midwives; ambulances; modern medicine; band-aids; pharmaceutical drugs; sanitary pads; toothbrushes; dental floss (some do floss); disinfectants; glasses; sunglasses; contact lenses; hearing aids; and hospitals – including very well-equipped, modern hospitals that offer CT scans, which include intensive care units and allow heart or brain surgery or organ transplants.

Specific needs and wishes: Most of the products listed above are generally helpful to people. But often, the goods and services that are most important to one individual are very specific.

As I’m writing this, I have a big cast on my left leg after I broke it. These days, I depend on products that I had no use for just three weeks ago. To move around, I need two long crutches, and to prevent thrombosis, I need to inject a blood thinner every day. After I broke my leg, I needed the service of nurses and doctors. They had to rely on a range of medical equipment, such as X-ray machines. To get back on my feet, I might need the service of physiotherapists.

We all have very specific needs or wishes for particular goods and services. Some needs arise from bad luck, like an injury. Others are due to a new phase in life – think of the specific goods and services you need when you have a baby or when you take care of an elderly person. And yet others are due to specific interests – think of the needs of a fisherman, or a pianist, or a painter.

All of these goods and services do not just magically appear. They need to be produced. At some point in the past, the production of most of them was zero, and even the most essential ones were extremely scarce. So, if you want to know what economic growth means for your life, look at the list above.

What is economic growth?

So, how can we define what economic growth is?

A definition that can be found in so many publications that I don’t know which one to quote is that economic growth is “an increase in the amount of goods and services produced per head of the population over a period of time.”

The definition in the Oxford Dictionary is almost identical: “Economic growth is the increase in the production of goods and services per head of population over a stated period of time”. And the definition in the Cambridge Dictionary is similar. It defines growth as “an increase in the economy of a country or an area, especially of the value of goods and services the country or area produces.”

In the following footnote, you find more definitions. Bringing these definitions together and taking into account the economic literature more broadly, I suggest the following definition: Economic growth is an increase in the quantity and quality of the economic goods and services that a society produces.

I prefer a definition that is slightly longer than most others. If you want a shorter definition, you can speak of ‘products’ rather than ‘goods and services’, and you can speak of ‘value’ rather than mentioning both the quantity and quality aspects separately.

The most important change in quantity is from zero to one when a new product becomes available. Many of the most important changes in history became possible when new goods and services were developed; think of antibiotics, vaccines, computers, or the telephone.

You find more thoughts on the definition of growth in the footnote. 8

What are economic goods and services?

Many definitions of economic growth simply speak of the production of ‘goods and services’ collectively. This sidesteps a key difficulty in its definition and measurement. Economic growth is not concerned with all goods and services but with a subset of them: economic goods and services.

In everything we do – even in our most mundane activities – we continuously ‘produce’ goods and services in some form. Early in the morning, once we’ve brushed our teeth and made ourselves toast, we have already produced one service and one good. Should we count the tooth-brushing and the toast-making towards the economic production of the country we live in? The question of where to draw the line isn’t easy to answer. But we have to draw the line somewhere. If we don’t, we end up with a concept of production that is so broad that it becomes meaningless; we’d produce a service with every breath we take and every time we scratch our nose.

The line that we have to draw to define the economic goods and services is called the ‘production boundary’. The sketch illustrates the idea. The production boundary defines those goods and services that we consider when we speak about economic growth.

For a huge number of goods or services, there is no question that they are of the ‘economic’ type. But for some of them, it can be complicated to decide on which side of the production boundary they fall. One example is the question of whether the production of illegal goods should be included. Another is whether production within a household should be included – should we consider it as economic production if we grow tomatoes in our backyard and make soup from them? Different authors and different measurement frameworks have given different answers to these questions. 9

There are some characteristics that are helpful in deciding on which side of the boundary a particular product falls. 10 Economic goods and services are those that can be produced and that are scarce in relation to the demand for them. They stand in contrast to free goods, like sunlight, which are abundant, or those many important aspects in our lives that cannot be produced, like friendships. 11 Our everyday language has this right: we don’t refer to the sun or our friendships as a good or service that we ‘produce’.

An economic good or service is provided by people to each other as a solution to a problem they are faced with, and this means that they are considered useful by the person who demands it.

A last characteristic that helps decide whether you are looking at an economic product is “delegability”. An activity is considered to be production in an economic sense if it can be delegated to someone else. This would include many of the goods and services on that long list we considered earlier but would exclude your breathing, for example.

Because economic goods are scarce in relation to the demand for them, human effort is required to produce them. 12 A shorter way of defining growth is, therefore, to say that it is an increase in the production of those products that people produce for each other.

The majority of goods and services on that long list above are uncontroversially of the economic type – everything from the light bulbs and furniture in your home to the roads and bridges that connect your home with the rest of the world. They are scarce in relation to the demand for them and have to be produced by someone; their production is delegable, and they are considered useful by those who want them.

It’s worth recognizing that many of the difficulties in defining the production boundary arise from the effort to make measures of economic production as comparable as possible.

To give just one concrete example of the type of considerations that make the discussion about specific definitions so difficult, let’s look at how the production boundary is drawn in the housing sector.

Imagine two countries that are identical except for one aspect: home ownership. In Country A, everyone rents their homes, and the total sum of annual rent amounts to €2 billion per year. In Country B, everyone owns their own home, and no one pays rent. To provide housing is certainly an economic service, but if we only counted monetary transactions, then we would get the false impression that the value of goods and services in Country A is €2 billion higher than in Country B. To avoid such misjudgment, the production boundary includes the housing services that are provided without any monetary transactions. In National Accounts, statisticians take into account the “imputed rental value of owner-occupied housing” – those households who own their home get assigned an imputed rental value. In the imagined scenario, these imputed rents would amount to €2 billion in Country B so that the prosperity of people in these two countries would be judged to be identical.

It is the case more broadly that National Account figures (like GDP) do include important non-market goods and services that are not included in household survey measures of people’s income. GDP does not only include the housing services by owner-occupied housing but also the provision of most goods and services that are provided by the government or nonprofit institutions.

How can we measure economic growth?

Many discussions about economic growth are extraordinarily confusing. People often talk past one another.

I believe the key reason for this is that the discussion of what economic growth is gets muddled up with how it is measured .

While it is straightforward enough to define what growth is, measuring growth is very, very difficult.

In the worst cases, measures of growth are mixed up with a definition of growth. Growth is often measured as an increase in income or inflation-adjusted GDP per capita. But these measures are not the definition of it – just like life expectancy is a measure of population health but is certainly not the definition of population health.

To see how difficult it is to measure growth, take a moment to think about how you would measure it. How would you determine whether the quantity and quality of all economic goods and services produced by a society increased or decreased over time?

Finding a measure means that you have to find a way to express a huge amount of relevant information in a single metric. As the sketch shows, you have to first measure the quantity and quality of all the many, many goods and services that get produced and then find a way to aggregate all of these measurements into one summarizing metric. No matter what measure you propose for such a difficult task, there will always be problems and shortcomings in any proposal you might make.

In the following section, I will show four possible ways of measuring growth and present some data for each of them to see how they can inform us about the history of material living conditions.

Measuring economic growth by tracking access to particular goods and services

One possible way to measure growth is to make a list of some specific products that people want and to see what share of the population has access to them.

We do this very often at Our World in Data . The chart here shows the share of the world population that has access to four basic resources. All of these statistics measure some particular aspect of economic growth.

You can switch this chart to any country in the world via the “Change country” option. You will find that, judged by this metric, some countries achieved rapid growth – like Indonesia – while others only saw very little growth, like Chad.

The advantage of measuring growth in this way is that it is concrete. It makes clear what exactly is growing, and it’s clear which particular goods and services people gain access to.

The downside is that it only captures a small part of economic growth. There are many other goods and services that people want in addition to water, electricity, sanitation, and cooking technology. 13

You could, of course, expand this approach of measuring growth to many more goods and services, but this is usually not done for both practical and ethical considerations:

One practical reason is that a list of all the products that people value would be extremely long. Keeping lists that track people’s access to all products would be a daunting task: hundreds of different toothbrushes, thousands of different dentists, hundreds of thousands of different dishes in different restaurants, and many millions of different books. 14 If you wanted to measure growth across all goods and services in this way, you’d soon employ half the country in the statistical office.

In practice, any attempt to measure growth as access to particular products, therefore, means that you look only at a relatively small number of very particular goods and services that statisticians or economists are interested in. This is problematic for ethical reasons. It should not be up to the statisticians or economists to determine which few products should be considered valuable.

You might have realized this problem already when you read my list at the beginning of this text. You might have disagreed with the things that I put on that list and thought that some other goods and services were missing. This is why it is important to track incomes and not just access to particular goods: measuring people’s income is a way of measuring the options that they have rather than the choices that they make. It respects people’s judgment to decide for themselves what they find most important for their lives.

On our site, you find many more such metrics of growth that capture whether people have access to particular goods and services:

• This chart shows the share of US households having access to specific technologies.
• This chart shows the share that has health insurance.
• This chart shows access to schools.

Measuring economic growth by tracking the ratio between people’s income and the prices of particular goods and services

To measure the options that a person’s income represents, we have to compare their income with the prices of the goods and services that they want. We have to look at the ratio between income and prices.

The chart here does this for one particular product – books – and brings us back to the history of growth in the publishing sector that we started with. 15 Shown is the ratio between the average income that a worker receives and the price of a book. It shows how long the average worker had to work to buy one book. Note that this data is plotted on a logarithmic axis.

Before the invention of the printing press in the 15th century, the price was often as high as several months of work. The fact that books were unaffordable for almost everyone should not be surprising. It corresponds to what we’ve seen earlier that it took a scribe several months to produce a single book.

The chart also shows how this changed when the printing press increased the productivity of publishing. As the labor required to produce a book declined from many months of work to less than a day, the price fell from months of wages to mere hours.

This shows us how an innovation in technology raises productivity and how an increase in production makes it more affordable. How it increases the options that people have.

Global inequality: How do incomes compare in countries around the world?

In the previous section, we measured growth as the ratio between income and the price of one particular good. But of course, we could do the same for all the many goods and services that people want. This ratio – the ratio between the nominal income that people receive and the prices that people have to pay for goods and services – is called ‘real income’ . 16

Real income = Nominal income / price of goods and services

Real income grows when people’s nominal income increases or when the prices of goods and services decrease.

In contrast to many of the other metrics on Our World in Data, a person’s real income does not matter for its own sake but because it is a means to an end. A means to many ends, in fact.

Economic growth – measured as an increase in people’s real income – means that the ratio between people’s income and the prices of what they can buy is increasing: goods and services become more affordable, and people become less poor. It is because a person has more choices as their income grows that economists care so much about these monetary measures of prosperity.

The two most prominent measures of real income are GDP per capita and people’s incomes, as determined through household surveys.

They are shown in this chart.

Before we get back to the question of economic growth, let’s see what these measures of real income tell us about the economic inequality in the world today.

Both measures show that global inequality is very large. In a rich country like Denmark, an average person can purchase goods and services for $54 a day, while the average Ethiopian can only afford goods and services that cost $3 per day.

Both measures of real incomes in this chart are measured in international dollars, which means that they take into account the level of prices in each country (using purchasing power parity conversion factors). This price adjustment is done in such a way that one international-$ is equivalent to the purchasing power of one US-$ in the US . An income of int.-$3 in Ethiopia, for example, means that it allows you to purchase goods and services in Ethiopia that would cost US-$3 in the US . All dollar values in this text are given in international dollars, even though I often shorten it to just the $-sign.

If you are living in a rich country and you want to have a sense of what it means to live in a poor country – where incomes are 20 times lower – you can imagine that the prices for everything around you suddenly increase 20-fold. 17 If all the things you buy suddenly get 20-times more expensive your real income is 20-times lower. A loaf of bread doesn’t cost $2 but $40, a pair of jeans costs $400, and an old car costs $40,000. If you ask yourself how these price increases would change your daily consumption and your day-to-day life, you can get a sense of what it means to live in a poor country.

The two shown measures of real income differ:

• The data on the vertical axis is based on surveys in which researchers go from house to house and ask people about their economic situation. In some countries, people are asked about their income, while in other countries, people are asked about their expenditure – expenditure is income minus savings. In poor countries, these two measures are close to each other since poor people do not have the chance to save much.
• On the other hand, GDP per capita starts at the aggregate level and divides the income of the entire economy by the number of people in that country. GDP per capita is higher than per capita survey income because GDP is a more comprehensive measure of income. As we’ve discussed before, it includes an imputed rental value of owner-occupied housing and other differences, such as government expenditure.

Income as a measure of economic prosperity is much more abstract than the metrics we looked at previously. The comparison of incomes of people around the world in this scatterplot measures options, not choices. It shows us that the economic options for billions of people are very low. The majority of the world lives on very low incomes of less than $20, $10, or even $5 per day. In the next section, we’ll see how poverty has changed over time.

• GDP per capita vs. Daily income of the poorest 10%
• GDP per capita vs. Daily average income

Global poverty and growth: How have incomes changed around the world?

Economic growth, as we said before, is an increase in the production of the quantity and quality of the economic goods and services that a society produces. The total income in a society corresponds to the total sum of goods and services the society produces – everyone’s spending is someone else’s income. This means that the average income corresponds to the level of average production, so that the average income in a society increases when the production of goods and services increases.

Average production = average income

In this final section, let’s see how incomes have changed over time, first as documented in survey incomes and then via GDP per capita.

Measuring economic growth by tracking incomes as reported in household surveys

The chart shows the income of people around the world over time, as reported in household surveys. It shows the share of the world population that lives below different poverty lines: from extremely low poverty lines up to $30 per day, which corresponds to notions of poverty in high-income countries .

Many of the poorest people in the world rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians who produce these figures estimate the monetary value of their home production and add it to their income.

Again, the prices of goods and services are taken into account: these are measures of real incomes. As explained before, incomes are adjusted for price differences between countries, and they are also adjusted for inflation. As a consequence of these two adjustments, incomes are expressed in international dollars in 2017 prices, which means that these income measures express what you would have been able to buy with US dollars in the US in 201 7.

Global economic growth can be seen in this chart as an increasing share of the population living on higher incomes. In 2000 two thirds of the world lived on less than $6.85 per day. In the following 19 years, this share fell by 22 percentage points.

In 2020 and 2021 — during the economic recession that followed the pandemic — the size of the world economy declined, and the share of people in poverty increased . As soon as global data for this period is available, we will update this chart.

The data shows that global poverty has declined, no matter what poverty line you choose. It also shows that the majority of the world still lives on very low incomes. As we’ve seen, we can describe the same reality from the production side: the global production of the goods and services that people want has increased, but there is still not enough production of even very basic products. Most people in the world do not have access to them.

An advantage of household survey data over GDP per capita is that it captures the inequality of incomes within a country. You can explore this inequality with this chart by switching to see the data for an individual country via the ‘Change country’ button.

Measuring economic growth by tracking GDP per capita

GDP per capita is a broader measure of real income, and in contrast to survey income, it also takes government expenditures into account. A lot of thinking has gone into the construction of this very prominent metric so that it is comparable not only over time but also across countries. This makes it especially useful as a measure to understand the economic inequality in the world, as we’ve seen above. 18

Another advantage of this measure is that historians have reconstructed estimates of GDP per capita that go back many centuries. This historical research is an extremely laborious task , and researchers have dedicated many years of work to these reconstructions. The ‘Maddison Project’ brings together these long-run reconstructions from various researchers, and thanks to these efforts, we have a good understanding of how incomes have changed over time.

The chart shows how average incomes in different world regions have changed over the last two centuries. Looking at the latest data, you see again the very large inequality between different parts of the world today. You now also see the history of how we got here: small increases in production in some world regions and very large increases in those regions where people have the highest incomes today.

One of the very first countries to achieve sustained economic growth was the United Kingdom. In this chart, we see the reconstructions of GDP per capita in the UK over the last centuries.

It is no accident that the shape of this chart is very similar to the chart on book production at the beginning of this text – very low and almost flat for many generations and then quickly rising. Both of these developments are driven by changes in production.

Average income corresponds to average production, and societies around the world were able to produce very few goods and services in the past. There were no major exceptions to this reality. As we see in this chart, global inequality was much lower than today: the majority of people around the world were very poor.

To get a sense of what this means, you can again take the approach we’ve used to understand the inequality in the world today. When incomes in today’s rich countries were 20 times lower, it was as if all the prices around you today would suddenly increase 20-fold. But in addition to this, you have to consider that all the goods and services that were developed since then disappeared – no bicycle, no internet, no antibiotics. All that’s left for you are the goods and services of the 17th century, but all of them are 20 times more expensive than today. The majority of people around the world, including in today’s richest countries, live in deep poverty.

Just as we’ve seen in the history of book production, this changed once new production technologies were introduced. The printing press was an exceptionally early innovation in production technology; most innovations happened in the last 250 years. The starting point of this rise out of poverty is called the Industrial Revolution.

The printing press made it possible to produce more books. The many innovations that made up the Industrial Revolution made it possible to increase the production of many goods and services. Compare the effort that it takes for a farmer to reap corn with a scythe to the possibilities of a farmer with a tractor or a combined harvester, or think of the technologies that made overland travel faster – from walking on foot to traveling in a horse buggy to taking the train or car; or think of the effort it took to build those roads that the buggies once traveled on with the modern machinery that allows us to produce the corresponding public infrastructure today .

The production of a myriad of different goods and services followed trajectories very similar to the production of books – flat and low in the past and then steeply increasing. The rise in average income that we see in this chart is the result of the aggregation of all these production increases.

In the past, before societies achieved economic growth, the only way for anyone to become richer was for someone else to become poorer; the economy was a zero-sum game. In a society that achieves economic growth, this is no longer the case. When average incomes increase, it becomes possible for people to become richer without someone else becoming poorer.

This transition from a zero-sum to a positive-sum economy is the most important change in economic history (I wrote about it here ) and made it possible for entire societies to leave the extreme poverty of the past behind.

Conclusion: The history of global poverty reduction has just begun

The chart shows the global history of extreme poverty and economic growth.

In the top left panel, you can see how global poverty has declined as incomes increased; in the other eight panels, you see the same for all world regions separately. The starting point of each trajectory shows the data for 1820 and tells us that two centuries ago, the majority of people lived in extreme poverty, no matter where in the world they were at home.

Back then, it was widely believed that widespread poverty was inevitable. But this turned out to be wrong. The trajectories show how incomes and poverty have changed in each world region. All regions achieved growth – the goods and services that people need saw their production and quality increase – and the share living in extreme poverty declined. 19

This historical research was done by Michail Moatsos and is based on the ‘cost of basic needs’-approach as suggested by Robert Allen (2017) and recommended by the late Tony Atkinson. 20 The name ‘extreme poverty’ is appropriate as this measure is based on an extremely low poverty threshold. It takes us back to what I mentioned at the very beginning; this historical research tells us – as the author puts it – that three-quarters of the world "could not afford a tiny space to live, food that would not induce malnutrition, and some minimum heating capacity.”

Since then, all world regions have made progress against extreme poverty – some much earlier than others – but in particular, in Sub-Saharan Africa, the share of people living in deep poverty is still very high.

The last two centuries were the first time in human history that societies have achieved sustained economic growth, and the decline of global poverty is one of the most important achievements in history. But it is still a very long way to go.

This is what we see in this final chart. The red line shows the share of people living in extreme poverty that we just discussed. Additionally, you now also see the share living on less than $3.65, $6.85, and $30 per day. 21

The world today is very unequal, and the majority of the world still lives in poverty: 47% live on less than $6.85 per day, and 84% live on less than $30. Even after two centuries of progress, we are still in the early stages. The history of global poverty reduction has only just begun.

That the world has made substantial progress but nevertheless still has a long way to go is the case for many of the world’s very large problems. I’ve written before that all three statements are true at the same time: The world is much better, the world is awful, and the world can be much better. This is very much the case for global poverty. The world is much less poor than in the past, but it is still very poor, and it remains one of the largest problems we face.

Some writers suggest we can end poverty by simply reducing global inequality. This is not the case. I’m very much in favor of reducing global inequality, and I hope I do what I can to contribute to this. But it is important to be clear that a reduction of inequality alone would still mean that billions around the world would live in very poor conditions. Those who don’t see the importance of growth are not aware of the extent of global poverty. The production of many crucial goods and services has to increase if we want to end it. How much economic growth is needed to achieve this? This is the question I answered in this recent text .

To solve the problems we face, it is not enough to increase overall production. We also need to make good decisions about which goods and services we want to produce more of and which ones we want less of. Growth doesn’t just have a rate, it also has a direction, and the direction we choose matters – for our own happiness and for achieving a sustainable future .

I hope this text was helpful in making clear what economic growth is. It is necessary to remind ourselves of that because we mostly talk about poverty and growth in monetary terms. The monetary measures have the disadvantage that they are abstract, perhaps so abstract that we even forget what growth is actually about and why it is so important. The goods and services that we all need are not just there – they need to be produced – and economic growth means that the quality and quantity of these goods and services increase, from the food that we eat to the public infrastructure we rely on.

The history of economic growth is the history of how societies leave widespread poverty behind by finding ways to produce more of the goods and services that people need – all the very many goods and services that people produce for each other: look around you now.

Acknowledgments: I would like to thank Joe Hasell and Hannah Ritchie for very helpful comments on draft versions of this article.

Our World in Data presents the data and research to make progress against the world’s largest problems. This article draws on data and research discussed in our topic pages on Economic Inequality , Global Poverty , and Economic Growth .

Version history: In October 2023, I copy-edited this article; it was a minor update, and nothing substantial was changed.

Michail Moatsos (2021) – Global extreme poverty: Present and past since 1820. Published in OECD (2021), How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

At the time when material prosperity was so poor, living conditions were extremely poor in general; close to half of all children died .

Historian Gregory Clark reports the estimate that scribes were able to copy about 3,000 words of plain text per day.

See Clark (2007) – A Farewell to Alms: A Brief Economic History of the World. Clark (2007). In it, Clark quotes his earlier working paper with Patricia Levin as the source of these estimates. Gregory Clark and Patricia Levin (2001) – “How Different Was the Industrial Revolution? The Revolution in Printing, 1350–1869.”

There are about 760,000 words in the bible (it differs between various translations and languages; here is an overview of some translations).

This implies that the production of one copy of the Bible meant 253.3 days (8.3 months) of daily work.

Copying the text was not the only step in the production process for which productivity was low. The ink had to be made, parchment had to be produced and cut, and many other steps involved laborious work.

Wikipedia’s article about scribes reports sources that estimate that the production time per bible was even longer than 8 months.

Clark himself states in the same publication that “Prior to that innovation, books had to be copied by hand, with copyists on works with just plain text still only able to copy 3,000 words per day. Producing one copy of the Bible at this rate would take 136 man-days.” Since the product of 136 and 3000 is only 408,000, it is unclear to me how Clark has arrived at this estimate – 408,000 words are fewer words than in the Tanakh and other versions of the bible.

The data is taken from Eltjo Buringh and Jan Luiten Van Zanden (2009) – Charting the “Rise of the West”: Manuscripts and Printed Books in Europe, a Long-Term Perspective from the Sixth through Eighteenth Centuries. In The Journal of Economic History Vol. 69, No. 2 (June 2009), pp. 409-445. Online here .

Western Europe in this study is the area of today’s Great Britain, Ireland, France, Belgium, Netherlands, Germany, Switzerland, Italy, Spain, Sweden, and Poland.

On the history and economics of book production, see also the historical work of Jeremiah Dittmar.

I’ve relied on several sources to produce this list. One source was the simple descriptions of the consumption bundles that are relied upon for CPI measurement – like this one from Germany’s statistical office . And I have also relied on the national accounts themselves.

This list is also inspired partly by this list of Gwern and I’m also grateful for the feedback that I got via Twitter to earlier versions of this list. [ Here I shared the list on Twitter ]

This is Hans Rosling’s talk on the magic of the washing machine – worth watching if you haven’t seen it.

Of course all of these transfer payments have a service component to them, someone is managing the payment of the disability benefits etc.

Because smoking causes a large amount of suffering and death I do not find cigarettes valuable, but my opinion is not what matters for a list of goods and services that people produce for each other. Whether some good is considered to be part of the domestic product depends on whether it is a good that some people want, not whether you or I want it. More on this below.

Very similar to the definitions given above is the definition that Kimberly Amadeo gives: “Economic growth is an increase in the production of goods and services over a specific period.”

“Economic growth is an increase in the production of economic goods and services, compared from one period of time to another” is the definition at Investopedia .

Alternatively, to my definition, I think it can be useful to think of economic growth as not directly concerned with the output as such but with the capacity to produce this output. The NASDAQ’s glossary defines growth in that way: “An increase in the nation's capacity to produce goods and services.”

Wikipedia defines economic growth as follows: “Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.” Definitions that are based on how growth is measured strike me as wrong – just like life expectancy is a measure of population health and hardly the definition of population health. I will get back to this mistake further below in this text.

An aspect that I emphasize more explicitly than others is the quality of the goods and services. People obviously do just care about the number of goods, and in the literature on growth, the measurement of changes in quality is a central question. Many definitions speak more broadly about the ‘value’ of the goods and services that are produced, but I think it is worth emphasizing that growth is also concerned with a rise in the quality of goods and services.

OECD – Measuring the Non-Observed Economy: A Handbook .

The relevant numbers are not small. For the US alone, “illegal drugs add $108 billion to measured nominal GDP in 2017, illegal prostitution adds $10 billion, illegal gambling adds $4 billion, and theft from businesses adds $109 billion” if they were to be included in the US National Accounts. This is according to the report by Rachel Soloveichik (2019) – Including Illegal Activity in the U.S. National Economic Accounts . Published by the BEA.

Ironmonger (2001) – Household Production. In International Encyclopedia of the Social & Behavioral Sciences. Pages 6934-6939. https://doi.org/10.1016/B0-08-043076-7/03964-4

Or for some longer run data on the US: Danit Kanal and Joseph Ted Kornegay (2019) – Accounting for Household Production in the National Accounts: An Update, 1965–2017 . In the Survey of Current Business.

Helpful references that discuss how the production boundary is drawn (and how it changed over time) are: Lequiller and Blades – Understanding National Accounts (available in various editions) Diane Coyle (2016) – GDP: A Brief but Affectionate History https://press.princeton.edu/books/paperback/9780691169859/gdp

The definition of the production boundary by Statistics Finland

Itsuo Sakuma (2013) – The Production Boundary Reconsidered. In The Review of Income and Wealth. Volume 59, Issue 3; Pages 556-567.

Diane Coyle (2017) – Do-it-Yourself Digital: The Production Boundary and the Productivity Puzzle. ESCoE Discussion Paper 2017-01, Available at SSRN: http://dx.doi.org/10.2139/ssrn.2986725

A more general way of thinking about free goods and services is to consider them as those for which the supply is hugely greater than the demand.

Their production, therefore, has an opportunity cost, which means that if someone obtains an economic good, someone is giving up on something for it – this can either be the person themselves or society more broadly. Free goods, in contrast, are provided with zero opportunity cost to society.

It is also the case that the international statistics on these measures often have very low cutoffs for what it means ‘to have access’; this is, for example, the case for what it means to have access to energy.

10 years ago, Google counted there were 129,864,880 different books, and since then, the number has increased further by many thousands of new books every day.

This chart is from Jeremiah Dittmar and Skipper Seabold (2019) – New Media New Knowledge – How the printing press led to a transformation of European thought . I was unfortunately not able to find the raw data anywhere and could not redraw this chart; if someone knows where this (or comparable) data can be found, please let me know.

In the language of economists, the nominal value is measured in terms of money, whereas the real value is measured against goods or services. This means that the real income is the income adjusted for inflation (it is adjusted for the changes in prices of goods and services). Thereby, it allows comparisons that tell us the quantity and quality of the goods and services that people were able to purchase at different points in time.

I learned this way of thinking about it from Twitter user @Kirsten3531, who responded with this idea to a tweet of mine here https://twitter.com/Kirsten3531/status/1389553625308045317

We’ve discussed one such consideration that is crucial for comparability when we consider how to take into account the value of owner-occupied housing.

Whether economic growth translates into the reduction of poverty depends not only on the growth itself but also on how the distribution of income changes. The poverty metrics shown in this chart and in previous charts take both of these aspects – the average level of production/income and its distribution – into account.

Jutta Bolt and Jan Luiten van Zanden (2021) – The GDP data in the chart is taken from The Long View on Economic Growth: New Estimates of GDP, How Was Life? Volume II: New Perspectives on Well-being and Global Inequality since 1820 , OECD Publishing, Paris, https://doi.org/10.1787/3d96efc5-en .

The latest data point for the poverty data refers to 2018, while the latest data point for GDP per capita refers to 2016. In the chart, I have chosen the middle year (2017) as the reference year.

The ‘cost of basic needs’-approach was recommended by the ‘World Bank Commission on Global Poverty’, headed by Tony Atkinson, as a complementary method in measuring poverty.

The report for the ‘World Bank Commission on Global Poverty’ can be found here .

Tony Atkinson – and, after his death, his colleagues – turned this report into a book that was published as Anthony B. Atkinson (2019) – Measuring Poverty Around the World. You find more information on Atkinson’s website .

The CBN-approach Moatsos’ work is based on what was suggested by Allen in Robert Allen (2017) – Absolute poverty: When necessity displaces desire. In American Economic Review, Vol. 107/12, pp. 3690-3721, https://doi.org/10.1257/aer.20161080 .

Moatsos describes the methodology as follows: “In this approach, poverty lines are calculated for every year and country separately, rather than using a single global line. The second step is to gather the necessary data to operationalize this approach alongside imputation methods in cases where not all the necessary data are available. The third step is to devise a method for aggregating countries’ poverty estimates on a global scale to account for countries that lack some of the relevant data.” In his publication – linked above – you find much more detail on all of the shown poverty data. The speed at which extreme poverty declined increased over time, as the chart shows. Moatsos writes, “It took 136 years from 1820 for our global poverty rate to fall under 50%, then another 45 years to cut this rate in half again by 2001. In the early 21st century, global poverty reduction accelerated, and in 13 years, our global measure of extreme poverty was halved again by 2014.”

These are the same global poverty estimates – based on household surveys – we discussed above.

Cite this work

Our articles and data visualizations rely on work from many different people and organizations. When citing this article, please also cite the underlying data sources. This article can be cited as:

BibTeX citation

Reuse this work freely

All visualizations, data, and code produced by Our World in Data are completely open access under the Creative Commons BY license . You have the permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited.

The data produced by third parties and made available by Our World in Data is subject to the license terms from the original third-party authors. We will always indicate the original source of the data in our documentation, so you should always check the license of any such third-party data before use and redistribution.

All of our charts can be embedded in any site.

Our World in Data is free and accessible for everyone.

Help us do this work by making a donation.

Reviewing Recent Evidence of the Effect of Taxes on Economic Growth

With the Biden administration proposing a variety of new taxes, it is worth revisiting the literature on how taxes impact economic growth. In 2012, we published a review of the evidence , noting that most studies find negative impacts. However, many papers have been written since, some using more sophisticated empirical methods to identify a causal impact of tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es on economic growth. Below we review this new evidence, again confirming our original findings: Taxes, particularly on corporate and individual income, harm economic growth.

The economic impacts of tax changes on economic growth, measured as a change in real GDP or the components of GDP such as consumption and investment, are difficult to measure. Some tax changes occur as a response to economic growth, and looking at a tax cut at a certain point in time could lead to the mistaken conclusion that tax cuts are bad for growth, since tax cuts are often enacted during economic downturns. For this reason, most of the literature in recent years, and reviewed below, has followed the methodology developed in Romer and Romer (2010) : Looking at unanticipated changes in tax policy, which economists refer to as “exogenous shocks.”

There are other methodological challenges as well. Failure to control for other factors that impact economic growth, such as government spending and monetary policy, could understate or overstate the impact of taxes on growth. Some tax changes in particular may have stronger long-run impacts relative to the short run, such as corporate tax changes, and a study with only a limited time series would miss this effect. Finally, tax reforms involve many moving parts: Certain taxes may go up, while others may drop. This can make it difficult to characterize certain reforms as net tax increases or decreases, leading to mistaken interpretations of how taxes impact growth.

We investigate papers in top economics journals and National Bureau of Economic Research (NBER) working papers over the past few years, considering both U.S. and international evidence. This research covers a wide variety of taxes, including income, consumption, and corporate taxation. All seven papers reviewed here find that tax cuts have positive effects on growth, although some papers note that the strength of this effect depends on which taxes are cut, for whom, and when.

Mertens and Olea (2018) used time series data from 1946 to 2012 to estimate the impacts of marginal tax rates on individual income. They found that marginal rate cuts led to both increases in real GDP and declines in unemployment. A 1 percentage-point decrease in the tax rate increases real GDP by 0.78 percent by the third year after the tax change. Importantly, they find that changes in income following a tax change are responsive to the marginal rate change regardless of the change in the average tax rate The average tax rate is the total tax paid divided by taxable income . While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. . This illustrates that the positive GDP changes the authors find are the response to changes in the incentives, rather than due to an increase aggregate demand through the consumption channel. Cuts in tax rates for the top 1 percent also have positive impacts on other income groups, consistent with a supply-side narrative of how reductions in top marginal rates can increase incomes for other groups over time. However, tax cuts for the top 1 percent do increase inequality.

Zidar (2019) examines the impact of federal tax burdens on economic growth and labor supply across different income groups and states from 1950-2011. He finds positive impacts of tax cuts on economic growth following two years after the change in policy but finds that tax cuts for low- and moderate-income taxpayers affect growth more than tax cuts for high-income taxpayers. The paper finds that a 1 percent of state GDP tax decrease for the bottom 90 percent of earners increases state GDP by 6.6 percent. Looking at labor supply effects in particular, he finds that a 1 percent of state GDP tax decrease increases labor force participation for the bottom 90 percent of earners by 3.5 percentage points and hours worked by 2 percent. He does not find any significant impact on labor force participation rates, hours worked, or GDP growth for the top 10 percent of earners from a similarly sized tax change, somewhat in contrast to the results found in Mertens and Olea (2018) for top earners.

This result may lead some to assume that Zidar is identifying “Keynesian” effects of tax changes, or aggregate demand effects. However, the paper finds strong effects of tax cuts on real wages as well. As Zidar notes, “the increase in real wages suggests that supply-side responses are important and may exceed demand-side responses to tax changes for the bottom 90%.” Additionally, some may go further and argue that this paper shows that tax cuts for top earners have no impact on growth. However, this paper only looks at short-run impacts of tax changes on GDP and does not consider the broader implication of tax policy on long-run growth, human capital, or innovation. Nonetheless, the paper provides compelling evidence of tax cuts impacting growth through the supply side, consistent with neoclassical economic theory.

Ljungvist and Smolyansky (2018) look at 250 state corporate tax changes from 1970-2010 to assess their impact on employment and income. By comparing nearby counties across states, this allows the authors to isolate the impacts of corporate tax changes relative to other policies that might affect economic growth. They find that a 1 percentage-point cut in statutory corporate tax rates leads to a 0.2 percent increase in employment and a 0.3 percent increase in wages. They find that tax increases are almost uniformly harmful, while tax cuts seem to have their strongest positive impact during recessionary environments. As with some of the other studies discussed here, the paper mainly examines short-runs effects, and it is possible that these positive effects could grow over a longer time horizon.

Gunter et al. (2019) use a data set of 51 countries from 1970-2014 to examine the impacts of value-added taxes (VAT) on economic growth. They find that the effect of taxes on growth are highly non-linear: At low rates with small changes, the effects are essentially zero, but the economic damage grows with a higher initial tax rate and larger rate changes. For this reason, increases in the VAT in countries with high VAT rates, such as much of industrialized Europe, will have more significant impacts on GDP than increases in countries with low VAT rates. These non-linearities imply strong Laffer curve effects: At certain tax rates, further increases beyond that point will actually reduce federal tax revenues. For European industrialized countries, the authors estimate a tax multiplier of -3.6 for two years after a tax change, suggesting that tax cuts strongly stimulate economic activity in these countries.

Nguyen et al. (2021) examine the effects of individual income, corporate, and consumption taxes in the United Kingdom from 1973-2009. They find that income tax cuts, defined in their paper as an aggregate of individual and corporate income, have large effects on GDP, private consumption, and investment. A percentage-point cut in the average income tax rate raises GDP by 0.78 percent. The effects of consumption tax A consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes , excise taxes , tariffs , value-added taxes (VAT) , or an income tax where all savings is tax- deductible . cuts are comparatively smaller and did not produce statistically significant effects, but the paper finds that switching from an income to a consumption tax base The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. has positive effects on growth. Consumption taxes are generally viewed as less distortionary than other forms of taxation, as they do not significantly impact incentives to work and invest that are essential for ensuring long-run economic growth.

Cloyne et al. (2018) study the interwar period of the UK, 1918-1939, a period of high debt and low interest rates, to understand the impact of taxes on economic growth. The British tax system at this time consisted largely of excise tax An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda , gasoline , insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es on alcohol, tobacco, and motor vehicles, and to a lesser degree taxes on income and corporate profits. As this time period predates the development of Keynesian macroeconomic theory, tax changes were generally not designed to be countercyclical, but rather focused on balancing the budget, inequality, or enhancing productivity. The authors find that a 1 percentage-point reduction in taxes as a share of GDP increased GDP between 0.5 to 1 percent, rising to 2 percent after one year. While the British economy of a century ago vastly differs from modern economies, this paper does provide compelling evidence of how taxes impact growth in high debt and low interest rate environments.

Alinaghi and Reed (2021) conduct a meta-analysis on the effects of taxes on growth for OECD countries. Their sample includes 979 estimates from 49 studies. Unlike other papers discussed in this review, this paper considers both the effects of taxes and spending on growth. The authors disaggregate policy changes into three categories: tax negative fiscal policies, tax positive fiscal policies, and tax ambiguous fiscal policies. Tax negative fiscal policies include increases to fund unproductive investments, or increases in distortionary taxes combined with a decrease in non-distortionary taxes. Tax positive fiscal policies include tax increases to fund productive investment, decreases in distortionary taxation combined with increases in non-distortionary taxation, or tax increases to reduce the deficit. Tax ambiguous fiscal policies are those where the overall economic effect is unclear. Using these classifications, the authors find a 10 percent decrease in taxes of a tax negative fiscal package increases GDP growth by 0.2 percent. The same sized tax decrease for tax positive fiscal policies reduces GDP growth by 0.2 percent.

Economic Growth: Causes, Benefits, and Current Limits

Testimony of Chad Stone, Chief Economist, Center on Budget and Policy Priorities, Before the Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access, U.S. House of Representatives

Chairman Brat, Ranking Member Evans, and other members of the Committee, thank you for this opportunity to testify today about the causes of economic growth, the benefits associated with economic growth, and current limits on economic growth in the United States.  These are important topics to understand better if we are to evaluate properly President Trump’s bold claim that his policies will supercharge the economy and return us to the higher rates of growth we enjoyed in an earlier era.

My testimony makes four essential points:

• Growth matters both for fiscal stabilization and for raising living standards.
• Economic growth over the next decade will be much closer to the 2 percent average annual rate the Congressional Budget Office (CBO) projects than to the 3 percent or better the Trump Administration is promising.
• Large tax cuts are far from a surefire way to spur growth, higher taxes don’t preclude growth, and tax cuts can harm growth if they add to the budget deficit or are paired with cuts to productive public investments.
• Small businesses are an important piece of the American economy, but in evaluating sources of growth, it’s new businesses rather than small businesses per se that matter.

Why Growth Matters

Faster growth in gross domestic product (GDP) expands the overall size of the economy and strengthens fiscal conditions.  Broadly shared growth in per capita GDP increases the typical American’s material standard of living.  But GDP is not meant to be a measure of economic welfare, and other considerations are important in fully assessing the costs and benefits of policy changes.

Estimates from both the Office of Management and Budget and CBO suggest that faster economic growth would improve the fiscal outlook.  They find that a 0.1 percentage point increase in annual economic growth would reduce deficits by roughly $300 billion over a decade, mostly through higher revenues. [1]   While actually boosting economic growth does reduce future budget deficits, all other things equal, making unrealistic growth claims for one’s policies as a way to offset their cost will understate the adverse impact of those policies on actual future deficits.

Broadly speaking, there are two main sources of economic growth:  growth in the size of the workforce and growth in the productivity (output per hour worked) of that workforce.  Either can increase the overall size of the economy but only strong productivity growth can increase per capita GDP and income.  Productivity growth allows people to achieve a higher material standard of living without having to work more hours or to enjoy the same material standard of living while spending fewer hours in the paid labor force.

GDP measures the market value of goods and services produced in the country, but it captures only market activity and is not designed to be a measure of economic welfare.  A parent in the paid labor force contributes to GDP; one who stays home to take care of children or an aging family member does not, but, if the family hires someone to perform these same duties, that labor would contribute to GDP.  Health, safety, and environmental regulations can impose costs on businesses that may slow measured GDP growth, but any such costs must be compared with the benefits of better health, safer workplaces, and a cleaner environment that may not be captured in GDP.  

Finally, a full assessment of the benefits of economic growth requires consideration of how widely Americans share in that economic growth.  There’s a big difference between growth like that we experienced between 1948 and 1973, which doubled living standards up and down the income distribution, and the growth accompanied by widening income inequality we’ve experienced since. [2]

Sources of Economic Growth

CBO projects that, under current laws and policies, the economy will grow 2.3 percent this year but that growth will average just 1.9 percent a year between now and 2027. [3]   As a candidate, President Trump boasted that his economic plan “would conservatively boost growth to 3.5 percent per year on average  . . . with the potential to reach a 4% growth rate.” [4]   And Treasury Secretary Steven Mnuchin has said that under President Trump’s policies, economic growth will pick up to “3 percent or higher.” [5] Last week, Mnuchin said the President’s economic plan would pay for itself with growth. [6]

It is not unusual for an administration’s economic forecast to be somewhat more optimistic than CBO’s, since the administration is presumably proposing policies it expects will improve economic performance over current laws and policies.  But the gap between CBO’s forecast and the numbers we are hearing from the Trump Administration is unusually large.

An economy recovering from a recession can temporarily achieve relatively high rates of “catch-up” growth as demand for goods and services rebounds from weak recession levels.  Businesses can readily meet the rise in demand for their output by hiring unemployed workers and more fully utilizing productive capacity that had been idled by the recession.  Once excess unemployment has been eliminated and capacity utilization is back to normal, however, the economy’s growth rate is constrained by growth in its ability to supply goods and services.

Economists use the term “potential output” or “potential GDP” to describe the economy’s maximum sustainable level of economic activity.  Growth in potential GDP is determined by growth in the potential labor force (the number of people who want to be working when the labor market is strong) and growth in potential labor productivity.  The potential labor force, in turn, grows through native population growth and immigration, while potential labor productivity grows through business investment in tangible capital (machines, factories, offices, and stores) as well as investments in R&D and other intangible capital.  Improvements in labor quality due to education and training can also boost productivity, as can improvements in managerial efficiency or technology that allow businesses to produce more with the same amount of labor and capital.

Well-conceived tax, regulatory, and public investment policies can complement labor force growth and private investment in expanding potential GDP.  They can also reap public benefits that GDP does not necessarily capture, such as distributional fairness and health and safety protections.  Poorly conceived policies, of course, can impede growth and hurt national economic welfare.

Potential GDP represents the economy’s maximum sustainable level of economic activity.  Actual GDP falls short of potential GDP in a recession, when aggregate demand is weak; it can temporarily exceed potential GDP in a boom, when aggregate demand is strong.  But, over longer periods, actual GDP and potential GDP tend to grow together.

The Great Recession produced a large output gap between actual and potential GDP, which narrowed only slowly over the next several years as the economy recovered from the recession. CBO projects that the remaining gap will be closed by the end of 2018 and that the major constraint on economic growth going forward will be the growth rate of potential output rather than weak aggregate demand. 

CBO estimates that potential GDP will grow at an average annual rate of a little under 1.9 percent over the next decade.  About 0.5 percentage points of that growth comes from increases in the potential labor force and about 1.3 percentage points comes from increases in labor productivity.  These projections of labor force and productivity growth are each lower than those that produced 3.2 percent average annual growth in potential GDP between 1950 and 2016 (see Figure 1).

Conditions are different now.  The population is aging and, without more immigration, the potential labor force will grow much more slowly than when baby boomers were flooding the labor market.  Productivity also grew much faster during the “golden age” of economic growth in the generation after World War II and in the late 1990s than CBO projects it will grow in coming years — and the benefits of that productivity growth were shared more equally than they have been recently.  Trump policies would have to produce some combination of stronger labor force participation and productivity growth totaling 1.4 percentage points to match the 3.2 percent historical average.

Economist Edward Lazear, Chairman of President George W. Bush’s Council of Economic Advisers, attempted in a recent Wall Street Journal op-ed to explain how this might happen. [7]   Like the Trump team, Lazear touted the purported benefits of “investment-friendly tax policy” and business relief from “burdensome” regulations.  However, he concluded that achieving such a high growth rate is “unlikely.” 

Tax Cuts and Economic Growth

Exaggerated claims for the economic growth benefits of large tax cuts have been around since the emergence of supply-side economics in the late 1970s and persist to this day.  But there’s scant evidence to support, for example, House Speaker Paul Ryan’s claim that cutting tax rates across the board is the “secret sauce” that generates faster economic growth, more upward mobility, and faster job creation or Treasury Secretary Mnuchin’s claim that the Trump economic plan will pay for itself through growth.  What the evidence shows is that tax cuts — particularly for high-income people — are an ineffective way to spur economic growth, and they’re likely to harm the economy if they add to the deficit or are paired with cuts to investments that support the economy and working families. [8]

History shows that tax cuts for the rich are far from a surefire way to boost growth — and that higher taxes don’t preclude robust economic and job growth.  Compare, for example, changes in employment and economic growth following the Bush tax cuts of 2001 with those following the Clinton tax increases on high-income taxpayers in 1993, which supply-siders were certain would lead to slower growth and large job losses (see Figure 2).  Small business job-creation was also more robust under Clinton.  After the Bush tax cuts for the very highest-income households expired at the end of 2012, the economy continued to grow and add jobs steadily.

In a comprehensive review of the literature, economists Bill Gale and Andrew Samwick conclude that “growth rates over long periods of time in the U.S. have not changed in tandem with the massive changes in the structure and revenue yield of the tax system that have occurred.” [9]

When Kansas enacted large tax cuts overwhelmingly for the wealthy, Gov. Sam Brownback claimed the tax cuts would act “like a shot of adrenaline into the heart of the Kansas economy.”  But rather than seeing an economic boom since the tax cuts, Kansas’ growth — including small business job growth, economic growth, and growth in small business formation — has lagged behind the country as a whole. [10]

These simple relationships are not controlled experiments to isolate the effect of tax cuts on growth, but they are a warning against credulous acceptance of supply-side claims.  Careful economic research reinforces that conclusion.  It finds that tax cuts on high-income people’s earnings or their income from wealth (such as capital gains and dividends) don’t substantially boost work, saving, and investment.

They are likely to hurt growth if they increase deficits or are paired with cuts to investments that help working families and the economy.  CBO, which aims to provide objective, impartial, and non-partisan analysis reflecting expert opinion, finds that even tax cuts that increase incentives to work, save, and invest with potentially positive effects on growth are a net drag on growth if they increase the budget deficit.

Financing tax cuts for the rich by cutting productive public investments that help support growth, such as education, research, and infrastructure, are also harmful.  Finally, a growing body of research suggests that investments in children in low-income families not only reduce poverty and hardship in the near term, but can have long-lasting positive effects on their health, education, and earnings as adults.

Unless it is dramatically different from candidate Trump’s tax plan or the House “Better Way” plan, the tax plan President Trump is working on will provide massive tax cuts that overwhelmingly benefit high-income taxpayers and lose huge amounts of revenue.  That’s certainly true under conventional revenue-estimating methods used by Congress’s official budget scorekeepers, CBO and the Joint Committee on Taxation (JCT). 

It’s also true under most “dynamic scoring” that takes into account macroeconomic feedback effects on economic growth and revenues.  The Tax Foundation, to whose analysis supply-siders gravitate, is an outlier with respect to dynamic scoring. [11]   It tends to find significantly larger dynamic effects for tax proposals than CBO or JCT have found in their own past analyses, and significantly larger effects than the Tax Policy Center/Penn Wharton model finds in its analyses of the Trump [12] and Better Way [13] proposals.  But even the Tax Foundation’s Alan Cole rejects the idea that Trump tax policies could produce enough economic growth to pay for themselves. [14]

A centerpiece of President Trump’s campaign tax proposal and the Better Way tax plan is a special, much lower top rate for “pass-through” business income — which is currently taxed at owners’ individual income tax rates rather than the corporate rate and as dividend income in the hands of shareholders.  About half of pass-through income flows to the top 1 percent of households, while only about 27 percent goes to the bottom 90 percent of households. [15]

These proposals would cut the top rate on pass-through income below the top rate on ordinary income (to 15 percent and 25 percent respectively), giving wealthy individuals a strong incentive to reclassify their wage and salary income as “business income” to get the lower pass-through rate.  This would produce a substantial loss in revenue, while providing no benefit to the vast majority of small businesses, whose tax rate would be unaffected (see Figure 3).

The beneficiaries don’t fit anyone’s reasonable definition of a small business.  They include hedge fund managers, consultants, and investment managers, who are among the pass-through business owners currently in the 39.6 percent tax bracket; the 400 highest-income taxpayers in the country, who have annual incomes exceeding $300 million each and receive about one-fifth of their income from pass-throughs; and business owners like President Trump, who owns about 500 pass-through businesses, according to his attorneys.

Kansas Gov. Sam Brownback exempted pass-through income from all state income taxes as part of his aggressive supply-side tax cutting in 2012.  As I’ve already noted, this did nothing for the Kansas economy, but it wreaked havoc on the state’s budget, with the pass-through exemption alone costing $472 million in 2014, leading Kansas to cut services, drain “rainy day” funds, delay road projects, and turn to budget gimmicks.  Two bond rating agencies have downgraded the state due to its budget problems.  The Kansas legislature recently passed bipartisan legislation to close the loophole, although Gov. Brownback vetoed the bill.

That’s an object lesson in how not to do tax reform, but what should we do?  In broad strokes, well-designed tax reform could spur growth by eliminating or scaling back inefficient tax subsidies and raising additional revenues to invest in national priorities and reduce deficits.  At a minimum, it must not lose revenues. [16]  

A Word About Small Business

As I’m sure many on this committee are aware, research over the last several years has modified the longstanding claim that small businesses are the engine of job growth.  This research shows that the age of a business matters more than its size as a contributor to job growth, although new companies are typically small to start with.  Every year there is huge turnover in the population of small businesses as firms fail or go out of business and new firms start up.  To quote one of the pioneers in this research:

Most entrants fail… [M]ost surviving young businesses don’t grow.  But a small fraction of surviving young businesses contribute enormously to job growth.  A challenge of modern economies is having an environment that allows such dynamic, high-growth businesses to succeed. [17]

More on this topic

Trump’s unrealistic expectations for economic growth, the legacy of the great recession, improving economic opportunity in the united states, policy basics economy.

• Fiscal Stimulus
• How Many Weeks of Unemployment Compensation Are Available?
• The Minimum Wage
• Unemployment Insurance

[1] Office of Management and Budget, “Economic Assumptions and Interactions with the Budget,” FY 2017 Budget, Analytical Perspectives , Table 2-4, https://obamawhitehouse.archives.gov/sites/default/files/omb/budget/fy2017/assets/ap_2_assumptions.pdf , and Congressional Budget Office, The Budget and Economic Outlook: 2017 to 2027 , January 24, 2017, Appendix B, p.83, https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52370-appendixb.pdf .

[2] Chad Stone et al ., “A Guide to Statistics on Historical Trends in Income Inequality,” Center on Budget and Policy Priorities, updated November 7, 2016, https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality .

[3] Congressional Budget Office, The Budget and Economic Outlook: 2017 to 2027 , January 24, 2017, Table C-1 and Summary Table 1, https://www.cbo.gov/publication/52370 .

[4] Fact Sheet: Donald J. Trump’s Pro-Growth Economic Policy Will Create 25 Million Jobs, September 15, 2016, https://www.donaldjtrump.com/press-releases/fact-sheet-donald-j.-trumps-pro-growth-economic-policy-will-create-25-milli .  

[5] “Treasury Secretary Steven Mnuchin Sees Tax Overhaul by August,” Wall Street Journal , February 22, 2017, https://www.wsj.com/articles/treasury-secretary-steven-mnuchin-pushes-hard-for-stronger-dollar-1487798404 .

[6] “Trump’s treasury secretary: The tax cut ‘will pay for itself,’” Washington Post , April 20, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/04/20/trumps-treasury-secretary-the-tax-cut-will-pay-for-itself/?utm_term=.1290bd4ccc05 .

[7] Edward P. Lazear, “How Trump Can Hit 3% Growth — Maybe,” Wall Street Journal , February 27, 2017, https://www.wsj.com/articles/how-trump-can-hit-3-growthmaybe-1488239746 .

[8] “Tax Cuts for the Rich Aren’t an Economic Panacea — and Could Hurt Growth,” Center on Budget and Policy Priorities, April 13, 2017, https://www.cbpp.org/research/federal-tax/tax-cuts-for-the-rich-arent-an-economic-panacea-and-could-hurt-growth .

[9] Andrew A. Samwick and William G. Gale “Effects of Income Tax Changes on Economic Growth,” Brookings Institution, February 1, 2016, https://www.brookings.edu/research/effects-of-income-tax-changes-on-economic-growth/ .

[10] “GOP Tax Plans Would Emulate Failed Kansas Experiment,” Center on Budget and Policy Priorities, April 21, 2017, https://www.cbpp.org/research/federal-tax/gop-tax-plans-would-emulate-failed-kansas-experiment .

[11] Chad Stone and Chye-Ching Huang, “Trump Campaign’s ‘Dynamic Scoring’ of Revised Tax Plan Should Be Taken With More Than a Grain of Salt,” CBPP, September 15, 2016,” https://www.cbpp.org/research/federal-tax/trump-campaigns-dynamic-scoring-of-revised-tax-plan-should-be-taken-with-more .

[12] Jim Nunns et al ., “An Analysis of Donald Trump’s Revised Tax Plan,” Tax Policy Center, October 11, 2016,” http://www.taxpolicycenter.org/publications/analysis-donald-trumps-revised-tax-plan/full .

[13] Leonard E. Burman et al ., “An Analysis of the House GOP Tax Plan,” Tax Policy Center, April 5, 2017, http://www.taxpolicycenter.org/publications/analysis-house-gop-tax-plan-0 .

[14] Alexia Fernández Campbell and Dylan Scott, “Trump wants a “massive” tax cut. Here’s his best shot at getting it,” Vox.com, April 25, 2017, http://www.vox.com/policy-and-politics/2017/4/25/15383806/trump-white-house-tax-plan-budget-math .

[15] “Pass-Through Tax Break Would Benefit the Wealthiest and Encourage Tax Avoidance,” Center on Budget and Policy Priorities, April 5, 2017, https://www.cbpp.org/research/federal-tax/pass-through-tax-break-would-benefit-the-wealthiest-and-encourage-tax-avoidance . 

[16] Paul N. Van de Water, “Tax Reform Must Not Lose Revenues — and Should Increase Them,” Center on Budget and Policy Priorities. April 20, 2017, https://www.cbpp.org/research/federal-tax/tax-reform-must-not-lose-revenues-and-should-increase-them .

[17] “Interview: John Haltiwanger,” Econ Focus , Second Quarter 2013, https://www.richmondfed.org/~/media/richmondfedorg/publications/research/econ_focus/2013/q2/pdf/interview.pdf .

More from the Authors

Areas of Expertise

Recent work:.

• Economy Strong as 2023 Ended
• Economy Remains Resilient at Mid-Year
• Amid Signs of Economic Improvement, an Overly Aggressive Fed Could Trigger a Recession

Policy Research in Macroeconomics

• Topics Americas Argentina's Debt Asia Pacific & Africa Climate Change Constitutional issues Ecological crisis Economic History Economics & Ideology Employment Eurasian Union Area Europe & Eurozone Finance & Regulation Fiscal Policy GDP & Economic Activity Inequality Inflation & Deflation International & World Investment Monetary Policy Money & Banking Pay & Earnings Population & Demography Private Debt Productivity Public Debt Public Services Sovereign Debt Trade Issues UK Americas Argentina's Debt Asia Pacific & Africa Climate Change Constitutional issues Ecological crisis Economic History Economics & Ideology Employment Eurasian Union Area Europe & Eurozone Finance & Regulation Financial Architecture Fiscal Policy GDP & Economic Activity Industrial policy Inequality Inflation & Deflation International & World Investment Monetary Policy Money & Banking Pay & Earnings Population & Demography Private Debt Productivity Public Debt Public Services Regional policy & devolution Sovereign Debt Trade Issues UK
• Book Reviews
• Publications
• August 16, 2024

Global Economic Governance: What’s “Growth” Got to Do with It?

Ann pettifor.

• Topics: Ecological crisis , Economics & Ideology , Finance & Regulation , Financial Architecture , International & World

An obsession with growth has generated massive inequality, undermined global economic stability, and weakened faith in democracy. Reversing these trends requires reining in the power of financial capital and managing global trade flows.

This essay is part of a series of articles, edited by Stewart Patrick, emerging from the Carnegie Working Group on Reimagining Global Economic Governance. It was first published on 17 July 2024 on the Carnegie Endowment website.

“Growth” is a term used by economists aiming for expanded economic activity: an increase in investment, employment, goods, and services. Conversely, it is used in a pejorative sense by environmental campaigners convinced that the endless expansion of economic activity in a world of finite resources is unsustainable. Its antonym, “degrowth,” is deployed instead, as in The Future Is Degrowth: A Guide to a World beyond Capitalism. The use and evolution of “growth,” and its link to GDP, represent an important stage in the development of today’s system of global economic governance, based as it is on expectations of continuous “growth” facilitated by financial deregulation and capital mobility. Such “growth” in the context of financialized capitalism has led to ecological, social, and economic imbalances that threaten systemic failure.

The global liquidity flows that are a consequence of the financial system’s development are channeled in large part through nonbank financial institutions, also known as “shadow banks.” According to the Financial Stability Board, the total value of financial assets held by shadow banks in 2022 amounted to $217 trillion—more than double global income (GDP). By design, these institutions operate beyond the reach of regulatory democracy, even though they are tethered to the world’s central banks. Their activities impact economic policy making at the level of the state and pose systemic risks to the world economy.

To re-imagine global economic governance, we need to go back in time and assess the emergence of a system of global economic “nongovernance,” or “a nonsystem,” to quote José Antonio Ocampo. One that has led to the creation of the shadow banking system—and to destabilizing global financial and economic imbalances.

The Origins of “Growth” and Deregulation

The story starts with British economist John Maynard Keynes. Back in the 1930s, Keynes played a far greater role in the creation and construction of the UK’s (and ultimately the world’s) national accounts than is usually recognized. He did so not for the purpose of accounting, but to assess the existing level of income against the potential level of income under certain policy conditions.

The value of what was then known as the “national income,” and which came to be defined by Simon Kuznets as “GDP,” was of minor interest to Keynes. As Geoff Tily explains, Keynes regarded the development of such accounting as a means to an end, not an end in its own right. “The national accounts were developed to support policy: to resolve the unemployment crisis of the Great Depression and to aid the deployment of national resources to their fullest possible extent for the conduct of the Second World War.” It is important to recognize, Tily continues, that

these theoretical and practical initiatives were aimed at the level of activity—at the increased and then full employment of resources and the full extent of national production—rather than the growth of activity. At this stage there was no notion on the part of policymakers that the level of activity might be encouraged to grow in any systematic or uniform way from year to year; the intention was achieving one-off level shifts. There can be no doubt that they were successful in this aim, and in sustaining these gains as the post-war golden age. (Emphasis added).

The “Growth” Revolution

This approach to national accounts changed radically in the late 1950s and early 1960s. In the United Kingdom, various professional economists—not least Sir Samuel Brittan, prominent columnist at the Financial Times—championed a new concept of continuous “growth” and defined themselves as “the growthmen.” It was an approach that changed the character of policy over the postwar age. Abandoning the aim of fixing the level of employment and output to sustainable levels, governments would set a systematic and improbable target: to chase growth. Nobody seems to have paused to consider whether growth—derived as the rate of change of a continuous function—was a meaningful or valid way to interpret changes in the size of economies over time, writes Tily.

In parallel, economic policy increasingly emphasized supply-side approaches, and hence a practical commitment to increased deregulation of economic activity. This is exemplified by the Council of the Organisation for Economic Co-operation and Development (OECD) adopting on September 12, 1961, a “Code for Liberalisation of Capital Movements.” This code, a framework for the progressive removal of barriers to cross-border capital flows, presumably was designed to enable what Tily calls the “ludicrous ambition of rapid and relentless growth, regardless of the extent of capacity in the labour market.”

In October 1961, the OECD held a conference on “Economic Growth and Investment in Education” at the Brookings Institution in Washington, DC. Encouraged by “classical” economists and discouraged by what (compared to today’s standards) were high yet sustainable levels of economic activity, the OECD proposed to turbo-charge the UK’s and other economies. At the time, the United Kingdom was in the happy position of providing full employment. In the words of then prime minister Harold Macmillan, Britons had “never had it so good.” On November 17, 1961, the OECD agreed to a 50 percent growth target for the UK for 1960 to 1970. The OECD target was equivalent to 4.1 percent per year. At the time, the British unemployment rate was 1.2 percent.

The result of this overly ambitious goal-setting was entirely predictable—an era of rampant inflation in the 1970s, followed by periods of financial excess and recurring crises. The blame for this inflation has since been laid squarely, and unfairly, on the shoulders of Keynes and on the labor movement. In fact, the attempt to achieve a wildly implausible growth target in conditions of near full employment led to the undoing of Keynes’s legacy: the “golden age” of capitalism from 1945 to 1971. Above all, it led to the dismantling of the system of managed global economic governance established at the Bretton Woods conference in 1944.

On the Question of Global Economic Governance

In the introduction to their book, Who Governs the Globe?, Deborah Avant, Martha Finnemore, and Susan Sell argue that the technical term “governance” obscures the role played by the world’s actual governors. Such abstractions absolve powerful individuals and institutions, including nonstate actors, of responsibility. Furthermore, as they explain

State-centric frameworks do not capture . . . the actual governance that goes on in the world today. Only a small fraction of global governance activity involves state representatives negotiating only with each other. . . . Globalization, deregulation, privatization and technological change have empowered non-state actors. Much of the literature on global governance equates it, implicitly or explicitly with the provision of global public goods. . . . [In fact,] governance outcomes are frequently disconnected from both the public and the good. Global inaction on climate change, access to HIV/AIDS and COVID vaccines are prominent examples. The 2007–09 global financial meltdown is another.

Nongovernance by states of the global economy has led to an international economic system that in effect is governed by private and not public (that is, democratic) authority—even as public taxpayer-backed institutions play a role in subsidizing, derisking, and bailing out private financial institutions.

Thanks to capital mobility, private actors in the international financial system exercise undue influence over policies vital to the economic stability of states, including exchange rates; interest rates; and global flows of investment, capital, and trade. This loss of public authority over both the global and domestic economies has led to disillusionment with democracy. Above all, it has generated obscene levels of inequality within and between states. This inequality, as Michael Pettis and Matthew C. Klein illustrate in their book, Trade Wars Are Class Wars, has helped create trade and capital account imbalances between states.

The global economic model that emerged from the growth revolution of the 1960s orients economies away from the domestic sphere, toward deregulated international capital markets and exports. The export orientation of economies like Germany and China boosts the income of the 1 percent: the owners and shareholders of export-oriented corporations. The incomes of the remaining 99 percent—the wages of workers in the domestic economy—are depressed. The British Resolution Foundation calculates that after fifteen years of stagnation, average earnings in the United Kingdom are £230 below the trend before the global financial crisis of 2007–2009. The Trades Union Congress argues that workers have endured the longest pay squeeze since the Napoleonic wars of the early nineteenth century.

However, the challenge is this: the top 1 percent of wealth holders do not spend all they earn. There are limits to the number of superyachts, private jets, and expansive estates they can buy. In contrast, the 99 percent spend all their income—using it to keep the roof over their heads, buy food, maintain their health, and send their children to university. However, as incomes have fallen in real terms, populations have come to lack the purchasing power needed to buy all that is produced by the export-oriented economy. Far from society’s purchasing power chasing too few goods and services, there are in aggregate terms too many goods and services chasing too little purchasing power. This imbalance has led to high levels of private debt, as the 99 percent borrow money for housing, healthcare, and food at the same time as firms (which cannot sell all they produce) borrow to compensate for falling sales.

The consequences are the reverse of most conventional economic commentary: overproduction, high levels of private debt, and falling incomes. Experience has shown that all of these elements lead to global financial crises.

What Is to Be Done?

Keynes’s policies for stable levels of production and employment required a global economic system that sustained, rather than opposed, domestic policymaking. As he prepared the British Treasury for the Bretton Woods conference, he explained to the House of Lords in 1944 that his “main task for the last twenty years” had been to ensure that

in [the] future, the external value of sterling shall conform to its internal value as set by our own domestic policies, and not the other way round. Secondly, we intend to retain control of our domestic rate of interest, so that we can keep it as low as suits our own purposes, without interference from the ebb and flow of international capital movements or flights of hot money. Thirdly, whilst we intend to prevent inflation at home, we will not accept deflation at the dictate of influences from outside. In other words, we abjure the instruments of bank rate and credit contraction operating through the increase of unemployment as a means of forcing our domestic economy into line with external factors. (Emphasis added.)

Keynes assumed that a monetary system that primarily served the interests of finance and wealth was opposed to stable levels of production and employment at home, and ultimately to balanced trading and financial relationships between states. Given today’s advanced scientific understanding of the earth’s finite resources, it is evident that a global economic system based on perfectly compounded interest and capital accumulation also stands in opposition to a stable climate and ecosystem. Belief in the viability and continuation of such a system is utopian. Given climate breakdown, societies facing extreme weather conditions and the resulting crop and energy failures will have to urgently transform the global “nonsystem” in order to stabilize domestic economies.

Global economic stability will require the restoration of balance to the international trading system and the reorientation of economies away from the global financial system and toward domestic economic interests, in particular those of the majority within economies: the 99 percent. In other words, the global economy needs to be restructured away from the interests of globalized wealth to the interests of workers in the domestic economy. We must again build an economy for work—especially the work of restoring balance to the ecosystem—and not wealth.

If faith in democracy is to be retained and if authoritarian forces are to be suppressed, societies must cooperate to help restore public, democratic, and accountable authority over the global and domestic economy. This transformation can be achieved only if the international community works in solidarity to restrain and manage global capital and trade flows. To do so will require a new form of global economic governance, based on international cooperation and coordination—and on balanced and sustainable economic activity.

One of the ways in which international solidarity can be fostered is by dismantling the financial system of unfettered capital mobility, based on a single, hegemonic reserve currency—a system as harmful to citizens of the hegemon as it is to many other states, as Michael Pettis argues. Fundamental to any move to “a world beyond capitalism” must be the abandonment of the system that turbo-charged globalization in the 1960s: “growth” derived as the rate of change of a continuous function.

Related Content

Austerity: a symptom of globalised rentier capitalism’s failure

Oecd statistics – how do labour markets perform.

G77 and China demand change in the international financial system

Jeremy smith, review of “the irreconcilable inconsistencies of neoclassical macroeconomics: a false paradigm” by john weeks, leave a reply cancel reply.

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

Policy Research in Macroeconomics (PRIME’s official name) is a company limited by guarantee, incorporated in England and Wales. It is company no. 07438334 and its registered office is at 11a Hatch Road, Pilgrims Hatch, Brentwood, Essex, CM15 9PU.

We collect cookies on this website through web analytics. For more information, please read our Privacy Policy .

Twitter @Primeeconomics @AnnPettifor @RefractionsJs

Facebook: Prime Economics

Linkedin: Ann Pettifor Jeremy Smith

jeremy.smith @ primeeconomics.org +44 20 7723 6940 (0) 7951 032283

PRIME 51 Clarence Gate Gardens Glentworth St London NW1 6QS

Provided that you acknowledge the authors, that you fairly represent the views they express and that you credit  primeeconomics.org  (and where relevant any original source of the article in question) with due prominence, you may freely quote from articles on this website.

© All rights reserved

Website designed by j.chatwin.

This website collects cookies and analytic data. To use our website you must consent. For more information read our Privacy Policy .

Share on Mastodon

San Antonio Economic Indicators

August 22, 2024

San Antonio payrolls grew slightly, and wages registered solid growth in July, while retail sales tax revenue marginally decreased.

Business-cycle index

The San Antonio Business-Cycle Index , a gauge of economic conditions in the metro area, increased an annualized 2.5 percent from June to July, narrower than the 3.1 percent rise from May to June ( Chart 1 ).

Labor market

Unemployment rate holds steady.

The San Antonio unemployment rate remained 3.7 percent ( Chart 2) . The unemployment rates in both Texas and the U.S. were higher at 4.1 percent and 4.3 percent.

Employment growth weakens

San Antonio payrolls increased an annualized 0.8 percent in July (815 jobs) (Chart 3) . Job gains were driven by trade, transportation and utilities (4.0 percent, or 673 jobs), financial activities (3.7 percent, or 305 jobs), construction (5.9 percent, or 319 jobs), and manufacturing (3.6 percent, or 185 jobs). All sectors experienced monthly growth except leisure and hospitality (-4.5 percent, or 558 jobs), educational and health services (-2.2 percent, or 339 jobs), government (-0.9 percent, or 141 jobs), information (-5.1 percent, or 75 jobs) and professional and business services (-0.2 percent, or 24 jobs). Year-to-date total nonfarm employment grew 1.2 percent in San Antonio, lower than Texas (1.7 percent) and the U.S. (1.6 percent).

San Antonio wages grew an annualized 10.9 percent in July, while Texas wages rose 3.9 percent and U.S. wages were up 3.7 percent. The three-month moving average of hourly wages in San Antonio was $29.48, below both the state average of $32.90 and the national average of $34.98 ( Chart 4 ). In the past year, wages in San Antonio have risen 5.0 percent, faster than the increase in Texas (4.9 percent) and the increase in the U.S. (3.8 percent).

Retail sales tax revenue

San Antonio sales tax revenue, adjusted for inflation, shrank 1.8 percent in July compared with the previous month. The state sales tax revenue increased 3.2 percent over the same period (Chart 5) . Year-over-year San Antonio sales tax revenue increased 2.6 percent, while state sales tax revenue rose a slight 0.3 percent.

Existing-home sales

Existing-home sales in San Antonio declined 3.2 percent in March compared with a 4.7 percent decrease statewide (Chart 6) . Despite the drop, homes sales are up 18 percent year to date in San Antonio and 7.8 percent in the state. Year-over-year sales are up 3.0 percent in San Antonio and down 6.4 percent in the state.

NOTE: Data may not match previously published numbers due to revisions.

About San Antonio Economic Indicators

Questions or suggestions can be addressed to Ethan Dixon at [email protected] . San Antonio Economic Indicators is published every month during the week after state and metro employment data are released.