Does Economic Growth Lead To Inflation?
June 6, 1997
- Long-term growth in the labor force is thought to be about 1.25 percent annually and the long-term rise in productivity is thought to be about the same, perhaps even a little lower -- yielding a "speed limit" when added together of 2 percent to 2.5 percent.
- But the economy has grown at an average annual rate of 3.7 percent since the start of 1996 -- without a significant increase in inflation.
Some economists believe the theory may be faulty, others blame the official statistics which, they claim, are in error.
- Last year, the work force grew by 2 percent -- well above the 1.1 percent growth in the working age population -- as the booming economy lured more and more people back to work.
- The government recently estimated that there are at least 4.9 million people not counted in official labor force statistics who want a job -- meaning that the economy may be able to expand much faster.
- Many economists now believe that the estimated 1 percent growth in productivity over the past few decades is significantly understated.
- At the same time, government data routinely overstate the level of inflation by 0.3 percent to 1.5 percent, meaning that real output per worker is underestimated.
Source: Perspective, "The Speed Limit," Investor's Business Daily, June 6, 1997.
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