Can Policy Boost Growth?

January 10, 2014

The best way to produce long-term economic growth is through tax reform, deregulation and freer trade, says John Makin, a resident scholar at the American Enterprise Institute.

The United States has grown at less than 2 percent of gross domestic product ever since the financial crisis in 2008, with some suggesting that the United States is in a period of persistent stagnation. Fiscal stimulus produces only short-term growth -- it does not stimulate long-term growth. Instead, the United States is more likely to keep growth at or above the 2 percent historical average by doing the following:

  • Reducing policy uncertainty: Research indicates that uncertainty reduction is associated with a higher growth rate of up to 1 percentage point in the United States. Moreover, budget and debt crises should be stopped, as they only increase uncertainty and weaken investment.
  • Creating a more neutral tax system: Lower and more uniform rates on a broad tax base would increase growth. While many people recognize this idea, it has not been implemented easily or quickly.
  • Creating more free trade: Restrictive, protectionist trade policies only hurt growth, and maintaining and increasing free trade should be encouraged.
  • Deregulating: Deregulation reduces policy uncertainty and government intervention leads to misallocation of resources. The U.S. health care and financial sectors have been heavily regulated and those policies need to be reversed.

On the bright side, the United States' pace of growth is better than the growth rate in Europe and Japan, and the United States remains one of the best environments for investment and growth in the world.

Source: John H. Makin, "Can Policy Boost Growth?" American Enterprise Institute, January 7, 2014.

 

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