Question

What drives long run growth? In your opinion, what policies could the U.S. adopt that would improve long run growth

Answer 1

If we go by the growth theory provided by Robert Solow, we know that once the economy reaches a steady state, the savings rate does not affect the growth rate.

In the long run, it is the 'ideas' that affects the growth through changes in total factor productivity.

Ideas include any kind of innovation,technological advancement, etc that changes the total factor productivity.

In terms of production function, Y = A * f(K,L)

Where Y is output, K is capital , L is labor , and A denotes total factor productivity. So ideas brings the long run growth for an economy by changing A. Since K and L both are limited, it is A that can affect growth in long run.

• There are two types of growth patterns that an economy can follow.

1.) Catching up growth

2.) Cutting edge growth

Catching up growth is what a developing country follows whereas the cutting edge growth is what the developed countries face.

Since US is a developed country,it follows the cutting edge growth pattern. So any policy that can increase A in the United States' production function will improve its long run growth.

It could be increased incentives given for investing in Research and development, creating an environment that can push innovation, providing opportunity to bright minds from different countries and providing them with the required resources,etc. This can be done by both government policies as well as monetary policy. Changes in Interest rate on loans for research and development, startups, etc may bring a change in total factor productivity.