How does economic growth benefit the government

New regulations were implemented in the years to follow that imposed increased capital requirements for banks, meaning they need more cash on hand to cover potential losses from bad loans. Infrastructure spending occurs when a local, state, or federal government spends money to build or repair the physical structures and facilities needed for commerce and society as a whole to thrive.

Infrastructure includes roads, bridges, ports, and sewer systems. Economists who favor infrastructure spending as an economic catalyst argue that having top-notch infrastructure increases productivity by enabling businesses to operate as efficiently as possible. For example, when roads and bridges are abundant and in working order, trucks spend less time sitting in traffic, and they don't have to take circuitous routes to traverse waterways. Additionally, infrastructure spending creates jobs as workers must be hired to complete the green-lighted projects.

It is also capable of spawning new economic growth. For example, the construction of a new highway might lead to other investments such as gas stations and retail stores opening to cater to motorists. The stimulus was designed to help create construction jobs that were hit hard due to the impact from mortgage crisis on residential and commercial construction.

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. Key Takeaways Economic growth is driven oftentimes by consumer spending and business investment. Tax cuts and rebates are used to return money to consumers and boost spending.

Deregulation relaxes the rules imposed on businesses and have been credited with creating growth but can lead to excessive risk-taking. Infrastructure spending is designed to create construction jobs and increase productivity by enabling businesses to operate more efficiently. Article Sources. Investopedia requires writers to use primary sources to support their work.

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. There are some characteristics that are helpful in deciding on which side of the boundary a particular product falls.

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. 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. 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. 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 it 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. Imagine two countries that are identical except for one aspect, home ownership.

In Country B everyone owns their own home and no one pays rent. To avoid such misjudgment, the production boundary includes the housing services that are provided without any monetary transactions. 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.

Many discussions about economic growth are extraordinarily confused. People often talk past one another. I believe the 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 of 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.

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 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. 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. 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. 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 are missing.

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

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. 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. In the previous section we measured growth as the ratio between income and the price for one particular good. But of course we could do the same for all the many goods and services that people want.

A means to many ends in fact. It is because a person has more choices as their income grows that economists care so much about these monetary measures of prosperity. They are shown in this chart. Both measures show that global inequality is very large. An income of int. If you are living in a rich country and you want to have a sense for what it means to live in a poor country — where incomes are times lower — you can imagine that the prices for everything around you suddenly increase fold.

If you ask yourself how these price increases would change your daily consumption and your day-to-day life, you can get a sense for what it means to live in a poor country. 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. Economic growth, as we said before, describes an increase in the production of the quantity and quality of the economic goods and services that a society produces. 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.

The chart shows the income of people around the world over time, as reported in household surveys. 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 that 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 measure real incomes. As explained before, incomes are adjusted for price differences between countries and they are also adjusted for inflation.

Global economic growth can be seen in this chart as an increasing share of the population living on higher incomes. It will also raise demand and boost private investment in manufacturing and other sectors where business investment has been weak for more than a decade. And it supports workers who care for their loved ones who are elderly or have disabilities. While infrastructure investment is about accelerating long-term growth, it will also speed recovery in crucial sectors and get people back to work to prevent the skill loss that poses real threats to productivity and GDP for decades to come.

Overcoming decades of lackluster and unequally shared economic growth requires large investments. The AJP delivers a series of investments that enables a transition to an economy that may grow at higher levels, delivering high-quality jobs and more broadly distributed economic benefits.

Christian E. Table B The year-to-year numbers of retirement plan access and coverage do not change much. Moreover, researchers use data from the U. Data thereafter are no longer reliably comparable to earlier years. For data on the gap between white households and Latino households, see Danyelle Solomon and Christian E. Also, wealth inequality among Asian Americans is greater than among white households, with many Asian households with low wealth financially less secure than their white counterparts.

See Christian E. For data on the widening gap between Black and white households, see Christian E. For data on the widening gap between Black and white households, see Ibid. Net equity issues and dividend payouts can fluctuate substantially from one quarter to the next. To get a clearer picture of trends, the calculations average those data over the first two quarters of the recession. Lucy Dadayan and Kim S. Working Women Fared During the Pandemic? The executive order on racial equity and support for underserved communities could also be a helpful tool to support workers.

More women work in countries that subsidized child care and offer abundant parental leave. See David R. Galen Hendricks , Lorena Roque. Ryan Zamarripa , Lily Roberts. Marc Jarsulic , Gregg Gelzinis. Colin Seeberger Director, Media Relations. Peter Gordon Director, Government Affairs.

Madeline Shepherd Director, Government Affairs. In this article. InProgress Stay updated on our work on the most pressing issues of our time. Figure 1. Growth has been subpar in the years leading up to the pandemic Economic growth over the past two decades has been modest at best. Figure 2. Figure 3. Figure 4. The capital stock of U. High income inequality and widespread income insecurity leave households financially stressed Persistently high income and wealth inequality is another key trend that holds back productivity growth.

Table 1. The effect of the coronavirus crisis on the U. Figure 6. Supporting workers both present and future Support for workers includes providing help for people to pursue the careers they want. This can be done in several ways, mainly by Congress through legislation and the administration through regulatory and executive actions: Expand social insurance spending.

More families will be protected from sharp income declines. This will give them peace of mind and allow them to better plan for their future. In some cases, peace of mind and stability can enable people to take risks, invest in the future, and start new businesses.

Expand and enforce anti-discrimination and anti-harassment legislation. President Biden has already signed an executive order establishing far-reaching anti-discrimination protections for LGBTQ people. Workers need more support to manage caring for children and other family members in order to participate fully in the labor market. And in the short to medium term, ensuring access to reliable, affordable child care will be crucial to reconnecting millions of parents, especially mothers, with the paid labor force.

GDP each year. This would give millions of undocumented immigrants opportunities to contribute their skills and experience to the American economy. It would also boost entrepreneurship and innovation, as immigrants are more likely to start new companies. Households will need more affordable health insurance that no longer leaves them with medical debt after unexpected health events. It will also include investments in health care infrastructure so that people living in currently underserved areas and neighborhoods will have equal access to high-quality care.

These investments will pay off in the form of a healthier workforce, less debt, and thus fewer financial and physical worries among workers, allowing them to better plan and focus on their future and careers. The federal government will need to make more sustained efforts to give currently underserved communities, for instance, communities of color and rural communities, greater access to quality health care. Policies such as the monthly distribution of the child tax credit, as expanded by ARP, can have many positive effects.

Improvements in health status, nutrition, and immediate educational attainment can lead to future educational success, higher career trajectories, and more productivity. Numerous studies show that the earned income tax credit program increases labor force attachment, increasing employment stability and therefore economic growth. Investments in public education tend to generate positive outcomes in the labor market, such as higher earnings for children in the future.

The ARP will make substantial down payments toward avoiding such cuts and enhancing key public services at the state and local government levels. For instance, a pre-COVID analysis by the Government Accountability Office concludes that 54 percent of school districts need to make updates to buildings to ensure safe and healthy environments.

Other needs include providing neglected communities with clean water and making neighborhoods more resilient to climate change, among other challenges. The post-pandemic needs of state and local governments are large. Boost public support for formal training, including but not limited to higher education.

Not all high school students want to go to college. Public support will mean making higher education more affordable so that people do not drown in debt when they graduate as well as expanding and improving a continuing training infrastructure so that those who do not attend college also enjoy rewarding and family-sustaining careers. These urgent needs are apparent in the number of people who are postponing or canceling postsecondary education plans. Supporting expanded and equitable access to other training opportunities also deserves attention in subsequent investment legislation.

Most of the measures in the ARP are designed to support the most affected populations, helping to reduce inequality—particularly as inequality has worsened during the COVID crisis—and boosting future growth. For instance, increasing the federal minimum wage, which should be enacted in legislation even though it did not make it into the final version of ARP, will reduce inequality and may even help small businesses.

Such a package should: Include robust, comprehensive investments in infrastructure that boost national competitiveness, raise household incomes, and reduce greenhouse gas emissions. The final package should include transportation, water, clean energy, schools, caregiving, rural broadband, and affordable housing, among investments in other sectors.

Target those communities facing sustained economic hardship. Equitable infrastructure investments are an essential component of achieving inclusive prosperity. Black Americans and other people of color have often been left out of public funding—or have seen their communities divided by highways and harmed by polluting facilities, including waste disposal. Any renewed efforts to boost productivity growth need to be race conscious and include, among other things, added funds for historically Black colleges and universities and other minority-serving institutions.

Greater inclusion of all people will ensure that the country will benefit from the largest talent pool and the widest range of new ideas.

Support new environmentally sustainable technologies, advanced manufacturing, the care economy, and education. All of these investments would pay long-term dividends. When infrastructure investments are done right, they can lower household transportation costs by reducing auto dependence; increase access to employment and educational opportunities; and redress past discriminatory policies and projects that disproportionately burden low-income communities and people of color.

Use regulatory tools to create incentives for private firms. Regulations that emphasize climate change, racial equity, inequality, and worker power will provide a level playing field for all businesses. Firms will no longer gain an advantage by being better at exploiting workers and the environment. The government can only lay the foundation for faster growth. In the end, private businesses need to leverage their vast resources toward tackling the challenges ahead.

The corporate tax system should incentivize investment in the United States rather than abroad. Forty percent of the benefits of these investments should also be directed toward disadvantaged and environmental justice communities, which have been disproportionately affected by fossil fuel pollution.

Significantly boost federal government support for research and development. This will help scientists, innovators, and inventors address the looming and emerging challenges of tomorrow. In addition to more spending on research and development, 63 this requires greater attention to equal access for communities of color to such funds.

There is also an opportunity to reconfigure and expand the existing Manufacturing Extension Partnership program and redirect federal demand for manufactured goods to high-performing domestic firms. These measures should be coupled with an expansion of the Manufacturing USA institutes, an accompanying program of labor force training.