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5.7 β€” Public Policy and Economic Growth

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As seen in 5.6 β€” Economic Growth, we see how economic growth is associated with an outward shift of the PPC and a rightward shift of the long-run aggregate supply curve.

There are a few shifters of economic growth, most specifically:

  1. Change in technology
  2. Change in human capital
  3. Change in physical capital

Public Policy

As a result, we can use public policy to foster economic growth. This is mostly done through stump policies like:

  1. Increasing human capital per worker by increasing government spending on education and job training and/or tax credits for education or job training
  2. Increasing technology by increasing government spending on technology and/or tax credits for research and development
  3. Increasing physical capital per worker by increasing government spending on infrastructure and/or tax credits for investment spending on physical capital.

More public policy we could achieve is by targeting to increase our productivity and labour-force participation rate:

  1. Increase the age when individuals can collect retirement benefits so people work longer
  2. Increase the number of individuals who enter the labor force by adding tax credits
  3. Increase spending on programs for older workers to continue working

This creates incentive to work longer and for more people to work.

Household Economic Behaviour

These policies also dictate household economic behavior since households benefit from income tax cuts and the reduction of taxes on household savings. Essentially:

  1. Tax cuts will lead to more disposable income, which leads to more consumption. Correspondingly, shifting the AD curve to the right
  2. Tax cuts also lead to more savings
  3. Most savings will increase the supply of loanable funds and lower real interest rates
  4. Lower interest rates mean more investment spending and capital stock formation, which eventually leads to economic growth. This is associated with a right wedge shift of both the short-run aggregate supply curve and the long-run aggregate supply curve

Business Economic Behaviour

These policies also dictate business economic behavior since businesses benefit from tax cuts and deregulation. Ultimately, public policy also helps business increase their GDP and correspondingly create economic growth.

Graph View