Written by Robyn Eggs
"New Focus: Endogenous Growth Measurement in the Economy"
The equilibrium of the global economy is in the not-too-distant future.
The population is increasing substantially, and the largest segment of the U.S. population will retire soon. According to PricewaterhouseCoopers (PWC) an economic slow-down will occur around 2020, or less than five years from now, and continue on into 2050, at which time the global economy is predicted to also triple in size (2015)!
With that knowledge it must be addressed that the GDP growth
of this nation will hence slow, causing businesses to look towards “deepening” capital within this growth measurement (MIT, 2009). It is important to note what kind of growth is occurring, whether it be in capital, hours, or Total Factors of Production (TFP) (MIT, 2009). For, labor growth alone won’t guarantee a healthy nation (Chien, 2015).
In order to fully maximize, or deepen output, the U.S. must first invest
in sustainable infrastructure, human capital, and technological advances, for only long term economic strategy will increase the GDP healthfully. In the past, government controls in economic policy have been thought to hinder growth, but, in light of the recent recession, that thinking must be re-evaluated. Apparently continual growth has more to it than just increasing output. At what point does every household have all the products it needs? What needs to happen to continue to grow a nation’s value after that?
Strong government controls may be the only answer,
considering the economy will soon reach equilibrium. How are businesses prepared for such an event? Consider that the free market of businesses might only be concerned with the short term effects of economic growth and shock, but what controls will be instituted to carry on efforts when said businesses mature or no longer exist? Continual increased output will simply not be enough, considering the explosion in population growth by 2050. Capital deepening must become the new focus of growth measurement, to guarantee that output per worker increases.
New economic policy must therefore become endogenous.
New, long term evidence has shed light on the effects of internal and external shocks to this nation, and globally over many decades. And while exogenous growth models can be applied to technological shocks, endogenous growth explains why those shocks inevitably deepen the capital of the labor force. Technology allows for more output per worker than ever before; labor increases using the same amount of hours. Not just technology can grow the economy but the TFP can as well, like the skills and abilities of trained and talented human capital.
Investing in human resources, new technology, and sustainable infrastructure
that said transactions occur over, is the new focus of growth measurement in the economy. Focusing on endogenous measurements of growth rather than exogenous is what is necessary in the long-term. How will government policy solve the economic problem of capital per worker decrease due to the large amount of population that will turn 60 between 2020 and 2050 (Kim & Hewings, 2013)? How will it deal with a long term economic slow-down? The separation between government policy and private sector economic business strategy lies in the training and investment of human capital, aka the education system.
Without this government control, the private sector
would need to establish their own education systems, to prepare children to enter the workforce. How would businesses even begin to do that? What types of people would a business choose? What business would the parents choose to educate their children? And would having non-standardized education increase the GDP, or would it weaken it?
These situations can only be measured in endogenous growth.
Government economic policy can serve to motivate or enhance this growth in human capital, in a way that businesses may fail at - by providing a standardized goal of education across the board, by maintaining the infrastructure already in use to house this education, and by caring for retirees that no longer contribute to the workforce.
Breaking down current government policy, however, is still a must.
It needs to be rebuilt efficiently, utilizing new technology, to maximize its effect on the GDP. It needs to question what will be done in regards to the slow-down. But surely, it must retain tight controls in order to plan for and protect the future health of the economy, both nation-wide and globally.
- Chien, YiLi. (2015) What drives long-run economic growth? Retrieved from https://www.stlouisfed.org/on-the-economy/2015/june/what-drives-long-run-economic-growth
- Kim, T., Hewings, G.J.D., (2013). Endogenous growth in an aging economy: Evidence and policy measures. The Annals of Regional Science, 50(3), 705-730. doi:http://dx.doi.org/10.1007/s00168-012-0527-z
- MIT OpenCourseWare (2009) Table 14.02 Principles of macroeconomics [PDF] Retrieved from http://ocw.mit.edu
- PricewaterhouseCoopers (2015) The world in 2050: will the shift in global economic power continue? [PDF] Retrieved from https://www.pwc.com/gx/en/issues/the-economy/assets/world-in-2050-february-2015.pdf
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