Economic growth is measured by an increase in gross domestic product (GDP), which is defined as the combined value of all goods and services produced within a country in a year. Many forces contribute to economic growth. However, there is no single factor that consistently spurs the perfect or ideal amount of growth needed for an economy. Unfortunately, recessions are a fact of life and can be caused by external factors such as geopolitical and geofinancial events.
In the United States, economic growth often is driven by consumer spending and business investment. If consumers are buying homes, for example, home builders, contractors, and construction workers will experience economic growth. Businesses also drive the economy when they hire workers, raise wages, and invest in growing their businesses. A company that buys a new manufacturing plant or invests in new technologies creates jobs and spending, which leads to growth in the economy.
Other factors help promote consumer and business spending and prosperity. Banks, for example, lend money to companies and consumers. As businesses have access to credit, they might finance a new production facility, buy a new fleet of trucks, or start a new product line or service. The spending and business investments, in turn, have positive effects on the companies involved. However, the growth also extends to those doing business with the companies, including in the above example, the bank employees and the truck manufacturer.
Key Takeaways
- Economic growth often is driven 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 has 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.
Tax Cuts and Tax Rebates
Tax cuts and tax rebates are designed to put more money back into the pockets of consumers. Ideally, these consumers spend a portion of that money at various businesses, which increases the businesses’ revenues, cash flows, and profits. Having more cash means companies have the resources to procure capital, improve technology, grow, and expand. All of these actions increase productivity, which grows the economy. Tax cuts and rebates, proponents argue, allow consumers to stimulate the economy themselves by imbuing it with more money.
Note
In 2017, the Trump administration proposed, and Congress passed the Tax Cuts and Jobs Act. The legislation lowered corporate taxes to 21%; the highest corporate income tax rate was 35% before the bill. Various personal income tax brackets were lowered as well. The bill cost $1.5 trillion and was designed to increase economic growth for the next 10 years.
As with any stimulus used to spur economic growth, it’s often difficult to pinpoint how much growth was created by the stimulus and how much was generated by other factors and market forces.
Stimulating the Economy With Deregulation
Deregulation is the relaxing of rules and regulations imposed on an industry or business. It became a centerpiece of economics in the United States under the Reagan administration in the 1980s, when the federal government deregulated several industries, most notably financial institutions. Many economists credit Reagan’s deregulation with the robust economic growth that characterized the U.S. during most of the 1980s and 1990s.
Proponents of deregulation argue tight regulations constrain businesses and prevent them from growing and operating to their full capabilities. This, in turn, slows production and hiring, which inhibits GDP growth. However, economists who favor regulations blame deregulation and a lack of government oversight for the numerous economic bubbles that expanded and subsequently burst during the 1990s and early 2000s.
Many economists cite that there was a lack of regulatory oversight leading up to the financial crisis of 2008. Subprime mortgages, which are high-risk mortgages to borrowers with less-than-perfect credit, began to default in 2007. The mortgage industry collapsed, leading to a recession and subsequent bailouts of several banks by the U.S. 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.
Using Infrastructure to Spur Economic Growth
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.
Note
During the Great Recession, the Obama administration, along with Congress, proposed and passed The American Recovery and Reinvestment Act of 2009. The stimulus package was designed to spur economic growth in the economy since business and private investment was waning. The Obama stimulus as it’s commonly referred to included federal government spending exceeding $26 billion for highways, bridges, and roads. The stimulus was designed to help create construction jobs that were hit hard due to the impact of the mortgage crisis on residential and commercial construction.
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.
What Are the 4 Factors of Economic Growth?
Economic growth has four phases—expansion, peak, contraction, and trough. Expansion is when employment, production, and more see an increase and ultimately reach a peak. After that peak, the economy typically goes through a contraction and reaches a trough.
What Makes a Strong Economy?
There is no singular answer to what makes an economy strong. Several factors working together contribute to strong economies. Efficiency and resources are among those contributing factors. An example would be an efficient manufacturing strategy that can more quickly turn resources into products that can be shipped and sold.
What Are 2 Measures of Economic Growth?
Two common measures for economic growth are gross domestic product (GDP) and gross national product (GNP). While GDP measures all output produced within a nation, GNP also includes investment income from overseas and removes investment income earned by foreign investors.
The Bottom Line
Multiple factors working together typically are what impact economic growth, which often is reflected in GDP growth and GNP growth. There are numerous strategies governments might use to try and stimulate economic growth, such as tax breaks or tax rebates, deregulation, and investment in infrastructure.
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