Fiscal Policy and Growth in Light of the Crisis

Solow An interview with Robert Solow, at Vox:

Viv [Davies]: And what are your views on the current growth prospects for the US?

Professor Solow: I've had another difficulty with the discussion at the conference today, which relates to this, and I'll mention it first. Some of the speakers, it seemed to me, talked about economic growth, when what they were talking about really was short term increases in output. Since I've spent my life doing growth theory – my adult life, anyhow, doing growth theory – this kind of distinction matters a lot to me. I think of economic growth as being a fundamentally long term proposition that relates primarily to the growth of potential output, of the supply of output. Of course, it's an economic responsibility to have demand grow to match the supply, but the growth problem for an economy is to make its capacity to produce grow.

The US, I don't think, in the course of the crisis or the recession, has suffered any dramatic loss in those factors that lead to long term growth, which are primarily productivity increases and innovation, whether organisational or technological, and to a lesser extent, investment in human capital and tangible capital.

The problem that's been created by the recession is, because of the loss of wealth and the buildup of debt, private and public, the problem has been a difficulty in using the capacity that we have. But I think that, if and when we can solve the problem of a return to reasonable full utilisation of the productive capacity that's already in existence, and to a much lower unemployment rate, the underlying growth factors in the economy are still there, so that over the next 50 years, 30 or 40 years, I would not think that the likely long term growth rate of the US will be very different from what it was before.