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World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
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Chapter 17: Can we grow faster?

James Tobin


* The capacity of the American economy to produce and to grow is commanding unusual attention. Current rates of growth of real (that is, inflation-corrected) gross domestic product (GDP) are in the range of 2 per cent to 2.3 per cent. They compare unfavorably with the 3.9 per cent spurt from 1982 to 1989 and the 3.5 per cent to 4.0 per cent average rates sustained from 1946 to 1972. ‘A rising tide lifts all boats’ was a favorite aphorism of John Kennedy and Lyndon Johnson. Were the economy to grow 3.5 per cent per year from 1996 to 2050 instead of 2.3 per cent, GDP in 2050 would be $68 trillion instead of $36 trillion. This 86 per cent gain would solve a host of problems, notably Social Security and Medicare, that now look intractable. Such is the magic of compound interest. That greater national output and faster GDP growth are desirable does not mean they are feasible. It is too much to expect that any government action can raise the GDP growth rate forever, or until 2050, or indeed for more than a few years. Maybe good policy can raise the level of GDP for years ahead, but generally not its growth rate. To keep raising GDP year after year, it would be necessary to keep repeating the dose of good policy. Consider, for example, a commonly asserted cause-to-effect chain resulting from a cut in marginal income-tax rates. People choose to work more; employment and GDP rise....

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