Economic growth without inflation

The U.S. economy can grow at the 3.5 per cent average of the past several decades, with low and stable inflation. Recent monetary policy has been about right, and it is being helped in the fight against inflation by globalisation, productivity gains and other factors, says Robert McTeer, a distinguished fellow with the National Center for Policy Analysis.

Moreover, it is possible to grow the economy without any drastic manipulation of the money supply. Supply-side factors may stimulate output independent of aggregate demand through:

Increases in labour productivity (output per worker), through investments in education, capital goods and technological advances.

Shifts in investment as a result of lower prices for capital and higher expected future returns.

Increases in globalisation and free trade, which makes imports more affordable while increasing the demand for U.S. exports.

Cutting taxes on capital investment, which stimulates job creation.

Hence, the quantity and quality of goods can be increased without expanding the money supply to raise aggregate demand. In a tight labour market, increased production can raise labour costs. But, accelerating productivity per worker allows wages to rise without comparable increases in the cost per unit of labour, says McTeer.

In fact, GDP growth rates have been higher in many years with lower-than-average inflation rates, says McTeer.

Source: Robert McTeer, Economic Growth without Inflation, National Center for Policy Analysis, Brief Analysis No. 582, March 9, 2007.

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FMF Policy Bulletin/ 13 March 2007