Glasgow Social Sciences Hub

After a slow recovery from the pandemic, a cost-of-living crisis and an uncertain outlook for inflation, interest rates and public finances, the economy is again at the top of political debate. It will no doubt dominate the upcoming UK and US elections.  

The emphasis amongst many economic policies these days is returning to economic growth. This is because growth can create jobs and allow for higher incomes. It can also generate revenues for social services and help governments to grow out of their high public debt.     

Historical growth accounting, i.e. looking at what changes have helped improve (or weaken) the growth rate of countries, has shown that the main factors contributing to better growth rates include higher capital per worker (e.g. better-quality plant and machinery), more years of quality schooling, technological progress, but also better ways of using scarce social resources or reducing resource misallocation.  

But what policy reforms might any new or incumbent government make to stimulate and remove barriers to economic growth? New research by Professor Jim Malley (University of Glasgow) and Professor Apostolis Philippopoulos (Athens University of Economics and Business) has been searching for government policies that can help in this direction, focusing on public investment and technological change.  

Public investment  

Government capital budgets are under significant pressure in the UK and the US as policymakers look to balance their books. In the UK, with net public sector debt over 90% of GDP and debt interest payments currently taking up nearly 1 in 10 of every pound raised in taxes, key investment budgets are being frozen in cash terms. 

This new work by Malley and Philippopoulos, however, argues that increasing public investment spending can help to boost economic growth on a sustainable basis and hence can be, at least up to a point, self-financing, although this depends on how it is funded and used. As the authors point out, the beneficial effects of higher public spending on infrastructure will be cancelled if this spending is financed by increased taxes that hurt private incentives to work and invest. The same will happen if higher public spending increases rent-seeking among big players. Reforms are needed to ensure that any increase in public investment is well-targeted and flows through to a genuine improvement in social prosperity.  

Technological progress and market structure    

For developed countries such as the US and the UK, technological progress is the most important factor for prosperity in the medium and long run. Therefore, a huge amount of effort has gone into understanding the channels through which this can be achieved, including policy efforts to translate innovative ideas and research into new and better products over time. But what factors shape the evolution of this progress? 

Malley and Philippopoulos find that stimulating innovation by allowing for higher price markups for research firms, at least up to a point, can benefit the economy. The reasoning is that such a change, although it makes blueprints less accessible to other firms, can boost the production of new and better products, leading to higher aggregate growth. On the other hand, stronger competition and more accessible entry of firms in the more traditional production sectors are also necessary to enhance efficiency, stimulate productivity, and accelerate growth. The lesson is that one-size-fits-all competition policies across industries are not a good idea.  

In sum, the combination of targeted investment and infrastructure and reforms to maximise efficiency in the operation of technological progress provides some ways for policymakers to navigate an economy out of a current low-growth environment.  

 

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Read the full technical articles in the Social Sciences Research Network journal and the European Economic Review. 

First published: 30 January 2024