Discussion Guide Share

Introduction

Case Study

Deirdre McCloskey explains in her book Bourgeois Dignity (2010) that the average person anywhere in the world in 1800 lived on the equivalent of $3 per day. Local economies could barely support the basic needs of their citizens. Those who wanted to improve their lives had few options as wealth was concentrated in the hands of the elite few with political power and was secured by force.

But then, something revolutionary happened. Starting in England and the Netherlands, and eventually in America, ordinary people began to get richer, and their situations improved dramatically. Over the past 250 years, economic growth has skyrocketed, especially where free enterprise has flourished. 

McCloskey points out that in 2010, the average Frenchman consumed about $100 per day, and the average American consumed about $120 per day, representing a sixteen-fold increase in wealth. Even though China only consumed about $13 per day in 2010, it was still a four-fold increase in the 32 years since the Cultural Revolution in 1978.

What contributed to the largest and most successful anti-poverty program in human history? Several economic factors, but according to McCloskey, what fundamentally changed was the attitude people had about business and entrepreneurship:

“What changed was the sociology…the attitude of the rest of the society toward businesspeople, and with that new attitude came a change in government policy. It was suddenly alright — most clearly in the most bourgeois country on earth, the U.S.A. — to get rich and to innovate.” 

For more on this, read The Policy Circle’s Free Enterprise and Economic Freedom Brief and watch the following videos:

  • Swedish academic and medical doctor Hans Rosling demonstrates the economic evolution of 200 countries over 200 years (5 min):

  • AEI presents how individuals and society alike benefit from economic growth (4 min):

Why it Matters

Economic growth generally refers to the growth of the gross domestic product (GDP, discussed more below). GDP is commonly used as a measure of the size and health of a nation’s economy but does not capture everything that is happening. A growing economy is also related to a number of supplementary indicators: employment and the labor force, household income, wages, standards of living assets and investments, retirement benefits, social safety net programs, and financial security. Economic growth affects what people spend their money on and how much of it they have to spend on a daily basis. 

The International Monetary Fund breaks down economic growth (6 min):

Putting it in Context

Gross Domestic Product

Gross domestic product (GDP) is defined as “a measure of economic activity in a country. It is calculated by adding the total value of a country’s annual output of goods and services.”

The U.S. GDP per capita (meaning GDP per individual, or how prosperous a country is to each of its citizens) is in the top 15 highest in the world. Explore the World Bank’s data to see country-level and worldwide economic growth since 1960.

The Wall Street Journal explores GDP, how fast it should grow, and what it doesn’t cover (5 min):

History

As noted above, economic growth skyrocketed shortly after the onset of the Industrial Revolution. Rapid economic development following the Civil War paved the way for the modern U.S. industrial economy. As farming technology improved, more people moved to the cities and took other jobs. This process of urbanization created the foundation for major cities.

Much prosperity was lost in the Great Depression (1929-1940), and rebuilding the economy involved major changes, including President Franklin D. Roosevelt’s New Deal, which included more government involvement and sharing of power among government officials, business leaders, and workers.

After recovering from the Great Depression and World War II, the international community realized the need for a structured international monetary arrangement (in the form of the International Monetary Fund and the World Bank). The U.S. has played an important role in both of these groups, which provide funding to poor governments for various projects.

Recessions and economic oscillations have interrupted U.S. economic growth, but none of these setbacks has been enough to hamper its overall upward trend.

Professor Brian Domitrovic dives deeper into U.S. economic history and its role as a global economic powerhouse post-WWII (6 min):

Keys to Economic Growth

Several important factors promote and encourage economic growth. The Index of Economic Freedom by the Heritage Foundation highlights the following aspects of economic growth: 

The Rule of Law: Respect for the rule of law (especially property rights) is a critical precondition for economic growth. When governments do not secure property rights, extra-legal economic activity (such as the black market) thrives, and economies stagnate and decline.

Competition and Openness: Competition spurs innovation, promotes consumer welfare, and can keep corruption in check. To foster economic growth, the government should not close off new entrants that bring market competition. For this reason, antitrust laws are in place to address mergers that may “lessen competition” or “tend to create monopoly.”

Technology: Technological advancement through innovation and entrepreneurship is an essential driver of economic growth. It keeps the economy moving forward by freeing up labor for other markets, using resources more efficiently, or a combination of both. Moving forward generates new and increased value, which shows up in the GDP and GDP per capita of the nation. To get a sense of the technological progress in a country, review its patent laws, entrepreneurship rates, and business exit rates.

Effects of a Sluggish Economy

A stagnant economy has a significant impact on multiple areas of society.

The Private Sector: When companies face weak economic growth, they hire less, and the unemployment rate rises. When fewer people are employed, they do not have a stable source of income and are less likely to make nonessential purchases. This creates a cycle of cost cuts and layoffs as business revenues decline. Businesses also have fewer opportunities to grow or don’t get off the ground because banks and private investors are reluctant to lend money.

Households: Decreased economic productivity reduces opportunity and incomes. As mentioned above, as more people are laid off, they spend less due to the financial loss. It can mean more poverty, homelessness, and reliance on safety net programs, all of which create more debt for the individual and the government.

The Public Sector: Almost everyone believes the government has an obligation to provide a safety net for those in need, including those who need temporary assistance due to economic hardship or health problems. However, this net must be carefully designed so as not to trap people in dependency on the government. See The Policy Circle’s Safety Net Programs Brief and Poverty Brief for more.

The Role of Government

Government Spending

Most government goods and services are not bought or sold on the private market, so it is difficult to assess the effect on GDP. One view maintains there is a “government spending multiplier;” when the government buys $1 worth of goods or services, whoever receives that $1 will spend some of it, which leads to an increase in GDP. Others argue government spending can “crowd out” economic activity because it could replace rather than supplement private sector spending, resulting in a decline in GDP. The money the government spends comes from private individuals and enterprises through taxes. 

The core question becomes: Who spends the money more efficiently to create the society you want, taxpayers or the government?

Fiscal and Monetary Policy

Fiscal policy refers to tax and spending policies controlled by the President and Congress. In general, fiscal policy provides for public needs and keeps the books balanced, such as decisions regarding tax reform or the federal budget.

Senate Committees involved include:

House Committees involved include:

Monetary policy is the wheelhouse of the U.S. central bank, called the Federal Reserve, which is considered independent from the executive and legislative branches. Such actions include buying and selling financial assets to adjust interest rates and influence the supply of money in circulation. These are the big macroeconomic endeavors that balance the entire economy, making sure jobs and wage growth are steady without overheating the economy or causing inflation. 

For more on the difference between fiscal and monetary policy, see this explainer from the Federal Reserve (1 min):

Investigate the background of the Federal Reserve, why it was created, and why some would like it eliminated. Review The Policy Circle’s Taxes Brief for more fiscal and monetary policy.

The Big Debate

The role of the government in our economy is heavily debated and tends to focus on economic equality and growth. The crux of the question rests on the level and depth of government involvement. Can the government design programs to solve all of our salary and economic woes? Or should the government only step in to help solve problems that arise in the quest for every American to reach the American dream?

Proponents of a strong government’s role in creating economic equality think that economic growth is not always the most accurate measurement of overall welfare. They place more emphasis on the government’s role in redistributing income and regulating the economy with the goal of ensuring opportunity. By supplying members of society with equal opportunities for economic success, policies that reduce inequality may build social support that allows the economy to function.

Most economists will agree that this reaches a point of diminishing redistributive returns. Increases in inequality correlate to decreases in economic output. Cuba is an example of strong equality driven by low economic output.

Proponents of less government involvement point to unintended consequences from government policies aimed at reducing poverty, which can misalign incentives for economic output. Government regulations can stifle competition and make it more difficult for businesses to take risks and invest in developing products and services they think people will want. Instead of one person or group of elected or nominated officials, the marketplace is the best organizer of resources, and the trial-and-error process of bringing new products and companies to market is more likely to yield progress for all.

The Role of the Private Sector

There are many successful private sector-led endeavors that bolster economic growth.

  • Policies promoting the value of free markets: Policies that promote economic freedom and the right to earn a living, efforts that shine a spotlight on the negative impact of excessive regulation (such as the Institute for Justice), and policies that open the door to quality educational opportunities are the pathway to a better future.
  • People-focused programs: This could encompass programs for mentoring and training, assistance with finding and keeping housing, daycare and after-school programs and supporting the whole person to promote self-motivation and personal responsibility.
  • Entrepreneurship and business formation: Many people have ideas but don’t know how to implement them. Incubators and accelerators, for example, assist entrepreneurs in the journey toward becoming successful companies. Some examples are Endeavor Detroit and Rising Tide Capital. Other options are supporting existing businesses and social enterprises that hire people in vulnerable communities and those needing a second chance.

Current Challenges and Areas for Reform

GDP

During the 2000s, economic growth was slower than in previous decades, and the recovery from the crash of 2008-09 was slower than previous recoveries; the growth rate averaged 1.7% in 2016, 2.3% in 2017, and 2.9% in 2018. The main concerns among economists were that this was still a low growth rate, although July 2019 marked 10 years since the Great Recession and the longest economic expansion since 1854.

The economic crisis brought on by the coronavirus pandemic ended this expansion: the second quarter of 2020 saw the economy contract 32.9%, a contraction “more than three times as sharp as the previous record – 10% in 1958 – and nearly four times the worst quarter during the Great Recession.” For the whole year of 2020, GDP decreased by 2.5%, the first annual decline since the Great Recession and the biggest drop since 1946. Preliminary estimates from the Bureau of Economic Analysis indicate real GDP increased 5.5% between the fourth quarter of 2020 and the fourth quarter of 2021.

The U.S. economy reversed direction in the first quarter of 2022 and then shrank at a rate of 1.4% (compared to the 6.9% growth rate in the fourth quarter of 2021). While consumer spending remains strong, economists point to fading government stimulus spending, slower pace of investment by businesses, and world events.

In 2024, the U.S. Real GDP percent change remains modest.

Employment

The unemployment rate accounts for individuals who want to work but haven’t found a job. People who are unemployed but not actively searching for work are not included in the unemployment rate. Low unemployment means there are more job openings than available workers, which generally makes employers raise pay to attract new workers or keep current employees. Higher wages give people more spending power, and more investment in labor can boost production, both of which can increase GDP.

After falling to one of its lowest levels (3.5%, representing 5.7 million individuals in February 2020), the unemployment rate skyrocketed during the pandemic. Through 2023, unemployment continued to slowly decline to around 4%, closer to historical averages, with a recent slight uptick in 2024.

Many businesses are struggling to hire. Workers quit at the highest rates on record in sectors from manufacturing and transportation to retail and professional services. A record high of 48% of small business owners in May 2021 reported unfilled job openings, marking the fourth consecutive month of this elevated level (for context, the historical average is about 22%). Over half (57%) of owners, and 93% of those hiring or trying to hire, reported “few or no ‘qualified’ applicants for the positions they were trying to fill” in May 2021. Just over one-third of owners reported raising compensation to attract workers. The so-called “Great Resignation” continued through 2021; between May and September, U.S. workers left 20 million jobs, an increase of 50% during the same period in 2020.

Some economists are concerned about a low labor force participation rate, which measures the active members of the economy. The rate has still not recovered to post-pandemic levels but is within a percentage point of that. 

Some business leaders have blamed expanded unemployment benefits, claiming that if individuals are compensated to stay at home, they are less likely to pursue employment. Studies have found evidence “that more generous unemployment benefits tend to increase unemployment duration…by decreasing job search efforts,” although how other pandemic-related factors may contribute is unclear. A July 2020 study found that the large increase in unemployment benefits did not make it more difficult for employers to fill vacancies.

The economic recovery from the pandemic has proven to be very different for the female labor force. By September 2020, 865,000 women had left the U.S. workforce, four times more than men. As of May 2021, there were 1.8 million fewer women in the labor force than before the pandemic. One reason is that many jobs lost during the pandemic were in sectors dominated by women. Getting back into the labor force is key; the labor force participation rate among mothers was 3.5% lower in March 2021 than in January 2020, but only 1% lower for fathers. Among mothers whose youngest children are under 13, the rate is more than 4% lower, and among single mothers it is 5% lower. 

For 2023, the labor force participation rate for mothers is at 74%, an increase of 1.1% from 2022. This goes down to 68.9% if the mother has a child under 6. The rate for fathers also increased to 93.4%. It increases to 94.6% if the father has a child under 6.

Additionally, many women supervised children during online learning and caretaking for other family members during the pandemic. Brookings Institution scholar Lauren Bauer suggests women having trouble finding affordable child care may have difficulty returning to the labor force.

Income and Wages

Median Household Income is the dollar amount that divides the income distribution into two equal parts, so that half of all households have incomes above that amount, and the other half have incomes below that amount. 

Families, on average, saw five consecutive declines in median household income between 2008 and 2012. The slow recovery, long hours, and stagnant wages left many middle-class families demoralized. Median household income was $68,703 in 2019, an increase of 6.8% from the 2018 median of $64,324 and the largest year-over-year increase since the Great Recession. It decreased 2.9% to $67,521 in 2020, even though some sources noted increased unemployment benefits, federal aid, and other public assistance. Between 2022 and 2023, this figure rose 4% to $80,610.

In terms of wage growth, average year-over-year wage growth was approximately 3.2% from 2010 to 2019, and just before the pandemic was concentrated at lower income brackets. An analysis from Indeed, a Goldman Sachs analysis of BLS data, and a New York Times analysis of Federal Reserve data all indicate wage growth was strongest for workers in low-wage industries such as retail stores and supermarkets and slowest for higher-wage industries such as law firms and telecom companies. Some economists also add that “the changing nature of work,” through the gig economy, for example, automation and digitization, are keeping wages low.

During the pandemic, Bureau of Labor Statistics data shows wage growth spiked in April 2020 due to millions of job losses in low-wage industries while relatively higher-paid workers remained employed, meaning the average wage became higher. A second BLS measure that controls for the composition of the labor market shows the average wage growth fell from 3% at the end of 2019 to 2.8% at the end of 2020. Wages have been increasing in subsequent years, 8.3% in 2022 and 7% in 2023.

While wages have been increasing, inflation has as well, which minimizes the increase. By January 2020, inflation rose nearly 8% through November 2021, erasing much of these wage increases. Although nominal wages (the amount earned in a paycheck) increased by almost 5% between November 2020 and November 2021, the Bureau of Labor Statistics reported that real wages (how far that money can actually go) decreased 2.4% from December 2020 to December 2021. From August 2023 to August 2024, real weekly wages increased by 1.3%.

Interest Rates & Inflation

Global economic slowdowns and trade tensions affect U.S. GDP, influencing where investments are made. These factors usually affect Federal Reserve decisions to increase or decrease interest rates, or the cost of borrowing money. These fluctuations will affect inflation, which measures the change in the price of goods and services over a set period of time.

Generally, interest rates and inflation have an inverse relationship. Lower interest rates are meant to stimulate economic growth; individuals and businesses can borrow more money and have more money to spend. Consumers also earn less by keeping their money in banks with lower interest rates. This causes inflation to increase. Conversely, higher interest rates make borrowing more expensive and serve as an incentive to keep more money in the bank. This is meant to cool off spending and the economy.

In response to trading conflicts with China and Europe, China’s economic slowdown, and falling manufacturing activity in the U.S., Japan, Germany, and the eurozone, the Federal Reserve Bank lowered short-term interest rates for the first time since 2008 in July 2019 and again in September 2019.

The Federal Reserve Bank (The Fed) drastically lowered rates again in response to the coronavirus pandemic, from about 1.5% in early 2020 to less than 0.1% by May 2020. Originally, the Fed was not planning to change rates until somewhere around 2024 but made the first incremental rate increase in March 2022 due to surging inflation. Since 2022, they have continued to increase interest rates with the goal of smoothing out a disruption to the economy from the pandemic. The Fed started to lower interest rates in September 2024.

The Consumer Price Index (CPI) measures average prices for a “basket of goods and services,” including things like food, clothes, cars, and housing. Economists use it to calculate inflation. For reference, the Federal Reserve has a 2% target for inflation. In 2024, the CPI is still increasing. See the graph below for trends in the percent change in the CPI – please note that the graph reflects the percentage of the change in the CPI – meaning that between 2023 and 2024 the CPI increased, just less in January of 2024 than in January of 2023.

Inflation is affected by supply and demand. For example, increases in production costs, such as costs for raw materials and wages, supply declines, and higher costs are passed on to consumers through higher prices. In the current global economy, supply issues around oil, shortages of metals (such as semiconductor chips), and shortages of labor (stemming from the so-called Great Resignation) impacted prices.

Inflation was irregularly high in 2022 – the average inflation rate that year was 8%. The rate in 2023 was half that – 4.1%. Pre-pandemic rates hovered around the Fed’s goal of 2%. In recent memory, 2015 was the lowest year for inflation – the average rate was 0.1%.

Taxes

Taxes are collected by state and federal governments to pay for the services they provide, like roads, law enforcement, and schools. The idea that taxes affect economic growth is supported by a 2008 study from the Organization for Economic Cooperation and Development, which found high corporate taxes tend to be the most harmful to economic growth, followed by high personal income taxes. For more evidence on taxes and economic growth, see this compilation of studies from the Tax Foundation.

In the U.S., the federal individual income tax has seven rates that range from 10% to 37%, depending on the tax bracket. The federal income tax rate has varied widely, reaching a height of 91% for the top rate in the 1960s to a low of 23% after the 1986 tax reform under the Reagan administration.

In 1980, the worldwide average corporate tax rate was about 40%. The Tax Foundation explains that “countries have recognized the impact that high corporate tax rates have on business investment decisions,” which has prompted lower rates. In 2020, the average was just under 24%. The U.S. previously had one of the highest effective corporate income tax rates in the developed world, ranking 4th in 2017. After the Tax Cuts and Jobs Act passed in 2017, the U.S. federal top corporate income tax rate fell from 35% to 21%.

The Tax Cuts and Jobs Act

Passed in December 2017, the Tax Cuts and Jobs Act (TCJA) was the biggest tax overhaul in the U.S. in 30 years. About 80% of taxpayers received a direct tax cut, even though many don’t believe they did. Part of the tax overhaul involved the Treasury Department changing its withholding tables, meaning many tax cuts “came in the form of larger paychecks throughout the year but smaller or no refunds at filing.” Wages also rose slightly faster than before the TCJA passed.

The Tax Policy Center estimated a .5% income increase for the bottom quintile and a 2.9% increase for the top quintile. This makes it seem as if the tax cuts were not evenly distributed, but as the chart below shows, the story may be different. Those who fall into the lowest tax brackets generally do not have a tax bill due at the end of the year and may even have a negative income tax due to refundable tax credits distributed from the taxes paid by higher earners. Therefore, when a tax cut occurs, it naturally will show a higher cut for those paying higher taxes each year.

The law’s design is for long-term economic impact, so it’s difficult to say what the overall economic effects are. Additionally, “the tax cuts didn’t occur in a vacuum,” and many benefits could have been offset by other economic happenings, including trade disputes with China (see more below). Given the fallout from the coronavirus pandemic, it may be even more difficult to determine the effects. For more on taxes and tax rates, see The Policy Circle’s Taxes Brief.

Federal Debt and Deficit

The federal debt is the total amount of money the U.S. government owes, accrued over time. Current U.S. debt is over $30 trillion as of early 2022, meaning the U.S. debt is larger than its GDP. As the graph shows, debt as a percentage of GDP was holding steady at just over 100% and spiked due to government response to the coronavirus pandemic.

Halfway through 2024, debt held by the public (government borrowing from the private sector and foreign governments) was over $27 trillion. The remaining debt is intergovernmental debt, owed to another arm of the federal government, such as Social Security Trust Funds.

The federal deficit refers to the annual difference between government spending and government revenue. Explore the U.S. Treasury’s Fiscal Data Center to see real-time revenue, spending, deficit, and debt numbers.

The federal debt and federal deficit have impacts all Americans can feel. As the national debt increases, the likelihood that the government cannot pay a debt increases, which means treasury securities (bills, notes, and bonds through which citizens and non-citizens essentially lend money to the government) are riskier investments. Some economists note investors aren’t worried about the debt and continue to borrow, and say the debt should be sustainable as long as interest rates remain low. Others argue that debts we accrue now will just need to be paid later, likely in the form of reduced benefits for services such as Social Security. For more on these arguments, see The Policy Circle’s Federal Debt Brief.

It’s all Connected: The Stock Market

When it comes to GDP and the stock market, the two are often indicators for each other and for investors. The stock market does not directly affect economic growth but still makes an impact by “influencing financial conditions and consumer confidence.” When stocks are highly valued, and people are more optimistic about the economy, companies can borrow more money at cheaper rates “to expand operations, invest in new projects, and hire more workers,” all of which boost GDP. The opposite is also true: “steep market declines can wipe out portions of people’s savings and retirement accounts,” as was the case during the financial crisis in 2008. 

For more on the stock market and its relationship to GDP, see this explainer from CNBC (7 min):

Conclusion

The U.S. economy is grappling with interest rates, inflation, consumer spending, growth, and unemployment. Economic growth and the overall health of the U.S. economy affect all American citizens. It is necessary for all to have a strong basis of understanding of economic functions, the keys to economic growth, and the current state of the economy for themselves and their economic security. Ensuring a prosperous society depends on sustainable and real economic growth.

What You Can Do/Ways to Get Involved

Measure: Find out what your state and district are doing about economic growth.

  • Do you know how your state fairs in terms of economic growth or unemployment, or how your community contributes to your state’s GDP?
  • What are your state’s laws regarding taxes, business rules and regulations, and economic development initiatives?

Identify: Who are the influencers in your state, county, or community? Learn about their priorities and consider how to contact them, including elected officials, attorneys general, law enforcement, boards of education, city councils, journalists, media outlets, community organizations, and local businesses.

  • Who are the members of the economic development authority, business and economic development departments, or chambers of commerce in your state?
  • What steps have your state’s or community’s elected and appointed officials taken?

Reach out: You are a catalyst. Finding a common cause is a great opportunity to develop relationships with people who may be outside of your immediate network. All it takes is a small team of two or three people to set a path for real improvement. The Policy Circle is your platform to convene with experts you want to hear from.

  • Find allies in your community or in nearby towns and elsewhere in the state.
  • Foster collaborative relationships with community organizations, school boards, and local businesses or entrepreneurs.

Plan: Set some milestones based on your state’s legislative calendar.

  • Don’t hesitate to contact The Policy Circle team, [email protected], for connections to the broader network, advice, insights on how to build rapport with policy makers and establish yourself as a civic leader.

Execute: Give it your best shot. You can:

  • Engage with local nonprofit organizations in your community to see how they are creating lasting opportunities for individuals.
  • Engage with your local school board to find out how local school districts teach economics, or what economics education requirements exist.
  • Talk to local entrepreneurs and owners of community businesses to understand the private sector impact on economic growth, and how public policies affect how they function.
  • Investigate the sources of economic growth in your state or community.
    • What does your state export and import?
    • Does your state have a large travel, tourism, or filming industry?
    • Does your state have a major hub for finance, manufacturing, or agriculture?
    • What is the current state of debt or deficit in your state?
  • Which Federal Reserve District covers your state?
  • Investigate taxes in your state, compared to other states:

Working with others, you may create something great for your community. Here are some tools to learn how to contact your representatives and write an op-ed.

Thought Leaders and Additional Resources

Additional Sources of Economic Data

Videos

Thought Leaders

  • Milton Friedman was perhaps the most well-known advocate of free markets in the last century. A Nobel prize-winning economist, he also wrote for a general audience. Friedman radically changed how the economics profession viewed the Great Depression of the 1930s and the inflation of the 1970s, in both cases showing that mistakes by the central bank were larger factors than market failures.
  • Thomas Sowell is an extremely influential contemporary supply-side economist who also writes articles for popular audiences. He is also well known for his book, A Conflict of Visions, which provides a philosophical treatment of modern politics.
  • Hernando de Soto, a Peruvian economist and president of the Institute for Liberty and Democracy, is known for his work on the informal economy. He argues that sustainable economic growth requires that all individuals have easy access to a strong legal system that protects their property rights.  He argues that respect for the rule of law is critical for developing communities to create opportunity and prosperity. His book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, is an excellent primer on why private property rights are so critical.
  • CATO Institute has organized a collection of free-market economists and authors in this online forum to address the question, “If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?”  To see their answers, click on their photos.

Suggestions for your Next Conversation

Explore the Series

This brief is part of a series of recommended conversations designed for circle's wishing to pursue a specific focus for the year. Each series recommends "5" briefs to provide a year of conversations.

Deep Dives

Want to dive deeper on Economic Growth? Consider exploring the following:

State Briefs

Want to learn more about how states are dealing with this issue? Read our state-specific briefs below: