Aging Population, Stagnant Productivity Challenge Donald Trump’s Growth Plan

Aging Population, Stagnant Productivity Challenge Donald Trump’s Growth Plan

By Ben Leubsdorf

Wall Street Journal, online edition

December 4, 2016

Tingting Pan

GR522

December 8, 2016

The article, “Aging Population, Stagnant Productivity Challenge Donald Trump’s Growth Plan,” by Ben Leubsdorf provides several good examples of aggregate supply and aggregate demand along with some other factors affecting the economy, all of which are essential points in the class.

To begin with, the article illustrates that although the economic recovery began in mid-2009, the average annual growth is just 2.1% because of deceleration in the labor force growth and marked slowdown in productivity gains. As we have learned, labor force is the total number of workers. If the number of workers grows slowly, the annual quantity of goods and services produced cannot increase fast since the U.S. is also faced with a stagnant productivity. In other words, the GDP cannot grow fast without increasing the country’s productivity. These reasons also explain why many people doubt that Donald Trump can hit his ambitious target, to generate average annual GDP growth of 3.5% or more, for long-run growth. After all, in the long run, the real GDP depends on how many people are working and how productive they are. Therefore, the price level does not affect the long-run determinants of real GDP and the aggregate-supply curve is vertical in the long run (just as Figure 1 shows). Now we can find out that whether the policies proposed by Mr. Trump can actually generate a remarkable economic growth depends on whether such policies can attract more people to work and increase the productivity.

[pic 1]

Second, the article states that economists believe that tax cuts and infrastructure spending, proposed by Mr. Trump, could give the U.S. a boost, especially in the short term. Why can such policy proposals benefit economic growth? Just as we have learned, real GDP helps gauge how well the overall economy is performing. If real GDP grows, the economy is better-off. As for the policy proposals, tax cuts would encourage investment because investors can earn more profits when paying less tax. The higher investment would increase the economy’s capital stock, shifting the long-run aggregate supply curve to the right. Thus, the real GDP would grow from Y0 to Y1 and the economy would be better-off (just as Figure 2 shows).

[pic 2]

In addition, the infrastructure spending would increase the country’s productivity. Infrastructure is a kind of physical capital, one of the factors determining productivity, so if infrastructure is improved, the country will be more productive and the production possibilities curve will move outwards (just as Figure 3 shows). That is, the higher productivity will help the country produce more goods and services with the same labor inputs. Therefore, the economy will become better. Also, the infrastructure spending would increase the government purchases, shifting the aggregate demand curve to the right. Therefore, the real GDP would increase from Y0 to Y1 in the short run (just as Figure 4 shows).