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Barriers to faster growth

The Prime Minister is wrong to think faster growth is the answer to the cost of living crisis.
Barriers to faster growth

Boris Johnson says “we need to grow our economy out of these problems” caused by high energy costs, perhaps by cutting taxes and red tape. There’s just one problem with this: it can’t be done.

“You can’t reform your way to rapid growth” says Dietrich Vollrath University of Houston. This is because the size of our economy depends, ultimately, upon our capital stock, labour, skills and technologies. Yes, low aggregate demand or mismatches between supply and demand can cause output to be below the limit set by these, but in the long-run it is these that determine economic activity.

But they are slow to change: as Abhijit Banerjee and Esther Duflo point out in Good Economics for Hard Times, economies are sticky. Companies are slow to invest, expand or make best use of new technologies and slow to move into new markets, while it takes time for workers to learn new skills. All of which means that even if the government can increase potential output by cutting taxes or red tape, it will take years for this potential to be reached.

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