Economic growth is the best way to raise living standards

Maximising output and finding better ways to measure it should be policymakers' priority

December is usually a time for looking back on the past year and forward to the year ahead. In 2019 we have witnessed rising political extremism (on both the left and right) and polarisation, increased government instability and growing tensions between central and subnational governments. Each trend will continue in 2020. Almost everywhere one looks, there is a growing gap between what people demand of governments and what governments can deliver. The reasons vary but a significant underlying cause explains many of the grievances: sluggish economic growth.

While rising inequality - a problem that the data suggest is real but overstated - has moved to the centre of public debate, the key issue is that living standards are not improving fast enough among those who are falling behind. In the US, the policies being proposed to address this issue include much higher marginal income-tax rates, a large tax on wealth and massive new entitlements and subsidies, implying larger deficits and far more government control of the economy. Unfortunately, this policy mix promises to reduce, not increase, living standards. To expand the economic pie, allowing people and firms to interact freely in markets, is a much better option than relying on government planners or bureaucrats. The government's role should be limited to setting and enforcing fair rules of the game.

Related: Can the eurozone economy be revived without budget deficits? | Barry Eichengreen