The assumption that raising productivity is the key to higher GDP looks like it needs a rethink.

During the 2016 presidential primary campaign, some supporters of Bernie Sanders argued that their candidate’s spending proposals would substantially raise long-term growth. This claim was pooh-poohed by mainstream Keynesian economists, and in fact the numbers the Sanders supporters were throwing around were almost certainly too high. But the discussion did manage to revive an interesting concept known as Verdoorn’s Law.

Verdoorn’s Law, named after Dutch economist Petrus Johannes Verdoorn, describes a correlation between output and productivity — when growth is faster, productivity also grows faster.

In other words, let the government continue to inject money into the economy, through things like a job guarantee for example to keep people employed, without worrying about inflation so much. Let it “run hot” for a bit, as the overall results will be more demand for stuff, which in turn will benefit corporations, ultimately lifting everyone out of current doldrums they are in.

Source: Bloomberg: Maybe We Have the Economic-Growth Equation Backward

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