BPEA | 1992 No. 2

Equipment Investment and Economic Growth: How Strong is the Nexus?

J. Bradford DeLong and
J. Bradford Delong
J. Bradford DeLong Professor of Economics and Blum Center Chief Economist - University of California, Berkeley
Lawrence H. Summers
Lawrence H. Summers Charles W. Eliot University Professor and President Emeritus - Harvard University

1992, No. 2

PRODUCTIVITY GROWTH is the important dimension of long-run economic performance. Yet economists have said relatively little about how policies affect the transcendently important long-run growth rate. Textbook theories of the type pioneered by Robert M. Solow maintain that policies cannot affect growth rates over a sufficiently long run. The growth-accounting tradition of Robert M. Solowl and Edward F. Denison has tended to conclude that most of the differences in growth are due not to differences in measured investments, but to a “residual,” total factor productivity (TFP). Such models produce what Solow calls “investment pessimism”: radical policy changes that have large effects on investment and other resource allocations have little effect on long-run growth.