What Really Makes Economies Grow? (Hint: It's Not Tariffs)

A few years ago, the idea of “degrowth” — slowing down the economy to save the planet — got some attention. But as countries like the U.S. and those in Europe face growing debt and aging populations, leaders are shifting their focus back to economic growth. However, many aren’t offering real solutions that can actually work.

Take former U.S. President Donald Trump’s recent interview as an example. He claimed that big tariffs (taxes on imported goods) would boost the U.S. economy by bringing manufacturing jobs back to the country. But most economists disagree. History shows that tariffs usually cost consumers more money and don’t do much to help growth.

Even if Trump’s tariffs could bring some factories back to the U.S., this wouldn't really make the economy grow. Economic growth comes from three main things: capital (investment), labor (people working), and productivity (doing more with less). For example, China's economy boomed over the past few decades because it was poor and had a lot of people moving from farming to factories. Adding investment (capital) helped create more productive jobs in manufacturing, boosting the economy. But after a while, this strategy stops working as economies mature. That's what's happening to China now — and the U.S. reached this stage long ago.

The U.S. has already automated most of its manufacturing jobs, meaning fewer people are needed to do the same work. Many low-skill jobs have been replaced by technology or moved to other countries because they don’t create enough value to pay well.

So, bringing back old manufacturing jobs (like making toasters) wouldn’t actually help much. Plus, with unemployment already low in the U.S., there aren’t many people waiting to take those kinds of jobs. If people left their current, more productive jobs to make toasters, overall growth would probably slow down.

So, what will actually make economies grow? For countries like the U.S. and others in Europe, there are two main things: more people and better productivity. The first one is tricky because of political issues around immigration. That leaves us with increasing productivity — making more stuff with fewer resources, or creating new products altogether.

The U.S. has historically been great at innovation, thanks to things like strong capital markets, big investments in research, and a flexible labor market. There’s some debate about how much the government should get involved in innovation. While some argue the government should lead, as it did with DARPA (which helped invent the internet), the private sector also plays a huge role in driving innovation.

For real growth, governments can support innovation by offering tax breaks or removing unnecessary regulations. This allows companies to take risks and bring new products to market. This year’s Nobel Prize in Economics went to experts who studied why some countries grow faster than others. The key lesson? Countries that encourage innovation and change are the ones that grow the fastest.

In the end, holding onto the past or resisting change — as some populist leaders suggest — won’t help economies grow. Real growth comes from looking forward, embracing new ideas, and adapting to a rapidly changing world.

Sources: Bloomberg, Internet Sources & Twitter X 

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