The rate of long-term economic growth is the salient measure of the nation's ability to steadily advance its material living standard. That living standard advances by increasing the economy's capacity to produce goods and services and thereby expanding the range of choices open to society. Today's level of gross domestic product (GDP) per person is 15 to 25 times that of a person alive in 1895. This degree of improvement in material well-being is not only the result of today's far lower cost relative to income of directly comparable products (such as an hour of illumination, a new suit of clothes, or a chair) but also the availability of an array of products that defines our current standard of living (such as a cd player, air conditioning, tv, and air travel) that were not available at any price in 1895. Aside from the creation of new products, economic growth has also meant a dramatic change in what we do. Agriculture has gone from the principal occupation to that of a tiny share of the labor force. The automobile has transformed how we move about and where we live. Higher education has become an endeavor of the many rather than the few. Hours of work have decreased while hours of leisure have increased. The pace of long-term economic growth is likely to be a central focus of attention in the decades just ahead, as the U.S. economy must confront the need to undertake unprecedentedly large generational transfers of income to pay for the retirement of the huge baby-boom generation. Faster economic growth leads to a larger economic pie from which to make such transfers and makes this redistribution less onerous for future workers. Another element of concern about the future burden on workers grows out of the United States' large accumulation of foreign debt stemming from a long succession of large trade deficits. With a net foreign debt that now approaching $3 trillion and could plausibly approach $10 trillion in the decade ahead, the United States could expect to have to make annual debt service payments to foreign creditors of $80 to $100 billion. This means that a significant share of future output growth will be transferred to foreigners and will not be available to improve the future living standard of domestic consumers. Again, the eroding effect of these transfers on future living standards of workers will be less if the annual rate of long-term growth is greater. Although the trend growth rates of mature industrial economies have historically not shown great variability, even relatively small differences in that growth rate steadily cumulate to have sizeable effects on the scale of improvement in future living standards. An economy in which output per capita grows at an average annual pace of 2.0% will double in size in 34 years, while growth at 3.0% leads to a doubling in size in only 24 years. Put another way, beginning at the 2004 level of real GDP per capita of about $37,000, at the end of 24 years a 3% annual growth rate generates a level of per capita real GDP of about $75,000, as compared to a level of only about $59,000 generated by a 2% annual growth rate for the same time interval. That extra $16,000 confers a substantial broadening of economic choices and the ability to achieve any given spectrum of economic and social goals with less sacrifice. Despite its importance for future living standards, long-term growth is seldom the explicit interest of economic policy. Nevertheless, many policies directed at more immediate goals are likely to have implications for the speed of economic growth. Tax policy, labor market policy, science and technology policy, education policy, budget policy, as well as legal and regulatory policy can all have effects on the rate of economic growth and the level of future income. If a more explicit concern with the rate of long-term growth is thought appropriate by policy makers, then it will be important to understand: what the salient determinants of long-term growth are; whether the decisions of economic agents in private markets lead to a economically optimal allocation of resources to each determinate; how could economic policy most successfully correct for a particular market failure; and what admixture of particular economic policies are likely to offer the best chance of achieving an optimal rate of improvement in future living standards. There are some other distinctions about long-term growth that should be understood before proceeding. First, long-term growth refers to an economy increasing its productive capacity or what is usually called "potential output." This is somewhat distinct from short-run changes in economic activity over the course of the business cycle, such as recovery from recession. The short-term goal is to have the economy operate near potential output, while the long-term goal is to steadily increase potential output. Short-term performance is certainly going to have an effect on long-term economic performance, but there will also be important differences in the forces governing each, as well as different policy implications presented by each. For example, in the short run in an economy operating below potential output due to slack demand, monetary and fiscal policy can stimulate aggregate demand, accelerate economic growth and push an economy towards potential output. But these policies may have little impact on the rate at which potential output expands. The distinct forces that govern the growth of potential output—or aggregate supply—are the concern of this report. Second, analysis of long-term growth focuses on the growth of per capita output, most often measured as real (or inflation adjusted) GDP divided by the nation's population, as more GDP per capita will likely be the essential requirement for a higher standard of living. It is possible to increase real GDP per capita by increasing the percentage of the population in the labor force or the average hours worked by the labor force. But both of these actions are bounded in that you can only increase the labor force up to the size of the population (and realistically the upper bound will be well short of that) and increase the average hours of work up to 24 hours a day (and, again, realistically the upper bound will be well short of that). Therefore, these are not actions that can cause a sustained increase in the rate of long-term growth. This is probably particularly true for a mature economy such as the United States' where these labor force parameters tend to be relatively stable. More fundamentally, one can question whether increases in per-capita GDP by such means represents a true rise in the standard of living. As we will see, a focus on per-capita output points to a critical requirement for long-term growth and a rising standard of living—increased efficiency, or productivity, that is, doing things that enable each worker to steadily produce more in any given time period. The standard measure of economic growth—increased real GDP/population—does not always function as a precise gauge of changes in economic welfare. Many valuable things are simply not measured in GDP. For example, leisure time, child rearing, and volunteer work all contribute to our well-being but they are not reflected in GDP. Therefore, if parents decided to work fewer hours to spend more time rearing their children, measured GDP would fall but general well-being could increase rather than fall. Also, many negative things can occur with economic growth that subtract from our well-being but are not counted as decrements in measures of real GDP. Environmental damage, increased income inequality, decreased quality of public education, or falling public health decrease economic well-being, but do not necessarily result in a corresponding reduction of measured GDP. Conversely, there are things measured in GDP, such as more prisons, more locks on doors, and expenditures to protect against terrorism, that do not easily correlate with a rising living standard. Nevertheless, while greater GDP does not assure a higher living standard, it provides the potential means for achieving greater well-being by making the various elements of how we choose to define that well-being more affordable. More affordable in economics is essentially a reduction in the number and degree of tradeoffs confronted in economic life. If we choose to work fewer hours or reduce environmental damage then we can do so with less sacrifice of other things if GDP is greater. Another important economic distinction between growth and economic welfare is that society's economic objective is not likely to be reaching the maximum rate of growth that is possible, but rather, achieving the optimal rate of growth. That economic policy has the ability to accelerate the rate of long-term growth does not necessarily mean that it should. Because faster future growth usually means that the economy must divert resources from the production of goods for current consumption and toward growth-generating activities, the growth rate consistent with an optimal balance between the level of current consumption and the raised level of future consumption will likely be far short of the greatest possible rate. Super-fast growth would have little appeal if the fruits of that achievement are never consumed because they must be continuously diverted to the investment needed to sustain that growth rate. Private economic agents will make decisions in the market place that establish a relative valuation of current versus future output, but if there is some degree of market failure, this outcome will not be the optimal one and economic policy can potentially improve on the market outcome. Sustained economic growth, anywhere, is a relatively recent historical phenomenon. While our knowledge is imperfect, before 1500 there is no record of any increase in output per capita anywhere in the world for millennia. And only after 1800 is there consistent evidence of sizeable sustained increases in living standards across the globe. Between 1800 and 1900, output per capita in the industrializing economies probably grew on average at 1.0% per year. Between 1900 and 2000, that rate of growth likely accelerated to about 2.0%. This may seem to be a modest pace, but its was a sharp break from the stagnation and poverty that had prevailed for centuries before, and because it was a sustained rate of increase generating cumulative gains, it was sufficient to steadily advance standards of living at a historically unprecedented speed, and ultimately transform the world economy.