Productivity and Long Term Productivity and Long Term Economic GrowthEconomic Growth

Or,Or,

How to really shift the AS How to really shift the AS curve rightwardcurve rightward

Output is a function of:Output is a function of:

natural resourcesnatural resourceslaborlaborcapitalcapitalhuman capitalhuman capitalentrepreneurshipentrepreneurshiptechnologytechnology

Natural resources are less Natural resources are less important than they used to important than they used to bebe

Hong Kong – One of the Hong Kong – One of the wealthiest places in the wealthiest places in the world – virtually no natural world – virtually no natural resourcesresources

Africa – the most natural Africa – the most natural resources anywhere, yet resources anywhere, yet they are poorthey are poor

Still, you would rather have Still, you would rather have natural resources than notnatural resources than not

Growth policies for resourcesGrowth policies for resources

1. Don’t waste natural 1. Don’t waste natural resources resources

a. corn should make flakes, not a. corn should make flakes, not ethanolethanol

b. allow but don’t subsidize the b. allow but don’t subsidize the logging of national forests logging of national forests (sustainable forestry vs. Haiti)(sustainable forestry vs. Haiti)

2. Define property rights to 2. Define property rights to prevent over-use of prevent over-use of resources (overfishing of resources (overfishing of oceans)oceans)

3. Natural resources are 3. Natural resources are only beneficial if they are only beneficial if they are usedused

oil in ANWAR (Alaska)oil in ANWAR (Alaska)

Growth policies for more Growth policies for more laborlabor

1. Allow the free movement 1. Allow the free movement of people (more of people (more immigration)immigration)

on average, immigrants on average, immigrants work more hours per week work more hours per week than do native workersthan do native workers

Growth policies for more Growth policies for more laborlabor

2. Lock fewer people up in 2. Lock fewer people up in jailjail

The US incarcerates the The US incarcerates the most people (over 7 million) most people (over 7 million) and largest percentage of and largest percentage of its population in the worldits population in the world

More than 1% of US adults More than 1% of US adults are currently incarceratedare currently incarcerated

27% of federal prisoners are 27% of federal prisoners are not citizens of the USnot citizens of the US

We should examine:We should examine:

US drug policiesUS drug policies

Rehabilitation vs. Rehabilitation vs. incarcerationincarceration

average cost of average cost of incarceration: $24,000/yearincarceration: $24,000/year

3. Lower taxes on labor 3. Lower taxes on labor including the income tax or including the income tax or payroll taxpayroll tax

Average hours worked are Average hours worked are higher in countries with higher in countries with lower marginal tax rates on lower marginal tax rates on labor labor Prescott articlePrescott article

4. Lower/ abolish minimum 4. Lower/ abolish minimum wages rather than increase wages rather than increase themthem

Countries with higher Countries with higher minimum wages have minimum wages have higher unemployment rateshigher unemployment rates

5. Lower the social safety 5. Lower the social safety net net

Countries with higher Countries with higher unemployment insurance unemployment insurance benefits work lessbenefits work less

The 1996 welfare reform act The 1996 welfare reform act increased the US labor increased the US labor supplysupply

6. Encourage people to 6. Encourage people to have kidshave kids

a. Family Leave Acta. Family Leave Actb. Tax breaks for kidsb. Tax breaks for kidsc. Subsidize c. Subsidize education/health care for education/health care for kidskids

While increasing the While increasing the number of people an number of people an economy has increases economy has increases GDP, it doesn’t increase per GDP, it doesn’t increase per capita GDPcapita GDP

that’s why the name of the that’s why the name of the economic game isn’t economic game isn’t “laborism”“laborism”

China’s “One child policy” is China’s “One child policy” is meant to increase per meant to increase per capita wealth by shrinking capita wealth by shrinking the population.the population.

Growth Policies for Human Growth Policies for Human Capital/ EntreprenuershipCapital/ Entreprenuership

1. Improve elementary 1. Improve elementary educationeducation

2003 OECD study of 15 year 2003 OECD study of 15 year olds in 38 countries olds in 38 countries

US Rank out of 38 countriesUS Rank out of 38 countries

MathMath 24th24thScienceScience 19th19thReadingReading 12th12thProblem Solving Problem Solving 26th26th

While the US ranks 2While the US ranks 2ndnd in in the world behind Norway in the world behind Norway in percentage of people with percentage of people with college degrees, our college college degrees, our college graduation rate is much graduation rate is much lower than in other lower than in other countriescountries

The US spends more $ per The US spends more $ per pupil than any other countrypupil than any other country

Best thing to do for Best thing to do for elementary education: elementary education: increase competitionincrease competition

ex: US college systemex: US college system

2. Increase the affordability 2. Increase the affordability of collegeof college

529 savings accounts529 savings accounts

3. Allow more immigration 3. Allow more immigration among educated/skilled among educated/skilled immigrantsimmigrants

4. Improve the health of US 4. Improve the health of US workersworkers

- policies to prevent - policies to prevent smoking (cigarette tax), smoking (cigarette tax), obesity (fat tax)obesity (fat tax)

- policies to promote - policies to promote exerciseexercise(gas tax), (building (gas tax), (building sidewalks)sidewalks)

Make health insurance Make health insurance available to more peopleavailable to more people

Healthier people work more Healthier people work more hours than do sick peoplehours than do sick people

5. Allow people to profit 5. Allow people to profit from their increase in from their increase in human capital/ risk taking – human capital/ risk taking – i.e. lower the personal i.e. lower the personal income tax bracketincome tax bracket

Why go to med school if you Why go to med school if you make the same as a janitor?make the same as a janitor?

Growth policies for capitalGrowth policies for capital

Investment is highly Investment is highly correlated with economic correlated with economic growthgrowth

(that why it is called (that why it is called capitalism)capitalism)

1. Define and protect 1. Define and protect property rightsproperty rights

High levels of theft, civil High levels of theft, civil war, and expropriation deter war, and expropriation deter capital accumulation capital accumulation

2. Keep taxes on capital 2. Keep taxes on capital low;low;capital is mobile in the long capital is mobile in the long runrun

capital gains tax, corporate capital gains tax, corporate income tax, personal income tax, personal income taxincome tax

Case in point: IrelandCase in point: Ireland

3. Embrace free trade3. Embrace free trade

Capital is most productive Capital is most productive when its output can be sold when its output can be sold globallyglobally

4. Lower regulations on 4. Lower regulations on capitalcapital

Case in point: SwitzerlandCase in point: Switzerland

Why are Swiss banks Why are Swiss banks special?special?

5. Encourage private rather 5. Encourage private rather than public ownership of than public ownership of capitalcapital

The private sector uses The private sector uses capital more efficiently than capital more efficiently than do governmentsdo governments

Case in point: VenezuelaCase in point: Venezuela

6. Increase the national 6. Increase the national savings rate:savings rate:

a. Reduce the size of the a. Reduce the size of the national debtnational debt

b. Convince consumers to b. Convince consumers to save more: save more:

- replace the income tax - replace the income tax with a sales taxwith a sales tax

- abolish the estate tax- abolish the estate tax

7. Provide a stable currency, 7. Provide a stable currency, i.e. keep inflation lowi.e. keep inflation low

Case in point: ZimbabweCase in point: Zimbabwe

8. Provide needed 8. Provide needed infrastructureinfrastructure

this makes capital more this makes capital more productive by lowering the productive by lowering the cost of getting products to cost of getting products to marketmarket

ex: roads/ports/airports/rail ex: roads/ports/airports/rail

9. Reduce rent-seeking9. Reduce rent-seeking

ensure that people have an ensure that people have an incentive to make rather incentive to make rather than takethan take

Growth Policies for Growth Policies for TechnologyTechnology

1. Protect intellectual 1. Protect intellectual property rights – patentsproperty rights – patents

2. Provide research and 2. Provide research and development tax creditsdevelopment tax credits

3. Award prizes for 3. Award prizes for innovation:innovation:

ex: ex: The X Prize, The X Prize,

The British Longitude Act of The British Longitude Act of 1714 under Queen Anne 1714 under Queen Anne (20,000 British Pounds)(20,000 British Pounds)

4. Increase government 4. Increase government funded research and funded research and developmentdevelopment

caveat: government caveat: government research is often too research is often too politicized and bureaucratic politicized and bureaucratic to be as productive as to be as productive as private researchprivate research

Convergence theory: Convergence theory: Countries with a lower per Countries with a lower per capita GDP should grow capita GDP should grow faster than countries with a faster than countries with a higher per capita GDP until higher per capita GDP until their economies catch uptheir economies catch up