Productivity and Long Term Economic Growth Or, How to really shift the AS curve rightward

1. Productivity and Long Term Economic GrowthOr,How to really shift the AS curve rightward

2. Output is a function of:natural resourceslaborcapitalhuman capitalentrepreneurshiptechnology

3. Natural resources are less important than they used to beHong Kong – One of the wealthiest places in the world – virtually no natural resources

4. Africa – the most natural resources anywhere, yet they are poorStill, you would rather have natural resources than not

5. Growth policies for resources1. Don’t waste natural resources a. corn should make flakes, not ethanolb. allow but don’t subsidize the logging of national forests (sustainable forestry vs. Haiti)

6. 2. Define property rights to prevent over-use of resources (overfishing of oceans)3. Natural resources are only beneficial if they are usedoil in ANWAR (Alaska)

7. Growth policies for more labor1. Allow the free movement of people (more immigration)on average, immigrants work more hours per week than do native workers

8. Growth policies for more labor2. Lock fewer people up in jailThe US incarcerates the most people (over 7 million) and largest percentage of its population in the world

9. More than 1% of US adults are currently incarcerated27% of federal prisoners are not citizens of the US

10. We should examine:US drug policiesRehabilitation vs. incarcerationaverage cost of incarceration: $24,000/year

11. 3. Lower taxes on labor including the income tax or payroll taxAverage hours worked are higher in countries with lower marginal tax rates on labor Prescott article

12. 4. Lower/ abolish minimum wages rather than increase themCountries with higher minimum wages have higher unemployment rates

13. 5. Lower the social safety net Countries with higher unemployment insurance benefits work lessThe 1996 welfare reform act increased the US labor supply

14. 6. Encourage people to have kidsa. Family Leave Actb. Tax breaks for kidsc. Subsidize education/health care for kids

15. While increasing the number of people an economy has increases GDP, it doesn’t increase per capita GDPthat’s why the name of the economic game isn’t “laborism”

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

17. Growth Policies for Human Capital/ Entreprenuership1. Improve elementary education2003 OECD study of 15 year olds in 38 countries

18. US Rank out of 38 countriesMath 24thScience 19thReading 12thProblem Solving 26th

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

20. The US spends more $ per pupil than any other countryBest thing to do for elementary education: increase competitionex: US college system

21. 2. Increase the affordability of college529 savings accounts

22. 3. Allow more immigration among educated/skilled immigrants

23. 4. Improve the health of US workers- policies to prevent smoking (cigarette tax), obesity (fat tax)- policies to promote exercise(gas tax), (building sidewalks)

24. Make health insurance available to more peopleHealthier people work more hours than do sick people

25. 5. Allow people to profit from their increase in human capital/ risk taking – i.e. lower the personal income tax bracketWhy go to med school if you make the same as a janitor?

26. Growth policies for capitalInvestment is highly correlated with economic growth(that why it is called capitalism)

27. 1. Define and protect property rightsHigh levels of theft, civil war, and expropriation deter capital accumulation

28. 2. Keep taxes on capital low;capital is mobile in the long runcapital gains tax, corporate income tax, personal income taxCase in point: Ireland

29. 3. Embrace free tradeCapital is most productive when its output can be sold globally

30. 4. Lower regulations on capitalCase in point: SwitzerlandWhy are Swiss banks special?

31. 5. Encourage private rather than public ownership of capitalThe private sector uses capital more efficiently than do governmentsCase in point: Venezuela

32. 6. Increase the national savings rate:a. Reduce the size of the national debt

33. b. Convince consumers to save more: - replace the income tax with a sales tax- abolish the estate tax

34. 7. Provide a stable currency, i.e. keep inflation lowCase in point: Zimbabwe

35. 8. Provide needed infrastructurethis makes capital more productive by lowering the cost of getting products to marketex: roads/ports/airports/rail

36. 9. Reduce rent-seekingensure that people have an incentive to make rather than take

37. Growth Policies for Technology1. Protect intellectual property rights – patents2. Provide research and development tax credits

38. 3. Award prizes for innovation:ex: The X Prize, The British Longitude Act of 1714 under Queen Anne (20,000 British Pounds)

39. 4. Increase government funded research and developmentcaveat: government research is often too politicized and bureaucratic to be as productive as private research

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