[MUSIC] Is more growth always good and if so, what demand and supply side government policies might be used to improve productivity and growth? Increased economic growth increases our wages and our standard of living, but there are some major disadvantages to rapid growth that have been noted by many economists. Indeed, critics of growth say it results in dirtier air, a dying ocean, global warming, ozone depletion, and other environmental problems. Such critics also point out that while growth may permit us to make a better living, it does not guarantee us the good life in this sense. Growth often means worker burnout and alienation and accompanying health problems. Not just for assembly line workers, but in the high stress managerial ranks as well. These are all fair comments, but one important distinction to make in talking about the merits of growth, is between economic growth and population growth. In this regard, congested neighborhoods, crowded cities, and gridlocked freeways are often the consequence of too many people, not too many good in services. This observation brings us back to the really essential measure of growth, GDP per capita. And the underlying question of whether there are really any serious grounds for desiring less GDP per person and a reduced standard of living. From this perspective, let's turn now to our final question. How might the government use public policy to stimulate growth? On the demand side of the equation, low growth is often the consequence of inadequate aggregate demand and the resulting recessionary gap. And both fiscal and monetary policies can be used to address this problem. For example, monetary policy, which provides low real interest rates, helps promote high levels of investment spending. While a fiscal policy, which eliminates budget deficits, can reinforce this easy money policy. Having said this, when economists think about ways to stimulate productivity and growth, they are more often thinking about the supply side of the equation. Major reason is that, as we have learned, policies which can successfully shift the economy supply curve out, do so with the twin advantages of both lower unemployment and lower inflation. Let's use what we have learned then about growth theory, and the various factors of growth to guide us through some supply side policy options. First, we know that productivity increases as the ratio of capital to labor increases. And to boost the capital labor ratio, we must accelerate the rate of investment in new plant and equipment. In fact, the current US tax code offers a variety of incentives to stimulate investment, including accelerated depreciation, tax credits for new investments, and lower business tax rates. The second way to increase productivity is to improve the quality of our human capital, that is our labor force and its managers. In this category policy options range from tuition tax credits and expanded student loans to job retraining programs and a focus on lifetime learning. The third way to increase productivity is to accelerate the rate of technological change, because such change allows us to produce more goods and services from a given amount of resources. Here, the policy option are very similar to those for increasing investment in new plant equipment namely, tax incentives. In this regard, an increasing the rate of investment in new plant and equipment works hand in hand with increased R&D. Because it speeds the diffusion of new technology and accelerates the rate of productivity gains. The fourth way to increase productivity growth is to raise the level of investment in public infrastructure. Just as new plant and equipment help workers produce more, so too does modern infrastructure help businesses produce more. This means that in the quest to balance its budget, the United States must be careful not to ignore appropriate investments in basic infrastructure. From bridges and airports, to smart roads and the information superhighway. Indeed as President Clinton once remarked during his administration, deficit reduction at the expense of public investment has been and will continue to be self-defeating. More broadly, many of the factors that determine productivity growth will be enhanced by an increase in the domestic savings rate. This is because increased saving ultimately helps provide the funds necessary to invest in new plant and equipment, human capital, research and development and public infrastructure. At present, the US has one of the lowest savings rates of any of the industrialized nations. Policy options to address this problem include such things as expanded tax preferences, individual retirement accounts, and other pension funds. Well, that concludes our discussion of growth and productivity. In the next lecture, we tackle the thorny problem of budget deficits. In the meantime, please remember that economics is not something to be memorized, but rather something to conceptualize. Once you study it, think about it to. Your job and your business might just depend on it. [MUSIC]
