Afternoon Discussion Topics – Lecture #1 The Importance of Productivity and National Saving How Can We Encourage Capital Formation and Capital Usage? Why Does the US Save Very Little? What Factors Determine Successful Growth of an Economy? Why is Productivity Growth So Difficult to Understand? How Can We Encourage an Increase in National Saving? Does Sustained Growth in Productivity Need Freedom and Democracy?

How Can We Encourage Capital Formation and Capital Usage? Promote low taxes on income, wealth, profits, and bequests Create low risk environment and stable policies Borrow domestically unless for projects that earn forex Reduce regulations that inhibit investment Promote low interest rates and higher saving Promote public funding for basic research, private funding for applied research Seek out public projects that have high social rates of return Encourage long run pro-business environment

2. Why Does the US Save Very Little? US consumer is sought out by producers around the world Credit cards easy to acquire and use in the US US consumers live in a highly disposable world Entertainment and leisure industries well developed in US American have large houses, many rooms, expansive land US stores well stocked with many choices American families live apart and households lack economies of scale US has social security which is pay-as you-go Tax system encourages borrowing and discourages lending US governments spend too much without sufficient revenues

3. What Factors Determine Successful Growth of an Economy? 1.. Steady and dependable increase in size of the market – free trade. Low taxes and regulation Public funding of basic research, private funding of applied research High saving rates and rational long term investment Development and promotion of human capital Access of abundant natural resources with clear property rights Well educated and growing workforce Stable and predictable political environment

4. Why is Productivity Growth So Difficult to Understand? Productivity cannot be directly measured for all industries. Productivity growth depends on very intangible items such as human capital, technological progress, regulatory environment, work attitudes, culture, etc. Service sector is 60% of the economy for most countries, but productivity of this sector is very hard to measure. Productivity depends on capital, but machines and tools are constantly changing in their quality. Capital is also hard to measure. Productivity growth depends on market size which is hard to increase except by pioneering new markets and opening up to balanced free trade. Productivity growth probably depends on “learning by doing” and experience, which is difficult to assess.

5. How Can We Encourage an Increase in National Saving? Encouragements for Private Saving low tax private retirement accounts stronger regulations governing borrowing low inflationary environment higher consumption taxes less paternalistic involvement of the government in people’s lives lower corporate profit tax changes in depreciation schedules and charges Encouragements for Public Saving fiscal soundness, lower government spending lower debt limits – making it hard to change better fiscal planning and generational accounting

6. Does Sustained Growth in Productivity Need Freedom and Democracy? Capitalism is founded on free rational individualistic choice – incompatible with strict, top-down control by an oppressive government Many countries have rejected socialism and communism in favor of greater market oriented systems. Political freedoms are appearing as well. Taiwan had a strong central government and martial law, but it gradually opened up without external pressure. Capitalism requires innovation and reward without the threat of expropriation. This is not possible in a non-democratic country. Capitalism requires property rights and the rule of law. Not possible in countries having judicial systems that are non-transparent and arbitrary. Capitalism will have a shift of power from government to consumers and to the wealthy and this cannot be avoided.