Policies to encourage growth and productivity increases fall into four broad categories:
1. Government should provide an institutional environment conducive to the efficient operation of private enterprise, including protection of property rights; maintenance of law and order; establishment of a sound monetary system; avoidance of excessive regulation; no protection of existing jobs, industries, or businesses; prevention of monopolies in major services such as transportation and communication; dedication of unemployment outlays to retraining programs; and liberalization of trade and investment so that the country does not miss out on new technologies.
2. Government should invest in growth-enhancing public goods. Such goods have overall returns to society that exceed the returns that can be captured by private enterprise. For example, private enterprise cannot collect payment from all those who benefit from a dam providing flood control. As a result, such goods are not provided adequately by private enterprise. Other examples involve providing infrastructure, such as highways, and spending on education and health. Some have argued that such investment in public goods should be viewed as part of national saving because it augments the nation's stock of human and physical capital.
3. Government should provide appropriate incentives for savers and investors through favorable tax treatment of saving and investment, particularly investment in research and development, tax reductions for individual retirement accounts to increase saving, and lower taxes on capital gains to reward investment in entrepreneurial activities. Bringing private saving back up to earlier levels may be difficult, however. Personal savings have fallen for many reasons that government policy is not in a position to affect. For example, improved social security has reduced the need to save for one's old age; insurance and bank loans have reduced the need to save for rainy days; and changes in the age profile of the populace, from younger to older, and in social attitudes, toward self-gratification and less concern for future generations, have reduced saving. Most empirical evidence does suggest, however, that high-growth countries have lower tax rates on average than low-growth countries.
4. Government should ensure that fiscal policy does not create a large government deficit that reduces financing available for private investment in other words, national saving. The reduction in national saving is particularly disadvantageous if the deficit corresponds to spending on things like transfer payments rather than infrastructure.
A prime objective of these policies is to increase saving and investment. The bottom line here can be expressed in cruder terms that may strike a reader with more force. Raising productivity requires that workers be given more and better capital and education. The only way these things can be done is by asking the present generation to sacrifice consume less to create capital and pay for education that in all likelihood will benefit only future generations. If
