| | | | | | 1970, with the creation of plastics, synthetic fibers, the jet engine, television, and multinational corporations; and, most recently, the computer/information revolution based on the personal computer, biotechnology, telecom networks, and lean, flexible, decentralized, nonhierachical workplaces. | | | | | | | | | Such periods of great innovation give rise to a long-wave cycle. The recession created by significant innovations lingers with stagnant growth, write-offs of dated capital stock, high structural unemployment, and social tension until a new generation of workers arises, unencumbered by the old way of doing things. The economy rebuilds itself around the new technology and its associated new infrastructure, creating a protracted period of expansion, within which the normal business cycles occur. Some economists believe that the productivity slowdown that occurred from the early 1970s to the mid-1990s was in part due to the economy passing through the trough of a long-wave cycle, and that the apparent recovery of productivity growth during the late 1990s represents the beginning of a long-wave expansion period based on Internet, telecommunication, and computer technologies. | | | | | | | | | The creative destruction phenomenon is the process whereby productivity increases are implemented, increasing our standard of living. One policy implication is that government should not inhibit this process by forcing firms to bear high costs when laying off workers, subsidizing firms to protect jobs, or insulating firms from competition. Another policy implication is that governments should facilitate adjustment by organizing worker retraining programs. | | | | | | | | | 6.3
The Role of National Saving | | | | | | | | | No agreement exists about the causes of the productivity growth slowdown, but economists do agree that the level of investment is a crucial element in the productivity growth process. Figure 6.1 illustrates the connection between growth and investment for selected countries. The relationship between investment and growth is by no means exact, but it is apparent. A major determinant of investment is the level of national saving that part of GDP not used for private or public consumption. A useful perspective on national saving can be gained by looking at how the various categories of aggregate demand are financed. | | | | | | | | | Income earners allocate some of their income to pay for their consumption goods and services, and some of it to pay their taxes. What is left over is called private saving, which is used to buy financial assets, such as government bonds or stocks and bonds sold by businesses to pay for their investment in plant and equipment. What determines how much of the saving goes to the government and how much goes to business? The answer, in short, is the interest rate. The government needs to sell enough bonds to finance its deficit, so it bids up the interest rate to get the financing it needs. As the interest rate rises, some businesses decide that it is too expensive to undertake investment plans, and they abandon their plans. In this way, the rising interest rate squeezes business demand for financing down to what is left over after the government has financed its deficit. | | | | |
