Speaking Out 262 – A Manifesto for Economic Sense

The ultimate objectives of economic policy are to create quality jobs and to increase per capita income. You are absolutely right that current austerity policies stifle economic growth and intensify long-term mass unemployment. I agree that in the current global recession, the immediate response needs to be a public policy that “acts as a stabilizing force, attempting to sustain spending.”

However, attempts to generate growth and employment through demand-stimulating monetary and fiscal policies can only work if they are complemented by long-term policies to strengthen incentives for companies to invest in productivity-enhancing innovations that create quality jobs, especially in manufacturing. As Evsey D. Domar convincingly argued long time ago, employment depends on income-generating productivity growth (Domar, E.D., 1946, “Capital Expansion, Rate of Growth, and Employment”, Econometrica, Vol. 14, No. 2, April: p.147). Low-paying jobs created by Wal-Mart-type productivity growth clearly do not qualify. Nor does productivity growth which results from a hollowing out of the US manufacturing base through offshoring.

In short, creating quality jobs in manufacturing requires a sustained, high rate of productivity growth that yields larger market shares through a combination of improved product and price performance. The critical prerequisite is innovation that enables productivity growth that is not just focused on cost reduction but that increases the value of output through improvements in product performance.

Dr. Dieter Ernst, Senior Fellow and Professor, East-West Center, Honolulu