Although most of us won't admit that we wasted our youth playing pinball rather than reading Shakespeare, the pinball machine is likely no stranger to any of us. The objective of the pinball game, of course, is to keep the ball in play as long as possible, while racking up a high score. The score is dependent on the interplay of the ball with the obstacles. The skill involved rests in the player's ability to use the flippers to keep the ball in play. Oddly enough, the basics of the pinball game have something in common with the fundamentals of maintaining a growing economy. To better understand just what these two diverse entities—the pinball machine and the economy—have in common, let's look at the basics of economic growth.
Economic growth is measured by how fast living standards rise over time, which is usually defined as per capita Gross Domestic Product (GDP). Per capita GDP refers to an economy's output per person and is, therefore, a better measure of standard of living than GDP, which does not take into account a country's population. After all, how much pizza I get for dinner doesn't just depend on the size of the pie, it also depends on how many people are sharing it.
A country's economic growth depends on factors that facilitate the production, distribution and sales of goods and services, which economists refer to as the economy's "infrastructure." In this context, infrastructure does not refer to roads, structures, dams, or other capital goods, but to the institutional factors listed below.
These essential elements of the economic infrastructure help explain gaps among countries' per capita GDP. Per capita output in the United States, for example, is roughly seven times greater than that of Mexico, and nearly 10 times that of China.
A country's economic infrastructure goes a long way toward explaining why U.S. citizens are much wealthier than those of Mexico or China—or every other country for that matter—and also directly influences those factors that determine how fast an economy grows over time. Labor productivity—measured by total business output divided by total hours worked—is a critical factor in a nation's standard of living. It would be difficult to overstate the importance of labor productivity growth in determining future increases in living standards. Simply put, when economic resources (whether they're human beings, machines or land) are not very productive, the economy's potential to grow over time is severely constrained. To use a sports analogy, a running back who gains four yards per carry is much more productive than one who gains only two. Not surprisingly, the former is also paid much more than the latter. Thus, the more productive an economy's resources are, the more income the economy will produce and the higher the nation's standard of living will be. Labor productivity depends on both physical capital like plants and equipment and human capital, such as a skilled labor force. Not surprisingly, labor productivity can be influenced by those same institutional factors as GDP. Government, for example, can spur labor productivity with tax laws that encourage saving, investment, research and development and education. In addition, a central bank that achieves and maintains price stability contributes to an economy in which businesses can make long-term investment decisions and commitments, and workers can make savings decisions and retirement plans, without the worry of inflation. Free trade policies enable firms both to export their goods and services and import the needed factors of production, without becoming casualties in a trade war. A well-balanced regulatory system operates in a cost/benefit framework that encourages efficient production, while holding producers accountable for environmental issues.
Increasing physical and human capital is the force that keeps the ball of economic activity in play. Government policies that recognize the importance of the accumulation of capital and the creation of an environment conducive to a productive private sector are crucial in this regard. For example, sound monetary policies can encourage long-term investment by businesses and saving by workers-both of which are critical to a buildup of capital. Free trade policies can enable global markets to render the benefits of competition: greater variety, better quality and lower prices. A regulatory system can protect the public interest, without significantly reducing economic efficiency. Formulating policies within these parameters, however, is no simple flip of the wrist. Just as the pinball player must constantly focus on the ball, policymakers must constantly focus on their commitment to long-term economic growth.
This article was adapted from "A Brave New Economic World?" which was written by economist Kevin L. Kliesen and appeared in the January 1998 issue of The Regional Economist, a St. Louis Fed publication.