RELATED ARTICLE "These Are the Good Old Days," Annual Report 1993 (Text or PDF)

Free Enterprise
Policies for Growth

Dallas Fed Chief Economist W. Michael Cox presents the basic government policies that make economic growth possible.

Growth doesn't just happen. Instead, it arises out of the economic environment itself. The key is a stable framework of rights, freedoms and incentives that will spur individuals to work and invest, entrepreneurs to innovate, and businesses to produce.

In a free enterprise system, growth is a natural and continuous process, but it can be nurtured by the correct policies. Listed below are some basic secrets of growth.

Establish and preserve property rights. Private ownership of the means of production allows individuals to reap the rewards from economic activity, thus encouraging efficient use of resources to satisfy consumer wants. People produce more when working in their own self-interest: altruism is a weak motive when compared with the incentive for profit and personal material gain.

Create market-friendly institutions. Markets won't function properly without an appropriate legal code. Contracts need to be enforced. Property rights need to be upheld. Monopoly needs to be controlled. Institutions should facilitate economic activity and complement innovation.

Maintain stable government policies. Households and businesses can pursue their economic interests only if government honors all promises—implicit and explicit. Frequent changes in tax laws or other government policies create uncertainty and instability that can make a mockery of long-range planning.

Avoid protecting existing jobs, industries or businesses. The natural forces of creative destruction continuously regenerate the economy, but protection from failure prevents new, better or cheaper products from replacing older ones. By rejecting a paternalistic role for government, decision-making and responsibility stay in citizens' hands, where they can be best used to make the hard choices that new opportunities bring.

Keep taxes low and simple. People will work harder and invest more when they can keep a larger share of what they earn. Taxes that don't discourage work or investment—such as user fees or levies on consumption—are less harmful to the economy. Loopholes and special favors divert resources to less efficient uses.

Abstain from excessive regulation. Licenses, permits, fees and other burdens of operating businesses create the same disincentives as taxes. Efforts to deregulate and privatize will pay off by increasing the rewards of going into business and hiring new employees.

Invest in infrastructure. Government spending on transportation facilities and other investment-type projects can enhance the efficiency of the private sector and facilitate commerce.

Maintain stable prices. Gyrations in the general price level wreak havoc on decision-making by businesses, households and governments. Steady, sensible control of the supply of money is the key to maintaining the currency's purchasing power. Low inflation will facilitate the efficient exchange of goods and services.

Nurture business credit, particularly for entrepreneurs. Keeping government debt low will conserve credit for use by private business. It's tempting to try to legislate away credit risk with government guarantees, but such programs distort the allocation of investment funds and supplant the natural discipline of failure in the marketplace.

Focus unemployment outlays on retraining. The bulk of unemployment funds should be used to prepare displaced workers for new jobs and provide incentives to work. Only a minimum payment should go for passive unemployment.

Make education a priority. A better educated work force is more productive, and it speeds the introduction of new technology. Tax laws ought to treat education as a depreciable capital good, equal to, if not more important than, physical capital. Allowing choice in schools will foster competition and improve quality.

Promote free trade. Tariffs, quotas and other trade barriers decrease competition and deny an economy the full advantage of the production efficiencies offered throughout the world. Free trade makes all nations wealthier.

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