Thursday, June 19, 2008

New Evidence on Government and Growth

In the early 1980s, Ronald Reagan embraced the ideas of a small group of economists dubbed "supply-siders." They argued that lower taxes and slimmer government would stimulate growth, enterprise, harder work and higher levels of saving and investment. These views were widely ridiculed at the time, dismissed as "voodoo economics." Reagan did succeed in lowering some taxes. But a Democrat-controlled Congress weakened their impact by raising government spending sharply, resulting in large budget deficits. A quarter of a century later, many more countries have cut taxes and reined in heavy-handed government intervention. How far have they gone down this path, and with what success?

My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.

I compared their records to the 10 higher-taxed, bigger-government economies: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005)...

Slimmer-government countries also delivered more rapid social progress in some areas. They have, on average, higher annual employment growth rates (1.7% compared to 0.9% from 1995-2005). Their youth unemployment rates have been lower for both males and females since 2000. The discretionary income of households rose faster in the first group. This allowed their real consumption to increase by 4.1% annually from 2000-2005, up from 2.8% in 1990-2000. In the bigger-government group, the growth of household consumption has slowed to a 1.3% average annual rate, from 2.1% during the 1990-2000 period.

Faster economic growth in the first group also generated a more rapid increase in government revenue, despite (or rather, because of, supply-siders suggest) lower overall tax burdens.

Slimmer-government countries seem to have made better use of their smaller health resources. Total spending on health programs reached 9.5% of GDP in the bigger government group in 2004, 1.6 percentage points above the average in the slimmer-government group. Yet slimmer-government countries have raised their average life expectancy at birth at a faster pace since 1990, reaching an average level of 78 years in 2005, just one year below the average for bigger spenders. Average life expectancy is now 80 years in Singapore, although government and private health programs combined cost only 3.7% of its GDP.

Finally, spending by bigger governments on social benefits (such as unemployment and disability benefits, housing allowances and state pensions) was higher (20.3% of GDP in 2006) than that of slimmer governments (9.6%). But these transfers do not appear to have resulted in greater equality in the distribution of income. The Gini index measuring income distribution is similar for both groups...

The early supply-siders were right. My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.

More here


Congress is to Blame for $4 Gas

As oil prices head through the roof, and gasoline jumps over $4 a gallon, Americans feeling the pinch at the pump should recognize that the wealthiest nation on the planet has nothing but itself to blame for the third in a series of energy crises that began when Richard Nixon was still in office. Having largely ignored the previous two shots across the bow - the first coming in 1973 when OPEC decided to ban sales of oil to nations that supported Israel in the Yom Kippur War, and the second in 1979 after the Islamic Revolution in Iran - the U.S. seems determined to repeat the mistakes of the past. Shamefully, we are once again in the position of wondering just how high energy prices can go, and at what cost to our economy.

Despite 35 years of empty rhetoric from politicians bemoaning U.S. dependence on foreign oil, legislatively enacted environmental barriers have actually resulted in a 25-percent decline in domestic production since the first '70s energy crisis - while our usage has increased 20 percent. Regardless of one's ideological proclivities, it seems logical that you can't reduce foreign-oil dependence by cutting production at the same time that demand is rising. Despite how obvious this seems, one of our nation's two major political parties stubbornly continues to ignore that logic.

What should make Americans on both sides of the aisle even more ashamed is that before the first energy crisis, the United States produced 11.428 million barrels of oil per day. This represented 66 percent of the 17.308 million barrels we consumed that year. Compare that to 2007, when America produced 8.481 million barrels per day, or only 41 percent of the 20.7 million barrels consumed. Such is the result of the so-called energy policies of seven White Houses and 17 Congresses controlled by both Democrats and Republicans.

Yet, today's politicians - mostly on the left side of the aisle, of course - have the gall to place all the blame for rising energy prices on increased demand from expanding economies like China and India. At least those countries are participating in exploration efforts to expand their own supplies. China's oil production has almost doubled since 1980, while India's has grown by an astounding 375 percent. At the same time, U.S. production has declined by 22 percent. We sure do know how to respond to energy crises in this country, don't we?...

Much more here



A withdrawal you did not read about in your newspapers: "U.S. President George Bush on Monday announced the withdrawal of 30,000 troops next July, highlighting that any further withdrawal of the troops will depend on the security conditions in the country. This came during a joint press conference with British Prime Minister Gordon Brown in London. The U.S. president linked any further withdrawal of U.S. forces with the improvement of Iraqi forces' capabilities and their abilities to bear more responsibilities, as well as the economic improvement and more progress regarding political reconciliation. "This strategy aims at handing Iraqis more responsibilities," Bush said."

Ralph Nader has a point (for once): "The Wall Street Boys, like all charlatans, develop words and phrases to dress up their megagambling practices. They say they are trying to avoid a 'crisis of confidence' when these proclaimed capitalists go to Uncle Sam for a socialistic bailout. That only increases the 'moral hazard' -- another euphemism -- and sets the stage for another round of reckless Wall Street Goliaths being deemed 'too big to fail.' One of Wall Street's sharpest analysts -- Henry Kaufman -- believes that the 'too big to fail' phenomenon undermines market discipline and encourages the smaller firms to merge with the larger companies to avail themselves of Washington's bailout criteria."

Pope wisely returning church to its roots: "Pope Benedict XVI wants every parish in the West to offer believers the Mass in the Tridentine or Gregorian Rite, the Latin-language liturgy used until the 1960s by every Catholic church in the world. The Pope wishes every parish to offer both rites for Sunday Mass, an eminent Vatican Cardinal announced in London on Saturday. Cardinal Dario Castrillon Hoyos, President of the Ecclesia Dei Commission, said: "The Holy Father is willing to offer to all the people this possibility, not only for the few groups who demand it but so that everybody knows this way of celebrating the Eucharist in the Catholic Church." It was a "gift" and a "treasure," Castrillon Hoyos said, hours before celebrating a Tridentine liturgy attended by some 1,500 worshippers at Westminster Cathedral on June 14. "This kind of worship is so noble, so beautiful - the deepest theologians' way to express our faith. The worship, the music, the architecture, the painting, makes a whole that is a treasure."






1 comment:

Robert said...

Regarding the Ralph Nader story, I've been following an analyst for over 7 years who has been warning about everything Ralph Nader talked about in the article. The other analyst also advises getting your money the heck out of banks while you still can, as he expects the government to freeze all bank accounts and limit withdrawals to $500/month. His conclusion is that the financial institutions have lost far more than the cumulative $1 trillion or so they have admitted to from gambling in derivatives. He believes the losses will ultimately total hundreds of trillions of dollars, far more than even all the governments of the world could cover or bail out. Plan A has been for the Fed to swap its treasury securities dollar for dollar with the face value of those derivatives, and agree to look the other way as the troubled financial institutions manipulate the commodity markets in an effort to make up for their derivatives losses. But as those derivatives lose more and more every day with every new consumer default on debt they can't afford to pay, and the troubled institutions are going to have to sell the leveraged futures they bought sometime if they are ever going to take profits, and attempts to take profits have collapsed the markets on all the rest of their leveraged positions when they have been attempted, that plan is only likely to make their losses worse. So Plan B is the plan straight out of the pits of hell, modeled after the Scandinavian bank bailout in which accounts were frozen, large withdrawals from accounts were not allowed, wiring money out of the country was not allowed, and buying foreign currencies was not allowed. It was effectively forcing the general public to fund a bank bailout with their own life savings, and ultimately getting back around 25 cents on the dollar or so. From what I've heard, the Fed hopes to hold off on this until after the election, but if one of those "too big to fail" (now "too big to save" (and failing)) institutions does fail, the Fed may have no choice but to nationalize early. And when the financial institutions that have been gambling with depositor money in the commodities markets or using depositor money to manipulate them higher are forced to liquidate at any price, whether by regulators or by massive margin calls, we should see huge wipe-outs in the commodities markets, especially in oil.