Kevin Spires, CFA, FRM
In yesterday's Wall Street Journal, Tim Know and Ryan Bourne presented the results of research showing that the smaller the size of government, all else equal, the faster the growth rate of an economy. In their own words "our results suggest that reducing the ratio of taxes or spending to GDP by five percentage points increases the growth rate of GDP per capita by 0.5 to 0.6 percentage points per year. " Over 25 years those .5% to .6% a year matter, leading to a smaller government economy outgrowing a larger government economy by "115% to 64%."
Their suggestion for resolving the European Economic Crisis is to put government on a diet. They correctly point out that "Austerity" as the Europeans understands the word is higher taxes on the private sector and no cut backs in the bloated state sector (some editorializing on my part-ks). To create sustainable, higher growth rates, a small state sector and smaller taxes are warrented. Seems pretty straightforward to me.
In yesterday's Wall Street Journal, Tim Know and Ryan Bourne presented the results of research showing that the smaller the size of government, all else equal, the faster the growth rate of an economy. In their own words "our results suggest that reducing the ratio of taxes or spending to GDP by five percentage points increases the growth rate of GDP per capita by 0.5 to 0.6 percentage points per year. " Over 25 years those .5% to .6% a year matter, leading to a smaller government economy outgrowing a larger government economy by "115% to 64%."
Their suggestion for resolving the European Economic Crisis is to put government on a diet. They correctly point out that "Austerity" as the Europeans understands the word is higher taxes on the private sector and no cut backs in the bloated state sector (some editorializing on my part-ks). To create sustainable, higher growth rates, a small state sector and smaller taxes are warrented. Seems pretty straightforward to me.
The combination of smaller government and smaller taxes can also be a winner politically as well. Scott Walker, the Governor of Wisconsin, who pushed through "Austerity" by cutting into the inefficiencies of the Government Union Bureaucracy and did not raise taxes to close a big budget hole. The European political parties should take note - as whomever is in power has been getting bounced from power at the next election due to their failed policies.
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