Which Federal Policies Help or Hurt Economic Growth?

October 2, 2012

Many policies pursued by the Obama administration, as well as some pursued by the preceding Bush administration, have widely been thought to be stimulative.  They have led instead to prolonged economic weakness, as a careful reading of history would have suggested.  To turn the situation around, Washington needs to stabilize the dollar, freeze and reduce its spending, cut tax rates, and let the markets set interest rates freely, says R. David Ranson, a senior fellow with the National Center for Policy Analysis and president and director of research at H.C. Wainwright & Co. Economics.

So-called stimulus spending doesn't work:

  • The faster government spending increases relative to the economy, the more slowly the economy grows; thus, excessive public spending "crowds out" spending by the private sector.
  • The average dollar spent by government results in about two-thirds of a dollar of reduced private sector spending.
  • As a result of stimulus spending, since its lowest point in the second quarter of 2009, real gross domestic product (GDP) has been growing at a rate far below that of previous cyclical recoveries: 1.75 percent per year through the first quarter of 2012.

Higher levels of government employment lead to the loss of private sector jobs:

  • For every additional government worker, roughly half a private worker disappears, leading to a net gain of only half a worker.
  • Over a three-year period, every government employee added results in a reduction in total employment of more than three workers!

Taxes:

  • The fact that federal revenue has never surpassed 20 percent of GDP consistently suggests that tax rates in excess of 20 percent may well be revenue losers.
  • Decades in which the top marginal rate of income tax increased were decades of inferior economic growth and stock-market performance.
  • The evidence shows that reductions in marginal tax rates of 10 percentage points or more lead to higher levels of investment and higher stock prices.

Deficits and a declining dollar:

  • Deficit spending does not stimulate economic growth, but it does stimulate inflation.
  • Higher growth and better stock-market performance occur when the Federal Reserve creates less rather than more money. What debt monetization does stimulate is the rate at which the dollar depreciates.
  • Depreciation in the value of the dollar has twice as great an effect on output as it does on employment, suggesting that one of the consequences of a decline in the dollar is lower labor productivity -- putting downward pressure on workers' wages.

Source: R. David Ranson, "Which Federal Policies Help or Hurt Economic Growth?" National Center for Policy Analysis, October 2012.

 

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