U.S. Economy Close to Stall Speed

July 15, 2013

Stall speed is the airspeed at which an aircraft stops producing lift. Unless immediate corrective action is taken, such as reducing the wing's angle of attack or the weight of the aircraft, the results are not likely to be good. An economy can hit "stall speed" when it becomes burdened with too much dead-weight loss, says Richard Rahn, a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

  • The eurozone economies have hit stall speed, with France, Germany, Italy and Spain, as well as most of the smaller economies, having negative growth.
  • The United Kingdom and Japan are barely above stall speed with an annual growth rate of less than 1 percent.
  • The United States, Canada, Russia and Brazil are in the danger zone, all with annual rates of less than 2 percent growth.

When government grows as a percentage of gross domestic product (GDP), economic expansion and job creation begin to slow beyond a certain point. This occurs as the portion of government spending that is used to provide for protection of person, property and liberty (court systems and defense) diminishes, and the portion used for transfer payments (often explicit payments for not working) and nonproductive, bureaucratic programs increases.

  • Studies show that government spending above 25 percent of GDP tends to become increasingly counterproductive.
  • Government spending in France is now above 50 percent of GDP, more than 40 percent in the other euro countries and nearly that much in the United States.

The United States has slightly reduced government spending as a percentage of GDP (sequestration), but has increased taxes and regulatory burdens, which result in a dead-weight loss to the economy. Entrepreneurs are the main sources of economic growth and jobs, yet government policies in Europe and the United States have become increasingly hostile to entrepreneurs.

Those who forecast a return to real growth, well above stall speed, are actually forecasting that the political actors in Europe and America suddenly will become more rational and responsible. This is a prime example of hope over experience.

Source: Richard Rahn, "Approaching Economic Stall Speed," Washington Times, July 9, 2013.

 

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