Which Policies Bring Economic Growth?

February 28, 2014

A review of economic literature confirms that small government policies strengthen economic growth, says John Hood, president of the John Locke Foundation.

The John Locke Foundation assembled a summary of 528 economic policy articles published from 1992 to 2013. The studies presented strong evidence that limited, not big, government is best for economic progress.

112 of the academic studies focused on state and local taxes.

  • Only two of these studies found a link between higher tax burdens and stronger growth.
  • Seventy-two of them, on the other hand, showed that taxes negatively impacted economic growth.
  • There was also a link between state taxes and foreign investment in the United States. In one study, a 1 percent change in the state tax rate resulted in an 8 percent change in the share of manufacturing investment from taxed investors.

The evidence also indicated that states do not invest effectively and that regulations harm the economy.

  • While education outcomes appeared to be correlated with economic growth, education expenditures did not. Of 79 studies on the subject, only 30 found a positive relationship between spending and growth in education, while 34 had mixed or insignificant results and 15 had negative results (due to the offset in growth from the additional taxes).
  • A study that looked at the growth of major state government programs -- from public safety to education to housing subsidies and health care -- found that raising taxes to fund that additional spending almost always hurts economic growth. But slowing that spending and reducing tax rates, the study found, leads to higher investment and employment.
  • Of 123 articles on regulatory policy, there was a positive economic effect from less regulation, not more, 67 percent of the time.

North Carolina serves as an example of a state that has latched on to policies that positively impact economic growth. The legislature dropped the income tax from 7.75 percent to a flat 5.75 percent and cut the corporate tax down from 6.9 percent to 3 percent. Regulations that are not cost effective automatically expire and all regulations must undergo a review every decade. And in education, the state expanded charter schools and replaced teacher tenure with multiyear contracts based on merit pay.

Source: John Hood, "Laboratories for Prosperity," Reason Magazine, March 2014.

 

Browse more articles on Economic Issues