A Place to Stand

"Academic studies show that each extra one percent of an economy taken up by public spending reduces the growth rate for that economy by 0.15%"

John Redwood's blog

I commented that this single remark should be written in fire wherever the powerful gather so here it is ;-)

Also in Conservative & UKIP election material

That would mean if government spending were reduced from the present just over 50% to 20% we should expect growth to increase by about 5%

Note inter alia that that is the equivalent of a rate of return of 15% plus the inflation rate, which is far better than ever charged so it is more rewarding to borrow more & cut taxes than not to, though only if the borrowing is actually used to keep government off the back of the economy rather than to increase government spending. Theoretically that would mean Brown was right to say it is better to borrow for growth if he had been using the money to cut taxes & promote growth in the productive part of the economy rather than growth in the government part. This is pretty much what Reagan did when he cut taxes & let the deficit increase in the expectation increased growth would take care of it. It was described as "Voodoo economics" but there is no dispute that it worked. I must admit my Presbyterian conscience is uncomfortable at the thought of government simply borrowing but if it is used to promote real, return making, investment rather than the day to day spending politicians so often describe as "investment" the figures show it will work.

Less academically certain lets look at the effect of over-regulation. I have previously calculated that over-regulation in Britain costs us the equivalent of 100% of our current economy. If we assume that some of government spending which we are looking at cutting actually does have some economic use we should expect productivity released by the cutting of useless regulation to have, if anything, a slightly greater positive effect on growth. Taking only the same o.15%/1% ratio cutting all of this parasitism would improve growth by 15%.

Combining both factors with our present long term growth rate of 2.5% & compounding them we get (1.15 x 1.05 x 1.025) a possible growth rate of 1.238 ie 23.8%

Without even including X-Prizes

I think there are other things government can do that enhance growth more than putting the same money into tax cuts - legal aid to inventors trying to patent worldwide; improving transport infrastructure; providing technical education - but not many.

This sounds, even to me, pretty incredible but remember that though China has managed 10% growth over a long period & up to 11.5% China's economy is widely differentiated between the old socialist hinterland & the world's freest markets in Guangdong province beside Hong Kong which has managed 20%, though they have unlimited immigration from the hinterland. And China still has quite a big state sector - it is not run by libertarian supermen.

Also we should expect that growth rate to decline over time because it is being artificially pushed up by deregulation. When the economy grows faster than 7.5% it is catching up on foregone growth caused by over-regulation. As the regulatory overhang falls so will the benefit of deregulation.

Nonetheless a decade averaging above 20% growth would make us 8 times wealthier & almost make up for the last 6 decades of overregulation (4 decades of them "environmental") & consequent slow growth.

At the very least aiming for that & falling short would be better than the very best our current crop of leaders dare to dream of.

Labels: ecnomic growth, economics, Fixing the economy

// posted by neil craig @ 2:50 pm