Monday, December 15, 2014

Increasing Economic Growth Means Shrinking the Size and Scope of Government | Cato Institute

Increasing Economic Growth Means Shrinking the Size and Scope of Government | Cato Institute: "There is a growing body of evidence that bigger government means slower growth of real GDP. Once the level of total government spending as a percentage of GDP reaches a tipping point, estimated to be from 15 percent to 25 percent of GDP, additional expansion crowds out private productive investment and slows economic growth. When government overreaches, economic freedom is diminished and private exchange opportunities are lost — that is, the range of choices open to individuals is restricted.

In a pioneering study of the link between the growth of government and the wealth of nations, which appeared in the fall 1998 issue of the Cato Journal, economists James Gwartney, Randall Holcombe, and Robert Lawson found that a 10 percentage point increase in government spending as a percentage of GDP decreases real GDP growth by 1 percentage point. Thus, if government spending went from 25 percent of GDP to 35 percent, real GDP growth would slow over the longer term by a full percentage point. They also found that a 10 percentage point increase in the government’s share of GDP lowered private investment by 1.6 percentage points.

One of the key findings of their study was that secure property rights — which includes a legal system that protects persons and property, enforces contracts, and  limits the power of government by a just rule of law — play an important role in promoting economic growth.

The positive relationship between property rights and economic growth was developed more fully by the late Bernhard Heitger, an economist at the Kiel Institute for World Economics, in his path-breaking article in the Cato Journal. In that article, Heitger distinguished between proximate and ultimate determinants of economic growth. The former are well known: additions to physical and human capital and technological progress (also known as total factor productivity). But Heitger was interested in the question of what drives capital accumulation and innovation. His answer: the structure of property rights and the associated incentives."



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