social network for conservatives
I've been bugged that Republicans can't articulate a short argument as to why scaling back government will fix the economy. Democrats are winning (at least holding things in place) the argument about the size and scope of the federal government with "Republicans want to go back to the failed policies of the past (meaning Bush)." As I've looked at this for quite some time, my thinking has clarified.
I suggest that Republicans need to deal with two mechanisms: 1. why or how does government spending harm the economy; 2. How did Clinton raise taxes and have an economic expansion. Data sources are: MeasuringWorth.com (a nice little web site for such data) for GDP Growth and USgovernmentspending.com for the plot of government spending.
A chart that illustrates the connection between government spending and economic growth follows. It graphs government spending (blue line) as a % of GDP, which clearly shows the growth in government after the start of the Welfare State. The purple line is the rate of growth (year-to-year) in the economy and the green line is a best fit linear regression of the growth. It was almost constant but did decline just a little bit. If you look closely, however, you can see that federal spending ticked up a little bit after the Civil War (that blue line bump around 1860). The yellow and red lines are similar, representing year over year growth and the trend. It is obvious from this plot that as government spending has grown the economy has slowed. Below the plot the underlying reasons for the effect are explained.
Liberals argue that Clinton raised taxes and the economy surged ... it is true, but something else happened. A short explanation of Clinton's luck follows shortly. Here is a first principles proof that government growth slows the economy.
1. Markets are very efficient mechanism for allocating costs, including those of the government.
2. Regulation and taxes impose costs upon the impacted parts of the economy; markets efficiently raise the price of goods and services to pay the cost of government taxes and regulations.
3. According to the Law of Supply and Demand an increase in prices, as happens to service government taxes and regulations, reduces demand.
4. Softer demand slows economic activity, including growth.
Another way to look at this is Adam Smith -- people trade (two parties trade something produced by the labor of each) in order to create wealth. The majority of government spending today pays people to not work (e.g. produce anything with which to trade). So what is happening is that fewer and fewer people actually provide labor that produces anything. Even though there is a per worker increase in productivity the overall economic productivity decreases as fewer and fewer people are working at the higher productivity levels.
Clinton: Geeky and technical but ... Dr. Carlotta Perez (http://www.carlotaperez.org/) has studied extensively transitions to economic eras (such as Industrial Era) and found four phases (as I recall): Initial Innovation, Period of Irrational Exuberance (ala Greenspan), a bubble, and a long period of above average expansion. Clinton was fortunate to be president at the start of the Information Age. We saw the bubble in 2000 at the end of his term. That means we should have had 7-8% growth while Clinton was president, but it was 3-4% growth. So his tax increases did harm growth, but it wasn't noticed by those writing history because of the impact on growth of the transition to the Information Age. We should be having a period of 5-6% growth, as the parts of the world with reasonable government spending are, but our government is killing our economy.