The Correlation is Amazing: The Theories Work.
In the past, here is what I have suggested as the simple formula for economic growth and prosperity:
LIMITED GOVERNMENT + REASONABLE TAXES + BALANCED BUDGET =
MORE INVESTMENT + ECONOMIC GROWTH
In theory, smaller government would mean taking less from the private, productive sector of the economy to finance the public, nonproductive sector. This leaves more for the producers of the world to invest in and grow an economy. If that is the theory, then how does it stack up against the real world?
The answer is not hard to find. It lies in objectively analyzing the real world, what policies did rich, successful countries follow and what policies did poor, failing countries follow.
If you have studied economics and success and failures at all, you know the answer. But most of the good folks on Main Street are busy with the daily tasks of life and haven’t studied this. So here is a brief overview.
The Fraser Institute produces an annual report on The Economic Freedom of the World. Here is a link to the full report if you have some time to peruse it. Here is the summary of what it does:
The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to enter markets and compete, and security of the person and privately-owned property. Forty-five data points are used to construct a summary index …. The degree of economic freedom is measured in five broad areas.
Let’s skip to the conclusions. Those with the most limited governments and most economic freedom were the wealthiest countries in the world, by far. Using GDP/per capita as a measure of success, the wealthiest countries are always those with the highest score on economic freedom. They have over 10 times more income per capita than the poorest countries, those with the lowest scores.
In a book recently published by Dan Mitchell, a professional economist, and me, a businessman, The Greatest Ponzi Scheme on Earth, we included an entire section discussing this issue. In Section II of the book, Real World Fiscal Lessons, we review many countries that have succeeded and failed, including various periods in the history of the United States.
Spoiler Alert: Empirical results in the real world proves beyond a ‘shadow of a doubt’ that the formula works. Limited government, coupled with modest taxes, good fiscal policy, and economic freedom is the formula to achieve prosperity for a country and its people.
BOTTOM LINE
Youthful idealism eventually evolves to reality when we see what works and what doesn't.
Our current course is clearly in the wrong direction and we are paying the price today with slow economic growth and inflation. If you are old enough you remember ‘stagflation’, it is a combination of the two. That is exactly what is happening today. While that is unpleasant and causes many folks some problems, it is nothing compared to what could happen if we stay on the course we are on - which is a huge government and terrible fiscal and monetary policy.
The current course will inevitably lead to a financial crisis, and then the real problems begin. The interest-bearing debt today is around $35 trillion, and projected to be $54 trillion in 10 years, and $150+ trillion in 30 years. That is a recipe for disaster. That is why we must change course now, while we still can.
If you are seriously interested in the future of this country, read our book, or our short pamphlet, Restoring Fiscal Sanity, which is free on our website (the pamphlet is co-authored by David Walker, former Comptroller General of the United States, and me).
LEARN ECONOMICS, THEN VOTE SMART
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