Monday, September 8, 2008

How far to go with government intervention?

Here is an article about how to better utilize government involvement rather than clamoring for less government. Why? Because there is no evidence that higher taxes and bigger government spending on welfare slows down GDP growth rate. Compare the Nordic countries with the more liberal ones like the US!

...Contrary to the romantic claims about the nation's laissez-faire past, American history is a story of government intervening, time and again, to support growth.

...Rather than harm the economy, the evidence shows that government spending, when done well, contributes critically to economic growth. Americans rely on the government for the free primary and high schools that educate the workforce. The government subsidizes college education and has built the immense transportation infrastructure that moves goods across the country and gets people to work. Federal, state, and local government have been essential to the nation's health, building clean-water systems and developing vaccines that have eliminated or minimized diseases like diphtheria, tuberculosis, and polio. The government can waste money, too. But the national rhetoric about the economy needs to stop focusing on how to shrink the government, and start focusing on how best to use it.

...In 1992, President Bill Clinton succeeded in passing legislation to raise the income tax rate on higher income Americans. Harvard's Feldstein, who had served as Reagan's chief economic adviser, claimed that the tax increase would reduce the incentives to work and therefore the incomes of the wealthy. It turned out to do nothing of the kind: the top tier of Americans, in fact, made more money.

A look at tax history suggests that this should have been no surprise. Nancy L. Stokey, of the University of Chicago, and Sergio Rebelo, of Northwestern University, looked closely at the period between 1913 - when the United States first adopted an income tax - and 1942. In that period, the federal bite from income taxes rose from 2 to 15 percent of GDP. Discounting the data for business cycles, including the sharp downturns during the Great Depression, they found that the rate of growth remained consistently strong and positive over the years, despite ever-higher tax rates.

...But to a nation steeped in antigovernment economics, the idea that government cannot be of help - or that taxes are not worth paying - is now seriously jeopardizing its future. There is no rich nation in the world today, including America, that has grown wealthy without significant government involvement. And there will be no rich nation in the future that can stay wealthy without robust government, either