Thought provoking studies.

Challenge your modern liberals friends with this information:

Does government spending increase economic growth?

Apparently not. A recent survey of the empirical research on the matter states: 

"[When we examine] studies of the relationship [between government spending and growth] in rich countries, measuring government size as total taxes or total expenditure 
relative to GDP and relying on panel data estimations with variation over time... most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth
rate." [1]

Additionally, recent research suggests that the growth maximizing size of government in rich countries is no greater than 25% of GDP [2], much smaller than the 40% of GDP currently consumed by government spending in the US.

Is it true that regulations don't harm the economy?

According to a 2013 study published in the Journal of Economic Growth: "[Federal] Regulation’s overall effect on output’s growth rate is negative and substantial. Federal regulations added
over the past fifty years have reduced real output growth by about two percentage points on average over the period
1949-2005. That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as
of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if
regulation had remained at its 1949 level." [3]

This means that the average American household is $277,000 poorer than it otherwise would have been.

Does the minimum wage really have no impact on unemployment?

A summary of the last two decades of research from economists at the University of California-Irvine and the Federal Reserve Board found that 85 percent of the most credible studies on the minimum wage point to job loss for less-skilled employees. [4]

Does Capitalism (economic freedom) really make people worse off?

Economic freedom (measured using the Heritage Foundation’s Economic Freedom Index) is highly correlated with higher environmental protection, improved sanitation, cleaner water, longer life expectancy, lower infant mortality rates, more income equality, etc. [5]

Additionally, economic freedom is significantly positively correlated with economic growth and national income per capita [6]. There is significant evidence that economic freedom is the cause of this prosperity [7]. It’s also worth noting that this income isn’t just going to the very rich, rather, it is going to the poor as well. The poorest 10% of income earners in the most economically free countries have an average income which is eleven times greater than the average incomes of the poorest 10% in the least economically free countries (when adjusting for purchasing power disparities across countries) [8].

Please share this info with your modern liberal friends and see if it provokes some thought.

Citations:

[1] http://www.ifn.se/wfiles/wp/wp858.pdf

[2] http://ime.bg/uploads/335309_OptimalSizeOfGovernment.pdf

[3] http://www4.ncsu.edu/~jjseater/regulationandgrowth.pdf

[4] http://www.socsci.uci.edu/~dneumark/min_wage_review.pdf

[5] http://www.heritage.org/research/reports/2013/09/how-economic-freedom-promotes-better-health-care-education-and-environmental-quality

[6] http://ideas.repec.org/p/twi/respas/0005.html

[7] http://webcache.googleusercontent.com/search?q=cache%3Axs1e6MPoZs4J%3Awww.researchgate.net%2Fpublication%2F222674979_Causality_in_the_freedomgrowth_relationship%2Ffile%2F79e4150991d3adc52c.pdf+&cd=1&hl=en&ct=clnk&gl=us

[8] http://www.freetheworld.com/2013/EFW2013-complete.pdf

Fraser Institute Study: The optimal size of government

In 2013, the Fraser Institute released an extremely thorough study on the relationship between the size of government and economic growth. According to the study:

- "After controlling for confounding factors such as population, lagged per capita GDP, net debt to GDP, institutional factors of governance, economic freedom, and regional variation, etc... annual per capita GDP growth is maximized at 3.1% at a government expenditure ratio of 26% [of GDP]; beyond this ratio, economic growth rates tend to decline." [Today government spending in the US is around 40% of GDP]

- After controlling for the effect of confounding variables the authors found that a 10% increase in the size of government [measured as a % of GDP] would decrease the per capita GDP growth rate by around 0.9%.

-According to these estimates, the economy of a country with a public sector size of 30% of GDP would grow by over 33% within a decade whereas the economy of a country with a public sector size of 40% of GDP would only grow by 20%.

- The authors also found that economic freedom was a significant determinant of economic growth rates. According to their estimates, a 1 point increase on the Economic Freedom of the World Index (10 being highest) would increase per capita GDP growth by approximately 0.6% after controlling for numerous other variables.

These findings verify the classical liberal belief that the economy will grow fastest if government stays small and fosters an environment of economic freedom.

Fraser Institute study here: http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/measuring-government-in-the-21st-century.pdf

The free market and working people

Left wingers have an awfully perverse way of helping workers. Their primary means of doing so is to call for higher minimum wages and more labor unions.

The raising the minimum wage is a proven way to kill jobs since workers who don't produce revenues equal or greater than the minimum wage become costs to their employers. In fact, 85% of the most credible studies on minimum wage laws find that they create unemployment among low skilled workers [1].

Unions on the other hand are labor cartels which the number of workers in a company in order to boost the remaining workers wages, a scheme which is great for unionized workers but detrimental to non-unionized workers and the economy as a whole.

According to economists Richard K. Vedder and Lowell E. Gallaway, unions have cost the US economy $50 trillion between 1947 and 2000 [2]. Unions have been found to increase unemployment and lower investment, in fact, unionized industries tend to grow the slowest [3].

All that left wingers have to offer workers is benefits for some at the expense of others. Free market policies on the other hand attempt to raise worker's wages (at no one else's expense) by increasing their productivity (since wages are a function of productivity [4]).

According to the Free Marteteer, taxes which reduce the incentive to work or invest in capital will harm worker productivity growth and thus slow the growth of worker's wages. In fact, the marketeer acknowledges that restraining government spending, increasing economic freedom, and pro-growth tax reform are the best ways to boost workers wages. Consider the the following:

- Empirical research on the size of government consistently finds that government spending is significantly negatively correlated with economic growth (even when controlling for numerous other confounding variables) [5].

- "If government expenditures as a share of GDP in the United States had remained at their 1960 level, real GDP in 1996 would have been $9.16 trillion instead of $7.64 trillion, and the average income for a family of four would have been $23,440 higher." [6]

- "[T]he average income of the poorest 10% [of income earners in the most economically free countries] was $10,556, compared
to $932 [for the poorest 10% of income earners in the least economically free countries] in 2011US (PPP) dollars" [7]

- Abolishing the current federal tax system and replacing it with a progressive sales tax would increase worker's real (inflation adjusted) wages by around 10%  and increase employment between 5-10% over the current system according to several studies. [8]

- Abolishing the corporate income tax would raise worker's wages by 12-13% thanks to increased investment in capital and correspondingly higher worker productivity according to a recent study [9].

Ultimately, the free marketer is the realist who acknowledges that wages cannot simply be raised according to the will of politicians. Rather, raising worker's wages is best done by instituting pro-growth policies which encourage work, investment, and growing worker productivity. Lastly, unlike the policies of the left winger, those advocated by the marketeer raise wages at no one's else's expense. As Milton Friedman once noted:

“When unions get higher wages for their members by restricting entry into an occupation, those higher wages are at the expense of other workers who find their opportunities reduced. When government pays its employees higher wages, those higher wages are at the expense of the taxpayer. But when workers get higher wages and better working conditions through the free market, when they get raises by firm competing with one another for the best workers, by workers competing with one another for the best jobs, those higher wages are at nobody's expense. They can only come from higher productivity, greater capital investment, more widely diffused skills. The whole pie is bigger - there's more for the worker, but there's also more for the employer, the investor, the consumer, and even the tax collector.

That's the way the free market system distributes the fruits of economic progress among all people. That's the secret of the enormous improvements in the conditions of the working person over the past two centuries.”

Citations:
[1] http://www.socsci.uci.edu/~dneumark/min_wage_review.pdf
[2] http://www.ncpa.org/sub/dpd/index.php?Article_ID=5589
[3] http://www.heritage.org/research/reports/2009/05/what-unions-do-how-labor-unions-affect-jobs-and-the-economy
[4] http://www.sparknotes.com/economics/micro/labormarkets/labordemand/section1.rhtml
[5] http://www.ifn.se/wfiles/wp/wp858.pdf
[6] http://frihetspartiet.net/function.pdf
[7] http://www.freetheworld.com/2013/EFW2013-complete.pdf
[8] http://being-classical-liberal.blogspot.com/2014/03/its-no-secret-that-our-current-federal.html
[9] http://www.kotlikoff.net/sites/default/files/Corporate%20Income%20Tax%20NBER%20WP%2019757.pdf

The Optimal Size of Government

I generally analyze how government actions affect economic growth. In this post I will go through some of the empirical evidence on the optimal size of government. In the following studies, the optimal size of government is measured by government spending (as a % of GDP) which maximizes economic growth.

First it's worth noting that the majority of the empirical literature on the relationship between government size and growth finds that government spending is contractionary (meaning it decreases economic growth). Consider a recent survey of the literature which states:

"The most recent studies [on the relationship between government size and growth] find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate." [1]

Keep in mind the studies surveyed controlled for many others variables such as population, lagged per capita GDP, net debt to GDP ratios, institutional factors, economic freedom, regional variations, etc in order to isolate the affect government spending has on economic growth.

Using evidence provided by studies like the one previously mentioned, researchers have been able to predict the optimal (growth maximizing) size of government. For example:

Chobanov and Mladenova (2009) finds:

"The evidence indicates that the optimum size of government, e.g. the share of overall government spending that maximizes economic growth, is no greater than 25% of GDP (at a 95% confidence level) based on data from the OECD countries." [2]

Di Matteo of the Fraser Institute concludes:

"All other things given, annual per capita GDP growth is maximized at 3.1 percent at a government expenditure to GDP ratio of 26 percent (of GDP); beyond this ratio, economic growth rates decline." [3]

Our friends over at Unbiased America have provided more studies:

16% +/- 3% of GDP.
Karras, G. (1997). “On the Optimal Government Size in Europe: Theory and Empirical Evidence,” The Manchester School of Economic & Social Studies

17.3% +/- 3% of GDP.
Gunalp, B. and Dincer, O. (2005). “The Optimal Government Size in Transition Countries,” Department of Economics, Hacettepe University Beytepe, Ankara and Department of Commerce, Massey University, Auckland

17% to 20% of GNP.
Peden, E. (1991). “Productivity in the United States and its relationship to government activity: An analysis of 57 years, 1929-1986,”

The average rate of federal, state and local taxes combined should be between 21.5 and 22.9% of GNP.
Scully, G. (1994). “What is the optimal size of government in the US?,” National Center for Policy Analysis, Policy Report No. 188

28.9% of GDP
Vedder, R. and Gallaway, L. (1998). “Government Size and Economic Growth,” Joint Economic Committee, Washington D.C., p. 5

14.7% of GDP
Davies, A. (2008). “Human Development and the Optimal Size of Government,” Journal of Socioeconomics, forthcoming

NOTE: There are even more studies than these, the highest estimates I've seen is 37% for European Countries. Almost all studies purport that the optimal size of government is 30% or less, with the majority finding it to be between 15-25%.

Citations:

[1] http://www.ifn.se/wfiles/wp/wp858.pdf
[2] http://ime.bg/uploads/335309_OptimalSizeOfGovernment.pdf
[3] https://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/measuring-government-in-the-21st-century.pdf

Corporate taxation and economic growth aren't friends.

This post is dedicated to all the people who know nothing about economics and want the government to force corporations to "pay their fair share".

The corporate tax is probably the most harmful tax on economic growth since it discourages investment and thus productivity growth (as well as encouraging hiding income over seas).

Take for example, a series of OECD papers by Johansson et al. that examined 21 OECD (rich) countries between 1971 and 2004 that found corporate taxes were the most harmful to economic growth, followed by income taxes, then consumption taxes, and lastly property taxes. According to the a summary of the study:

"[A] 1 percent shift of tax revenues from income taxes (both personal and corporate) to consumption and property taxes would increase GDP per capita by between 0.25 percent and 1 percent in the long run." [1]

Not only that, but corporate taxes end up hurting workers slow growth in investment results in slower productivity growth, and thus slow growth in wages (since wages are based on worker productivity). In a recent working paper published by the National Bureau for Economic Research, economist Laurence Kotlifoff estimates that abolishing the corporate tax and replacing the lost revenue with higher income or consumption taxes would increase workers wages in the long run by 12-13%. [2]

Here is some more research on corporate taxes:

-Mertens and Ravn examine corporate taxes after WWII in the US and find that "A 1 percentage point cut in the ACITR [average corporate income tax rate]raises real GDP per capita on impact by 0.4 percent and by 0.6 percent after one year." Additionally, they find that a 1 percentage point cut in the APITR [average personal income tax rate] raises real GDP per capita by 1.4 percent on impact and by up to 1.8 percent after three quarters." [3]

-Ferede and Dahlby examine corporate taxes  and their effect on economic growth in the Canadian provinces and conclude by stating: "Our empirical analysis suggests that 1 percentage point cut in the corporate tax rate is related to a 0.1-0.2 percentage point increase in the annual growth rate." [4]

-Economists Young Lee and Roger Gordon examine corporate taxes in 70 countries over 20 years and state: "This paper finds that the corporate tax rate is significantly negatively correlated with economic growth in a cross-section data set of 70 countries during 1970-1997, controlling for many other determinants of economic growth." [5]

-Another study from Johansson et al. found that: "Corporate income taxes can be expected to be the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and in productivity improvements." [6]

-Kevin Hasset and Aparna Mathur of the American Enterprise Institute examined 72 countries over 22 years and found that on average, a 1% increase in the corporate-tax rate is associated with a 0.8% drop in wages over the next five years after controlling for other relevant macroeconomic factors. [7]

These are just some studies which examine how corporate taxes effect wages and economic growth. I think it's safe to safe that the majority of studies find that corporate taxes are harmful to economic growth, with a minority finding is has no effect. Regardless, this research exemplifies how foolish it can be to simply make assumptions that the government can raise taxes on corporations with no adverse consequences.

Citations:
[1] http://www.oecd.org/tax/tax-policy/41000592.pdf
[2] http://www.nber.org/data-appendix/w19757/CorporateTaxPaper.pdf
[3] http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.103.4.1212
[4] http://ntj.tax.org/wwtax/ntjrec.nsf/175d710dffc186a385256a31007cb40f/d2eeb9d5f1d7f7ea85257a6f00551c60/$FILE/A03_Ferede.pdf
[5] http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/05/corporate-taxes-dont-cause-recessions-but-they-do-hurt-growth/
[6] https://www.kent.ac.uk/economics/documents/research/papers/2009/0925.pdf
[7] http://www.aei.org/papers/economics/fiscal-policy/taxes-and-wages-paper/

Myth: Gun control in Australia reduced gun homicides and suicides tremendously.

Myth: Gun control in Australia reduced gun homicides and suicides tremendously. 

-Australian gun control and Mass Shootings

In 1996, the Australian government instituted strict gun control measures which made it almost impossible for a civilian to own a semi-automatic rifle or shotgun after a mass shooting which left 35 people dead (the even restricted access to airsoft guns). Since then, Australia hasn't witnessed a mass shooting, leading many gun control advocates crediting the 1996 gun control legislation as the cause of the lack of mass shootings. Are they right? No. 

A 2011 study published by the Justice Policy Journal examined the incidence of mass shootings in Australia and New Zealand over a 30 year time period. The results don't provide any evidence in favor of the belief that banning guns reduces mass shootings. According to the authors:

"[The results do]not find support for the hypothesis that Australia’s prohibition of certain types of firearms has prevented mass shootings, with New Zealand not experiencing a mass shooting since 1997 despite the availability in that country of firearms banned in Australia." [1]

- Gun control and firearm homicide and suicide

After the 1996 gun control legislation, firearm homicide declined, leading gun control advocates to credit gun control as the cause of this decline. However, firearm homicides were already declining before the gun control legislation passed. A study published by the University of Melbourne studied the effects of the 1996 gun control legislation on firearms homicide and suicide. The authors report:

"The results of these tests suggest that the NFA [the gun control legislation] did not have any large effects on reducing firearm homicide or suicide rates." [2]

Additionally, a study published in the British Journal of Criminology found that there was no evidence that the NFA [National Firearms Agreement] had any impact on reducing firearm homicide [3]. They did find that it may have helped reduce firearm suicide, but they that societal factors were already reducing suicide rates.

Lastly, a 2009 study the Australian Institute for Suicide research studied how the NFA effected suicide rates and found the following:

"The implemented restrictions may not be responsible for the observed reductions in firearms suicide. Data suggest that a change in social and cultural attitudes could have contributed to the shift in method preference". [4]

So now you have the facts. Do with them as you will. 

Citations:

[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2122854
[2] http://www.melbourneinstitute.com/miaesr/publications/working-paper-series/abstract-178.html
[3] http://bjc.oxfordjournals.org/content/47/3/455.abstract
[4] http://www.biomedexperts.com/Abstract.bme/18839044/Controlling_firearms_use_in_Australia_has_the_1996_gun_law_reform_produced_the_decrease_in_rates_of_suicide_with_this_method