Discussing economic theories is important, but using real world observable evidence to support or refute those theories is even more crucial. Progressives may hate libertarian ideas, but it turns out that the most empirical research supports the notion that libertarian economic policies lead to faster economic growth and a greater standard of living for everyone, including the poorest and most vulnerable.
On the other hand, progressive economic policies don’t fare so well. While people will be arguing about the following issues for years to come, it appears as though the research on such issues is close to consensus.
Here are three facts about the economy that everyone needs to know:
1. Large Government is Tremendously Bad for Growth
Conventional wisdom says government spending boosts economic growth. But like most conventional wisdom, this belief does not hold up under empirical scrutiny.
According to a late survey, “The most recent studies [on the relationship between government spending and economic growth] find a significant negative correlation: An increase in government size by 10 percentage points [as a share of the economy] is associated with a 0.5 to 1 percent lower annual growth rate [even when controlling for other confounding variables].”
That may not sound like a big difference, but even a small reduction in a country’s economic growth rate can reduce that country’s future wealth tremendously. Consider the fact that “[A]n annual growth rate of 2 percent means that the economic standard of living doubles in thirty-six years. But if the annual growth is instead 3 percent, a doubling of the standard of living takes a mere twenty-four years.”
According to researchers, the optimal size of government spending as a share of the economy (Gross Domestic Product) is no more than 25 percent. Unfortunately, total government spending in the United States is over 40 percent of GDP, and is even higher in other developed countries.
2. Capitalism Really Does Make Everyone Richer
Free Market Capitalism (economic freedom) is constantly under attack by its opponents who claim that it impoverishes people, causes income inequality and destroys the environment. While it certainly is popular to blame economic freedom, it’s also popular to assume these claims are true rather than prove them using observable evidence.
Contrary to its opponent’s claims, 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.
Additionally, economic freedom is positively correlated with economic growth and national income per capita. There is significant evidence that economic freedom is the cause of this prosperity. 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 percent of income earners in the most economically free countries have an average income which is 11 times greater than the average incomes of the poorest 10 percent in the least economically free countries (when adjusting for purchasing power disparities across countries).
The opponents of the free market, though they may be genuine in their intentions, are actually fighting the greatest anti-poverty program in the world.
3. Corporate Taxation is a Terrible Idea
Benjamin Franklin once famously stated, “In this world nothing can be said to be certain, except death and taxes.” He was certainly right. Americans today face many different types of taxes and nearly all are harmful to economic growth, but some more than others.
Corporate taxes, for example, are widely loved by both the public and politicians. After all, who better to tax than “greedy” corporations? Unfortunately, reality is not that simple. Taxing corporate income reduces the incentive to invest in capital. Slow growth in the capital stock necessarily corresponds with slow growth in worker’s wages since worker’s wages are dependent on worker productivity. Ultimately, research finds that corporate taxes result in a smaller economy and are much more harmful than other forms of taxation. Take for example a study by economists Young Lee and Roger Gordon which concluded by stating:
“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.”
Abolishing the corporate tax in order to stimulate economic growth may sound like the dreaded “trickle-down economics” to some, but in reality, workers directly benefit from the abolishment of corporate taxes. For example, economist Laurence Kotlikoff has found that abolishing the corporate tax would raise workers’ wages by an astounding 12-13 percent. Ultimately, if we want to grow the economy and raise workers’ wages, abolishing the corporate tax is a large step in the right direction.