If you close your mind and listen carefully to what the incoming president and congress are saying you may start to believe that economic growth comes from increasing the amount of deficit spending. If that were the case, my advice to the new Obama administration would be to increase the stimulus package from $1 trillion (about 7% of GDP) to $14 trillion or about 100% of GDP. Since that amount will be impossible to raise via taxation, perhaps he could find a way to confiscate private property for the greater good of the nation. After all, if growth can be provided through wealth redistribution then why stop at just one trillion dollars?
The truth, of course, is that real economic growth comes from increases in productivity, and the factors that engender productivity growth are low taxes, a stable currency and an unfettered free market.
If fact, according to OECD 2007 data, there is an inverse correlation between the level of government intervention in the economy and growth rates of productivity. Just look at the four industrialized countries with the highest total tax wedge (the average percentage of total taxes paid on earnings): Belgium (55.4%), Germany (52.5%), Hungary (51%) and France (50.2). The four industrialized countries with the lowest total tax wedge are Mexico (15.0%), Korea (18.1%), New Zealand (20.9%) and Ireland (23.1%). Those countries with highest tax burden have an average increase in productivity of 1.1%. But the four lowest taxed nations have an average annual increase of 3.07%.
Because increases in government spending act as a depressant to the private sector, what is really needed to fix what ails this economy is to decrease the size of government and its debt burden. By reducing spending and cutting taxes we can slowly emerge from this recession through real growth, more quickly returning to a viable economy based on real, free-market principles. This would require time and would not be achieved without great pain. But unfortunately we live in an era of instant gratification and magical fixes. And if this era of sophistry and impatience continues, the problems facing our economy may become innate.