march 17th  2007

 
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The Path To Sustainable Growth
Lessons From 20 Years Growth Differentials In Europe
  
Abstract:    While the rest of the world is booming, Europe lags behind. Europe's performance is weak in spite of high productivity and knowledge, high level of development and good labour ethics. Growth is also remarkably dissimular among regions. France, Germany and Italy are stagnating, and so do Denmark, Sweden and Finland. All gained less than 44% prosperity over the last 20 years. The Irish economy grew 4 times faster, gaining 169% wealth over the same period. In half a generation Ireland so metamorphosed into Europe's second richest country creating jobs for all.
 
" Big government " is the main cause of Europe's weak performance. The oversized Public-Sector lacks productivity and undoes the entire productivity gains of the Private Sector, eradicating all of its outstanding performance and productiveness. Europe can improve its overall performance by copying the Irish success formulas: Scaling down Public Spending, downsizing bureaucracy, and shifting the tax burden from income on consumption. This book demonstrates why the Lisbon Agenda and decades of Keynesian inflationist demand stimulation have failed. It devellops alternative and workable supply-side strategies as well as effective cures for humane growth and a financially sustainable social security.
 
This book reads as a   step-by-step manual for economic recovery.   It is a data-reference for students and politicians interested in growth, wellfare and in social modelling.   It is a  classic  for  economists concerned about Big Government,  poor public sector productivity  and for parents worrying about  their declining standard of living and their children's future.

 		Free institute for economic research

Find the Summary here
 
About the authors:
martin_de_vlieghere

Dr. Martin De Vlieghere is economist and doctor of philosophy since 1993.  His PhD was written on the conditions of modernity in the works of Habermas and Hayek. He has been assistant professor at the Department of Philosophy of the University of Ghent. He is president of the "Free Association for Civilization Studies" and member of the board of directors of Nova Civitas. 
Paul Vreymans is econometrist and advisor at the Free Institute for Economic Research. As an international businessman he is a close witness of Europe's industrial collapse and the rise of the parasitical bureaucratic complex. He is a founding member of the Brussels' think tank WorkForAll. 



                
PART 1 - The Economics of Taxation
In a first part of this working paper, we discuss the newest developments in macro-economic theory and taxation policies. We have special attention for theory relative to optimising tax receipts by Laffer (1985) and the Barro-Armey theories (1990-1995) concerning optimising prosperity growth and optinising income distribution. We compare the taxation policies in different social models, and have particular interest whether the Scandinavian model is suited for maximizing growth and creating new jobs.

PART 2 - The Causes of Growth Differentials: Empirical Research
In the second part we search for the causes of European growth differentials by means of multiple regression. The main conclusion is that two factors of the public policy mix cause weak growth performances: excessive public spending and a demotivating tax structure, on the one hand, and over- consumption with a lack of savings and investment on the other hand. We conclude that the public sector in most European countries is far too large, depriving the private sector of the recourses to realize its full wealth potential.

PART 3 - Ireland versus Belgium : A Case Study
In part three we make a case study analysing the performances of two countries with opposite public policies: Ireland's with low public spending and a flat tax structure and Belgium with high levels of public spending and a heavy direct tax burden. We analyse the effects on growth, budget, public debt, job creation and social expenditure. We conclude that only stimulation of the supply-side of the economy rescue Europe's generous social system and provide sustainable recourses for the challenges of its fast ageing population. This confirms the overwhelming importance of production and investment as the prime social objective.

Part 4 - Loosing Overweight: A slimming Cure for Big Governments.
In part four, we look at possible scenarios on how to reduce the public spending as the most effective way to restore dynamism and growth. On the basis of simulations we investigate the possibilities and consequences of a budget-freeze in real terms. We analyse whether pruning bureaucracy and the parasitical sector can free resources and return our workforce to its real task of creating wealth, and ultimately restore efficiency and competitivity of both private and public sector.
   Free institute for economic research
 

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irish_success_story
 scandinavian_model



Summary
Introduction: European Growth Performances are poor and differ remarkably.

Part 1 - The Economics of Taxation

Laffer: maximising Tax Receipts.
Armey: Optimising Growth Prospects.
Optimising Distribution of Wealth
Empirical Evidence
The Importance of choosing the right Policy Mix.
Europe's Empirical Armey Optimum
Under-performance: logical Consequence of an oversized Public Sector.
Europe's difficult Choice between Social Models
Obviously Size of Government does matter.
The Importance of choosing the right Policy Mix.
Europe can no longer afford wrong Policy Choices.

Part 2 - The Causes of Growth Differentials - Multiple Regression Analysis

Growth Differentials: Causes in Literature - some single Correlations
Investigation Method: Multiple Regression Analysis (OLS)
Differences with Prior Studies
The Growth Model
Independent Variables:
Results of the Regression Analysis.
Conclusions from the Regression Analysis
1. Excessive Public Spending: European governments are highly oversized
2. Europe is over-consuming and under-investing.
3. Inflation & easy-Money-Policy.
4. Interventionism and Misallocation of Resources.
5. Demotivation.
6. Welfare excesses:
7. Keynesian Fallacy.
Comparison with Other Studies
Simulations at Different Sizes of Governments (Belgian Case)
Simulations at Different Sizes of Governments

Part 3 - A Case Study: Ireland versus Belgium

The Effects of Tax Cuts on Growth
Ireland's 1985 policy change.
The Effects of Growth on Wealth and Policy Margin
Keynesianism versus a Production-stimulating Policy
The Effects of Growth on Public Finance.
The Effects of Growth on Social Spending
The Effects of Growth on Job Creation
The effects of Growth on Public Debt.
Unemployment under Supply-Side policies.
The Shift from Direct Taxes to Indirect Consumption Tax
Economic Effects of a Tax Shifts.
Distortionate Taxes on Production cause sub-optimal Location of Industry.
Social Consequences of Consumption Taxes
Sound Economic Policy and Politics.
The Role of the Media and Education.

 Part 4 - Loosing Overweight: A Slimming Cure for big Governments.

How NOT to do it: Starving the beast.
The soft and easy Approach: a Budget Freeze.
Good Governance Practices for improved Public Sector Performance.
Accountability & Transparency.
Differentiating Core Business from side-Tasks
Creating taxpayers' value through improved productivity.
Pruning the Parasitical Sector
1. Stopping the Exploitation of the Productive Sector
2. Confining the dispute industry.
3. Fighting Bureaucracy.
4. Fighting the Unemployment Trap and Social security Abuse
Directing Public funds at programs with high social value.
1. Programs benefiting the whole Population.
2. Programs with high social Benefit
3. Risk management: Adjusting Resources to Risks Relevancy.
Management at the lowest level of Administration.
The Separation of Economy and State
1. Abolish all occupational-licensure laws.
2. Privatising what the private Sector can do better: Restoring belief in markets
3. Pruning Subsidies.
4. Confining city Planning to its real Task.
5. Limiting Interference of Pressure Groups in consensus Models.
Human Resource Management in the Public Sector.
Financially Sustainable Growth.
Stimulating Tax Competition between Governments
Final Conclusions: Europe's challenges


Appendix 1: Comparison With Other Studies

A.    Studies Concerning Growth Effects Of Size of Government Expenditures
B. Studies Concerning Growth Effects of Tax Structure.
C. Concluding remarks

Appendix 2: Sources
Appendix 3: Data





Other articles on this site
Very recommended links:
mundell_noben_prize_lectureDr Robert A. Mundell's Nobel Prize Lecture:
"A Reconsideration of the 20th Century"
claiming that Supply Side Economics
leads to growth and price stability.

( 53 min. speach  Hosted by the Nobel Foundation )
(requires the Real-Player Plugin)


More Europe is not a remedy for European economic troubles.

Economists and politicians agree that Europe's economy has been suffering from a serious disease. In 2000 the Lisbon Agenda identified the symptoms of this disease – high unemployment and low economic growth.

In his presentation

  1. Petr Mach argues that the Lisbon Agenda misunderstood the real cause of the underperformance of European economy, and therefore prescribed wrong treatment.
  2. Petr Mach shows that now that the time for Lisbon Strategy is halfway through, the economic situation in Europe is even worse than it was in 2000 when the agenda was set, and that this is due partly to the wrong diagnosis of the disease.
  3. Petr Mach argues that there is a direct link between the European economic underperformance and European legislation which allows spreading of many of those bad and rigid policies that are underlying cause of the slow growth and high unemployment in Europe.
  4. Petr Mach argues that by extending majority voting in the Council of Ministers to other areas including labour legislation, the Constitutional Treaty actually extends the list of rigid economic rules that can be imposed on European nations from above. According to my opinion, this can only hinder the dynamics and competitiveness of European economie

Visit the Petr Mach website here

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Big Government equals Bad Governance:
Big Public Spending means high Taxes,
High Taxes mean poor Growth.

big government
source : http://www.house.gov/jec/growth/function/function.pdf

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