I’ve recently started reading Forbes magazine. It’s a magazine on business and financial news, stock market analysis, and technology & global headlines. It’s something I first picked up in the business department at Covenant. I read a recent article by Rich Karlgaard entitled “Why Growth Matters.” Although I don’t necessarily agree with everything the author is saying, I do think he makes some interesting points about why economic growth is so vital if our country is going to make it out of this recession. Karlgaard makes the point that GDP growth is, at best, an inaccurate number when taken by itself. GDP doesn’t always accurately capture inflation, as well as the point that increased government spending (like the “Cash for Clunkers” program, etc.) can make GDP appear higher than is really evident by actual growth of the economy.
Another big point that Karlgaard makes is that President Obama’s push towards greater social equality, even if it sacrifices economic growth, is not as simple (or as attractive) as it may seem. Even if GDP’s growth rate were cut only by 1% (from 3% to 2%), the real effects would be much greater. It is “reducing the rate of expected growth by 33.3%, not 1%, and that reduction is palpable in the real economy.” It has far-reaching consequences in not only the investment world, but also in increasing unemployment rates. Simultaneously, the higher tax rates (and consequently, higher tax receipts) that President Obama would like to implement wouldn’t necessarily bring in more government revenue. As Karlgaard points out, there “might be less [tax revenues] than if growth had occurred at 3% with the lower tax rates.” The best way to increase tax revenues is to first increase growth in the economy (Art Laffer’s economic theory, 1970s). Yet another problem with sacrificing economic growth for increased social equality is the “damage done to innovation and entrepreneurship.” When taxes are increased, the ability to research and develop new ideas is made harder. Innovations, inventions, and creativity are seemingly and effectively punished by making it more difficult to enter into these ventures. Karlgaard uses the example of social engineering in Europe. “European entrepreneurs are hampered by higher hurdles of social engineering: VAT taxes, union work rules, employee job security, etc.”
Real economic growth is “vital to the health of a society.” That is what should be our focus in reviving the economy – not multi-billion dollar bailouts and stimulus packages and higher tax rates which, in the end, do not really serve to fix the real problem.