Monday, December 17, 2012

Prescott, Taxes and GDP

Edward Prescott and Lee Ohanian wrote an article recently on the direction of the American economy. Prescott was a Nobel Price co-winner in economics in 2004 and Ohanian is an economics professor at UCLA. (Ohanian is also from the Hoover Institute where Sowell is so there may be some slanting here.) Their article focuses on income transfers from the private to public sector with its resulting changes in productivity.

The marginal tax rate in the U.S. is currently around 40% if state, local and consumption taxes are included. In California it is closer to 60% (as high as France, Germany and Italy.) The authors claim that such transfers depress production and, in Europe, have resulted in a decrease in almost 30% of work hours from 1400/yr to 1000/yr since the 1950s. (Although it must be said--though they do not--that the Europe of the Post-war period had significant stimulus to be productive.) Similarly, the Americans have had a decline in production of 13.5% since 2008 (as projected, not actual.)

Interestingly, they refer to an Economist assessment of start-ups reaching the Fortune 500 from 1976 to 2007 (like Microsoft or Apple) and can find only one European company to do so, Norway's Renewable Energy Corp.

Associations are, of course, not necessarily causation and such a decline could also be linked to the economic performance of the Chicago Cubs but it is a worry. But that is not what the Romer research says; their research is quite damning regarding taxation's effect on the GDP. Governments are, at least logically, not as good a steward of money as the owners are. Nor are the recipients of government largess the best investments; they are in need of help because they are failing at what they do. Prescott and Ohanian say that the further increase in taxation and regulation from the current government is certain to steal financing from the productive centers and underwrite the less productive.

The European laboratory must mean something.

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