Scott Sumner on tax policy and GDP:
Suppose you had gotten a room full of economists together in 1980, and made the following predictions:
Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)
Over the next 28 years Britain would overtake Germany and France in GDP per capita.
And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success. Your predictions (and the rationale) would have been met with laughter.
... Now let’s look at what actually happened over the next 28 years. All GDP per capita data are from the World Bank, and are normalized as a fraction of US GDP/person...
He proceeds to present relative GDP figures for a bunch of countries, and the results are:
Note that four countries gained significantly on the US, two were roughly stable (Australia, Japan) and the rest regressed. The four that gained were Chile, Britain, Hong Kong and Singapore. ... But I will show that the performance of every single country on the list is consistent with my view that the neoliberal reforms after 1980 helped growth, and inconsistent with Krugman’s view that they did not.
... You can’t just take a single data point to evaluate a complex phenomenon. “Eh, you say there’s a neoliberal revolution? OK, let me check to see whether most countries grew faster or slower after 1980. That should settle the argument.” Actually it doesn’t. The neoliberal revolution occurred precisely because growth was slowing almost everywhere in the 1970s and 1980s, and after 1980 growth slowed the most in those countries that reformed the least.
Not the final word, I'm sure, but a nice piece nonetheless.
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