It’s being widely reported that a continued, or accelerated, EU economic crisis could threaten President Obama’s reelection.
It’s certainly true that, in this increasingly globalized world (!?), the European crisis could impact the American economy, and through that, President Obama’s reelection.
But that’s an outcome, not a cause. The cause is Obama’s mishandling of our economy in the first place, to the point that it’s so enormously vulnerable to the European downturn.
That mishandling is a…misunderstanding…of the type of growth that’s needed. What President Obama and many of his EU counterparts pushed for at the just-concluded G-8 summit is growth in government spending and borrowing—and in Obama’s case, growth in tax rates—under the rubric of stimulating an economy.
On the other hand, we have Christina Romer (that Christima Romer) and David Romer demonstrating in a 2010 American Economic Review article (login required; sorry) the powerful effect of increasing tax rates on economic growth: an increase in taxes of 1% of GDP lowers GDP by nearly 3%.
And we have Swedish economists Andreas Bergh and Magnus Henrekson in a 2011 Journal of Economic Surveys article (again, login required; sorry again) concluding that a 10% increase in government size (relative to GDP) is associated with a 0.5%-1.0% lower annual growth rate in the economy.
Plainly, the answer, as I’ve been arguing lately, is smaller government and lower tax rates, to produce economic growth.
Economic, not government, growth. Now that’s growth we can believe in.