What's a surefire way to increase economic growth? Shrink the government, says James Dorn, vice president for monetary studies at the Cato Institute.
"There is a growing body of evidence that bigger government means slower growth of real GDP," he writes in an article for Forbes
"Once the level of total government spending as a percentage of GDP reaches a tipping point, estimated to be from 15 percent to 25 percent of GDP, additional expansion crowds out private productive investment and slows economic growth."
Government spending, including state and local governments, now totals 33 percent of GDP.
"Nearly half of federal spending goes toward Social Security, Medicare, and Medicaid; huge regulatory costs are imposed on the private sector; and the higher taxes needed to finance big government erode economic incentives to work, save and invest."
Over-regulation restricts freedom, he notes. "When government overreaches, economic freedom is diminished and private exchange opportunities are lost. That is, the range of choices open to individuals is restricted."
That shows in the annual Economic Freedom of the Word Report, published by the Cato Institute and others. In 1998, the United States ranked as the second most economically free country on the globe. In 2012 it placed 12th.
"To move up the freedom ladder, the United States needs to change the climate of ideas and recognize the importance of private property rights and the rule of law," Dorn writes.
"If history has taught us anything, it is that the size and scope of government matters, both for freedom and prosperity."
Meanwhile, Bill Gross, the former Pimco founder who is now a fund manager at Janus Capital Group, thinks economic growth will fall short of the consensus view of about 3 percent for next year. GDP expanded 3.9 percent in the third quarter.
"Yes, we're starting from a 3-percent growth economy that will probably persist for another quarter or so," he told CNBC
. "We get back to a relatively new structural growth rate, which is not 3 percent, but probably 2 percent or even less."
The plunge in oil prices to five-year lows will help spark the growth slowdown, as the energy industry suffers, he said.
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