How Public Policy
Can Support or Inhibit
a Growing Economy
Presentation by
William Beach & Mike Franc
The Heritage Foundation
and
Paul Gessing
The Rio Grande Foundation
What We Will be Presenting
• Brief foundation on how economies grow
• Why do we get into recessions
• Why government spending is not like
household or business spending
• Review of current stimulus policies
• Nationally, what we should do to create jobs
• In New Mexico, what can government do
• Summary
Background:
What is Economic Growth?
• Economist’s Explanation:
– Measured by regular increases in economic
output after adjusting for inflation.
– Usual measurement is Gross Domestic Product at
the national level
– Or, Gross State Product at the state level.
– Both measurements equal the value of goods and
services sold to final consumers.
Background:
What is Economic Growth?
• Educated Layman’s Explanation:
– Steady growth in income and purchasing power
– Growth in business opportunities and jobs
– Available credit at affordable interest rates
– Sufficient income to create savings for household
needs and retirement
– Steady growth in the value of investments
• Here is what has happened to the US
economy in the last several years…..
Change in Gross Domestic Product
2001 through 2010, First Quarters
(Annual Rates)
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
Gross Domestic Product
Gross Domestic Product
So, Why Would a Recession
Ever Occur?
• Tens of millions of mistakes are made in the
US economy every day.
• However, more good decisions are made each
day than bad, which is why the economy
continues to grow.
• Recessions are not normal or inevitable.
• They occur when something causes a trend of
errors to be made.
What Starts Recessions?
• Recessions start in part because of public
policy errors.
– Policy can re-enforce bad economic behavior or
create incentives that undermine innovation
• Non-productive assets (labor and capital)
must be rearranged to create value
• Thus, many assets must be “liquidated” or
given new economic assignments.
What Ends Recessions?
• Economic evidence shows that two factors are
important:
– Appropriate, timely actions by the monetary
authorities to support transition in the financial
sector.
– Reductions in the cost of capital and labor and the
business costs associated with regulation.
• Entrepreneurs lead the way out of recessions because
they discover how to reconfigure the productive assets of
the economy.
Jobs Plan of Congress
Not Working
Obama Jobs Plan Going in the
Wrong Direction
Current Stimulus Stems from a
Model of 1933
Which was Tried Again
in 2008
A Better Way:
Lower Taxes and Less Regulation
– Reduce business taxes from 35 to 25 percent
– Simplify tax rates to three: 10, 15, and 25
– Repeal or reduce the death tax rate to 15 percent
& $5 million exemption per person
– Make the tax relief of 2001 and 2003 permanent
– Repeal onerous regulations, like the SarbanesOxley law and Obama Care.
– Expand our nation’s energy supply
The Two Stimulus Plans
Which is Better for the Economy?
Few if Any Benefits from
Stimulus Plan
But Lots of Debt
For the Next Generation
The Obligations of the
Debt Paying Generation
• Total debt expected to grow from $7.5 trillion
in 2009 to over $15 trillion by 2020.
– That is from 53% of GDP in 2008 to 67% of
GDP in 2019. In 2008, debt equaled 41% of
GDP
• Tsunami of debt from Social Security,
Medicare and Medicaid will push total debt to
320% of GDP in 2050 and 750% in 2083
What Should New Mexico State
Government Do?
New Mexico’s Government
Bureaucracy is Very Bloated
State and Local Government Employees Per
Capita
25.33
Rank
State
2 New Mexico
17.13
27 Texas
16.51
34 Arizona
16.62
30 Colorado
12.44
50 Nevada
16.72
National Average
And Government Workers Are Better Paid than
their Private-Sector Colleagues
State and Local Compensation as %
Above/Below Private Sector
27.60%
Rank
State
3 Nevada
11.50%
10 New Mexico
7.00%
18 Arizona
-7.70%
46 Colorado
-9.80%
50 Texas
2.20%
National Average
New Mexico is THE most reliant state
on the federal government
State
Federal Spending per
Dollar of Federal Taxes
Rank
New Mexico
$2.03
1
Mississippi
$2.02
2
Alaska
$1.84
3
Oklahoma
$1.36
15
Arizona
$1.19
21
Utah
$1.07
29
Texas
$0.94
35
Colorado
$0.81
41
Nevada
$0.65
49
Conservatives Should Recognize
Success of Richardson’s Pro-Growth
Tax Cuts of 2003