Policies to Promote Economic Growth

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Policies to Promote Economic Growth Prosperity

• Russell S. Sobel, Ph.D.
• Professor of Economics
• James Clark Coffman Distinguished Chair
• West Virginia University

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What Explains Prosperity?
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Adam Smith The Father of Economics

• An Inquiry into the Nature and Causes of the
  Wealth of Nations (1776)

• Policies and the system of economic organization
  (e.g., capitalism) matter more than things such
  as resources, geography, education, etc.

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Rankings of Reliance on Capitalism
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Economic Growth is a Function of Both Inputs
and Institutions
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West Virginias Route 50
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North Korea vs. South Korea
Per Capita Income 1,800
Per Capita Income 24,200
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States also Differ in Reliance on Capitalism
West Virginia Ranks 50th in Capitalism
South Carolina Ranks 25th in Capitalism
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The Role Impact of Policy

• Policies affect how your citizens and
  entrepreneurs spend their time and talents
• Baumols Theory of Productive vs. Unproductive
  Entrepreneurship
• Rules of the Game Analogy

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Policy Reforms That Embrace Capitalism and
Promote Long-Run Growth
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1. Lower Taxes Regulations on Productive
Activities

• Reduce or Eliminate Taxes on Capital Investment,
  Equipment, Machinery
• Reform Welfare to Reward Work Participation
• Earned Income Spendable Income

0 6,000 12,000
11,026 11,014 15,286
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2. Discourage Unproductive Uses of Resources

• (e.g., excessive lobbying or lawsuit abuse)
• Examples
• Avoid targeted taxes, credits, subsidies - they
  encourage lobbying
• Enact legal reforms that reduce the reward to
  lawsuit abuse

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3. Rely on Entrepreneurial Discovery, Not
Central Planning, to Guide the State Economy

• A states economic future cannot be centrally
  planned or directed effectively - it must be
  discovered by your citizens within the marketplace

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The Reason Because Nobody Knows

• Ken Olson, chairman/founder of Digital Equipment
  Corp., 1977.
• "There is no reason anyone would want a computer
  in their home."
• Fred Smiths (FedEx) Yale University Senior
  Project Grade Remark
• "The concept is interesting and well-formed, but
  in order to earn better than a 'C,' the idea must
  be feasible."

Would You Have Invested? Microsoft Corporation,
1978
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3. Rely on Entrepreneurial Discovery, Not
Central Planning, to Guide the State Economy

• A states economic future cannot be centrally
  planned or directed effectively - it must be
  discovered by your citizens within the
  marketplace
• Business failure is not bad the goal is to
  maximize the number of attempts
• States erect to many barriers on entrepreneurs

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Barriers to Entrepreneurship
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4. Reduce Government Size, Growth, and
Centralization

• Goal should be to increase the share of the state
  economy controlled through the private sector
• An important first step is to constrain future
  state spending growth
• Overall spending can also be reduced and made
  more effective by decentralizing spending to
  local governments

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5. Impose Checks on the Regulatory Environment

• Regulations should be subject to cost-benefit
  analysis (and/or include sunset provisions based
  on proof of effectiveness)

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Unleashing Capitalism Why Prosperity Stops at
the WV Border and How to Fix It
SC Version of Unleashing Capitalism out this
November through the South Carolina Policy Council
Contact Information Russell S. Sobel,
Ph.D. Coffman Distinguished Chair Dept. of
Economics, WVU Russell.Sobel_at_mail.wvu.edu (304)
293-7864