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FLASH: New ECB Research Shows Big Government Retards Economic Growth

The research is here.

Abstract

We construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker. In the empirical analysis, for a panel of 108 countries from 1970-2008, we use different proxies for government size and institutional quality. Our results, consistent with the presented growth model, show a negative effect of the size of government on growth. Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth. Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments. The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights. Finally, for the EU, better overall fiscal and expenditure rules improve growth. [Emphasis mine]

Non-Technical Summary

Governments tend to absorb a sizeable share of society’s resources and, therefore, they affect economic development and growth in many countries. However, despite necessary, government intervention is not a sufficient condition for prosperity, if it leads to the monopolization of the allocation of resources and other important economic decisions, and societies do not succeeded in attaining higher levels of income.

The existing literature presents mixed results as to the relationship between government size and economic development. On the one hand, the former may impact economic growth negatively due to government inefficiencies, crowding-out effects, excess burden of taxation, distortion of the incentives systems and interventions to free markets. On the other hand, government activities may also have positive effects due to beneficial externalities, the development of a legal, administrative and economic infrastructure and interventions to offset market failures.

Our paper includes several contributions: i) we construct a growth model allowing for an explicit government role, we characterize the conditions underlying the optimal path of the economy and determine the steady-state solutions for the main aggregates; ii) we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size and institutional quality to increase robustness; iii) we build new measures of extreme-type political regimes which are then interacted with appropriate government size proxies in non-linear econometric specifications; iv) we make use of recent panel data techniques that allow for the possibility of heterogeneous dynamic adjustment around the long-run equilibrium relationship as well as heterogeneous unobserved parameters and cross-sectional dependence; vi) we also deal with potentially relevant endogeneity issues; and vii) for an EU sub-sample we assess the relevance of
numerical fiscal rules in explaining differentiated GDP and growth patterns.

Our results show a significant negative effect of the size of government on growth. Similarly, institutional quality has a significant positive impact on the level of real GDP per capita. Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries). Moreover, i) the negative effect of government size on GDP per capita is stronger at lower levels of institutional quality, and ii) the positive effect of institutional quality on GDP per capita is stronger at smaller levels of government size. [Emphasis mine]

On the other hand, the negative effect on growth of the government size variables is more attenuated for the case of Scandinavian legal origins, while the negative effect of government size on GDP per capita growth is stronger at lower levels of civil liberties and political rights. Finally, and for the EU countries, we find statistically significant positive coefficients on overall fiscal rule and expenditure rule indices, meaning that having stronger fiscal numerical rules in place improves GDP growth.

For an excellent analysis of this new research, go here.

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MICHAEL SAVAGE OFFERS NEWT GINGRICH $1 MILLION TO DROP OUT OF PRESIDENTIAL RACE

(From Savage’s web site)

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SAVAGE OFFERS GINGRICH $1 MILLION TO DROP OUT OF THE RACE — WILL ANNOUNCE ON SHOW TODAY

 

(SUBJECT TO ALL THE TERMS AND CONDITIONS TO BE EXPRESSLY STATED BY DR. SAVAGE, INCLUDING GINGRICH DROPPING OUT WITHIN 72 HOURS OF TODAY)

THE REPUBLICAN PRESIDENTIAL FIELD HAS COME DOWN TO TWO CANDIDATES WHO HAVE A REAL CHANCE OF GETTING THE NOMINATION: NEWT GINGRICH AND MITT ROMNEY. WHILE IT’S TRUE THAT ROMNEY IS NOT AS STRONG A CONSERVATIVE AS MANY WOULD LIKE HIM TO BE, THE MOST PRESSING ISSUE BEFORE AMERICA TODAY IS DEFEATING BARACK OBAMA. AND THAT IS SOMETHING NEWT GINGRICH CANNOT DO. FOR WEEKS ON MY SHOW, I HAVE ENUMERATED THE REASONS WHY GINGRICH CANNOT SUCCEED IN AN ELECTION AGAINST OBAMA:

  • ·        WHEN HE WAS SPEAKER OF THE HOUSE, GINGRICH FAILED TO DELIVER ON HIS SO-CALLED CONTRACT WITH AMERICA.
  • ·        HE MADE ADS WITH NANCY PELOSI PROMOTING THE FALSE THEORY OF GLOBAL WARMING.
  • ·        HE’S IN FAVOR OF AMNESTY FOR ILLEGAL ALIENS.
  • ·        HE’S TAKEN HUNDREDS OF THOUSANDS OF DOLLARS FROM FANNIE MAE AND FREDDIE MAC, TWO OF THE MOST CORRUPT FINANCIAL INSTITUTIONS IN HISTORY.
  • ·        HE’S CHEATED ON TWO WIVES AND LEFT BOTH OF THEM WHILE THEY WERE BOTH SERIOUSLY ILL, WHICH WILL DESTROY HIS CHANCES AMONG FEMALE VOTERS.
  • ·        HE CALLED THE REPUBLICAN PLAN TO REFORM MEDICARE “RIGHT WING SOCIAL ENGINEERING.”
  • ·        IN A PRESIDENTIAL DEBATE AGAINST OBAMA, REGARDLESS OF HOW WELL HE DOES, ON TELEVISION, HE WILL COME OFF BADLY COMPARED TO OBAMA AND LOOK LIKE NOTHING MORE THAN WHAT HE IS: A FAT, OLD, WHITE MAN.

NEWT GINRICH IS UNELECTABLE. MITT ROMNEY IS THE ONLY CANDIDATE WITH A CHANCE OF DEFEATING BARACK OBAMA, AND THERE IS NOTHING MORE IMPORTANT THAN THAT FOR FUTURE HEALTH, SAFETY, AND SECURITY OF THE UNITED STATES OF AMERICA. THEREFORE, I AM OFFERING NEWT GINGRICH ONE MILLION DOLLARS TO DROP OUT OF THE PRESIDENTIAL RACE FOR THE SAKE OF THE NATION.

IF NEWT GINGRICH REALLY LOVES THIS COUNTRY AS MUCH AS HE SAYS HE DOES, IF HE REALLY WANTS WHAT IS BEST FOR AMERICA, HE WILL SET HIS EGO ASIDE, CALL ME, AND ACCEPT MY OFFER. HIS CONTINUED CANDIDACY SPELLS NOTHING BUT RUIN FOR CONSERVATIVES, REPUBLICANS, AND ALL TRUE AMERICAN PATRIOTS. ONE MILLION DOLLARS IN EXCHANGE FOR PRESERVING THE NATION, NEWT. I SAY TAKE THE MONEY… AND DON’T RUN.

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TODAY’S HORRENDOUS LOSERS

No. Ticker % Change
1 LZEN -41.65
2 CAS -30.59
3 DMND -23.89
4 ZX -19.95
5 PNCL -19.78
6 NEXS -17.23
7 TNGN -16.02
8 NBG -15.42
9 TBSI -14.81
10 DHT -14.47
11 QTWW -13.89
12 GRO -13.32
13 AMR -13.06
14 IGC -12.35
15 NTE -12.10
16 CEDC -11.80
17 ROSE -11.77
18 SKY -11.43
19 CFW -10.89
20 PCBK -10.79
21 MTE -9.51
22 FRZ -9.30
23 CNAM -9.15
24 MNTG -9.14
25 GBE -9.09
26 WH -9.09
27 LYTS -9.08
28 ING -8.94
29 MGN -8.91
30 WNS -8.82
31 ANR -8.74
32 VALU -8.71
33 BPZ -8.65
34 XCO -8.58
35 SHZ -8.56
36 FREE -8.20
37 GBG -8.11
38 JSDA -8.08
39 DYN -8.00
40 AEG -7.98
41 KV-A -7.98
42 RAIL -7.93
43 EVC -7.91
44 LXRX -7.87
45 GENE -7.86
46 ZAGG -7.81
47 JRCC -7.77
48 SRT -7.77
49 HPOL -7.69
50 YMI -7.59

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U.S. budget being crafted, so far $1T

WASHINGTON (AP) — Congress is putting the finishing touches on a sweeping $1 trillion-plus spending bill wrapping together the day-to-day operating budgets of 10 Cabinet departments with funding for the war in Afghanistan.

The catchall measure has been drafted by the powerful Appropriations committees behind closed doors. It cuts environmental programs and foreign aid, while limiting the Pentagon to just a 1 percent budget hike.

The measure implements this summer’s hard-fought budget pact between President Barack Obama and GOP leaders, essentially freezing agency budgets, on average, at levels enacted in April for the recently completed budget year. Disaster money and war funding are getting some additional leeway.

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Think home sales bad already? NAR was overstating

WASHINGTON (AP) — National home sales figures will be lowered dating back to 2007 after the private trade group that collects them said the numbers were too high.

The National Association of Realtors said Monday it will release the downward revisions for previously occupied homes on Dec. 21.

Among the reasons for the inflated figures, the Realtors group says: changes in the way the Census Bureau collects data, population shifts and some sales being counted twice. Last year’s total sales figure of 4.91 million was the worst in 13 years.

The Realtors consulted with several government and private housing market experts, including the Federal Reserve, the Department of Housing and Urban Development, the Mortgage Bankers Association, the National Association of Home Builders, mortgage giants Fannie Mae and Freddie Mac and CoreLogic, the California-based data firm that first raised doubts about the annual numbers earlier this year.

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