Sunday, November 15, 2009

William Easterly's The Elusive Quest for Growth - Chapter 11

This chapter was rather simple. Easterly makes a case that seven factors kill growth. These are: high inflation, high black market premiums, high budget deficits, strongly negative real interest rates, restrictions on free trade, excessive red tape, and inadequate public services.
Inflation is a tax because it reduces the value of holding money, which is a mechanism for making production more efficient. Black market premiums tax exporters because they increase input costs while prices are stuck at an artificial level. Budget deficits cause people to expect future tax hikes, thus it makes people wary of investing in an economy. Negative real interest rates clearly hurts an economy because any money put into a bank is essentially taxed. Thus, there are no deposits with which to give loans. Trade interference distorts pricing and effectively causes resources to be used inefficiently. Red tape taxes entrepreneurship. And poor public services tax future productivity because money will have to spent to do major repairs to utilities such as roads that could have been maintained consistently at a low cost.
Looking at this list really makes me wonder whether America is killing growth right now. Inflation is very possible, our budget deficit is enormous, deposits are barely earning interest, and Obama is less of a free-trader than his predecessors.

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