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Commentary By e21 Staff

e21 Olympics: GDP Growth

Economics Tax & Budget

While the United States did not earn a medal in today’s e21 Olympics event, GDP growth, it came in at 10th place out of the 34 Organisation for Economic Co-operation and Development (OECD) countries. This was an improvement over yesterday’s disappointing last place finish in the corporate tax rate event.

 

Using the OECD quarterly GDP growth rate, compared to the same quarter of the previous year (and seasonally adjusted), we were able to rank the OECD member nations on their average year-over-year GDP growth through the first three quarters of 2013.

Chile earned the gold with an average GDP growth rate of 4.63 percent. Turkey followed with an average increase of 4.06 percent. Israel was awarded the bronze medal for its 3.47 percent growth. U.S. growth increased by 1.64 percent. 

Few European countries were competitive in this event. Only one of the top ten finshers is a European Union member, Luxembourg (8th place with 2.13 percent growth). The nine countries with negative GDP growth rates were all European, and Portugal came in last with a GDP decline of 2.35 percent. The OECD average was just over one percent and Euro-area OECD countries saw their overall GDP decline by .7 percent.

The staggering debt load of most European countries has significantly reduced the strength of their recovery. With higher debt comes increased cost of borrowing. In order to repair their finances, indebted countries must cut back government spending—decreasing a component of GDP. Welfare state programs that create disincentives to work, unreasonable regulatory burdens on business, and high tax rates all contribute to Europe’s still-ailing economic recovery.

Gold medal-winning Chile was the first and remains the only South American country to join OECD. The country has benefitted from being the freest economy in South America. The most recent Economic Freedom of the World Report ranks Chile as the world’s 11th most free economy, and the Index of Economic Freedom rates the country the 7th most free. Chile is more economically free than the United States in both publications. Aided by strong protection of property rights, the country’s mining industry continues to develop and grow. While mining is a large part of the country’s economy and Chile is the world’s leading producer of copper, the free market economic reforms of the 1980s helped to create today’s vibrant, multi-dimensional economy.

The silver medal winner, Turkey, has most likely seen its global ranking fall since the end of third quarter 2013. The country’s currency, the lira, has been dropping amidst government corruption charges. The country is still defined by the International Monetary Fund as an emerging economy even though nearly half of its employment and two-thirds of its GDP comes from services. It is one of the emerging economies that is faltering as the U.S. Federal Reserve mulls changing course on monetary policy. Even though Turkey has still not joined the European Union, exclusion may actually help its economic growth because it is free from pricing and regulatory restrictions that come with membership.

Israel has sustained a long, consistent recovery from the global crisis of 2008 which boosted it GDP growth to a bronze medal performance. Foreign investment flows to Israel because of its strong protection of property rights and prime trade location. The country has positioned itself as the start-up technology center of the Middle East with its educated workforce and relatively low barriers to entrepreneurship. If geopolitical risks are contained, Israel’s above-average GDP growth should continue.

While U.S. GDP has shown signs of picking up in the previous two quarters, much of the increase can be attributed to inventory accumulation. When businesses build up inventory, GDP increases. But, in the future, businesses will draw down their inventories instead of increasing production. 

Personal consumption and business investment are the two most important components of GDP. Residential investment, a commonly watched metric, is highly dependent on government subsidies and artificially-low interest rates. Increases in the government sector’s contribution to GDP are rarely from improved productivity. Have you ever been to the U.S. Post Office? Rather, government sector increases usually come from more borrowing or higher taxes on personal and business productivity and expenditures. 

For the United States to win gold in GDP growth at the next e21 Olympics, the country will need to substantially roll back barriers to entrepreneurship and commerce. Simple solutions, such as lowering the corporate tax rate and eliminating crony loopholes, are key reforms to achieve higher GDP growth. While it may be tempting to call for further government spending through stimulus, this would not help the United States build an economy that will remain competitive in the future. The money to fund this artificial GDP stimulus would come from increased taxes or borrowing—both of which harm country’s long-term growth prospects. 

If the United States chooses to pursue further government spending to inflate GDP, and continues to increase its regulatory burden, its growth will soon be as anemic as Europe’s and its gold medal hopes will disappear.

*The e21 Olympics are in no way affiliated with the International Olympic Committee