Wednesday, February 25, 2009


Dan Mitchell wrote an article arguing against Obama's spending stiumulus (here and here). Meanwhile, major European economies are suffering from a deep recessionary downturn. German economy is expected to contract by 2.25 percent annually (link), which is the deepest decline in the postwar period. Across the channel, the British economy contracted by 1.5 percent in Q4 while the incoming data on investment, consumption expenditures and industrial output indicate that Britain's economy is unlikely to avert the recession and offset deflationary pressures. BoE has already cut the benchmark interest rate to 1 percent, creating a loop of liqudity trap and strengthening the length of the recovery.

Except for Switzerland and Ireland, European countries are unfamously known for an excessive public sector consuming as much as 50 percent of the GDP while empirical evidence, embodied in Rahn curve (link), show that growth-maximizing share of government in the GDP is less than 20 percent of the GDP. Excessive regulation of labor market and high tax wedge dash out the growth potential in European welfare states. Nevertheless, the deregulation of labor market and lower marginal tax rates on labor supply would ease the macroeconomic impact of the ongoing recession.

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