Daily Quote (Extended Edition): Is Too Much Government the Problem?

One theory heard a lot these days is that the economy is burdened by excessive government regulation, interference and taxes. Cut them, the Republican candidates all say, and the economy will be unleashed.

It’s a compelling picture, but the data simply do not support it.

The Organization for Economic Cooperation and Development (OECD) released a study last week measuring tax revenue as a percentage of GDP. Of the 30 countries studied, the United States came in 27th. Taxes are low in historical terms as well – the lowest since the early 1950s.

The Kauffman Foundation, which looks at the level of U.S. entre­pre­neur­ship, found that in 2010, 340 out of every 100,000 Americans started a business each month. That rate hasn’t changed much in the past few years; it is only slightly higher than in 2007, before the recession. Regarding regulations, Bloomberg News has crunched the numbers and found that the Obama administration has not reviewed or issued significantly more rules than its predecessors.

Or look at competitiveness. The World Bank publishes a report that looks at “Doing Business” across the globe. The U.S. ranks 4th in the world. The World Economic Forum does an annual ranking of overall economic competitiveness. The U.S. ranked fifth. In both these rankings, the countries that score higher are tiny places like Singapore and Finland, with populations often at 5% that of the United States.

And these rankings have not slipped much over the last decade. So where has there been change? Where have we slipped?

The answer is pretty clear. Only five years ago, American infrastructure used to be ranked in the top 10 by the World Economic Forum. Now we’re 24th. U.S. air infrastructure has gone from 12th in the world to 31st – roads from eighth to 20th.

The drop in human capital is even greater than the drop in physical capital. The United States used to have the world’s largest percentage of college graduates. We’re now number 14, according to the most recent OECD data, and American students routinely rank toward the bottom of the developed world in international tests.

The situation in science education is more drastic. Even with the increase in college attendance over the past two decades, there were fewer engineering and engineering technologies graduates in 2009 (84,636) than in 1989 (85,002). Research and development spending has risen under Obama, but the basic trend has been downward for two decades. In percentage terms, the federal share of research spending – which funds basic science – is half of what it was in the 1950s.

In other words, the big shift in the United States over the past two decades is not a rise in regulations and taxation but a decline in investment – in physical and human capital. And investment is the crucial locomotive of long-term growth. In our interview, Michael Spence, the Nobel Prize-winning economist, pointed out that the United States got out of the Great Depression because of the spending associated with World War II but also because during the war, the U.S. dramatically reduced its consumption and expanded investments. People spent less; they saved more and bought war bonds. That surge in investment – by people and government – produced a generation of growth after the war.

If we want the next generation of growth, we need a similarly serious strategy of investment.

– Paraphrased from Fareed Zakaria, in a column from his GPS blog on CNN World.

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