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The Tale of Two Mental Models of Economic Growth
The document compares two economic growth models: the 1933 model which suggests government boosts growth through spending, and the 1981 model advocating for entrepreneurship through reduced taxes and regulation. It argues that the 1981 model has a better track record, highlighting that policy errors can trigger recessions, while timely monetary support and reduced business costs can facilitate recovery. Congress is encouraged to adopt tax reforms, exemplified by Senator Jim DeMint's proposal, to stimulate economic growth.
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The Tale of Two Mental Models of Economic Growth
- 1. WILLIAM W. BEACHTHE HERITAGE FOUNDATION July, 2009 The Tale of Two Mental Models of Economic Growth
- 2. Two Policy ModelsThe Mental Model of 1933 Government leads or supports economic growth by boosting income and consumption through its spending. The Mental Model of 1981 Government supports the growth of entrepreneurship by reducing tax and regulatory burdens.
- 3. What is theRecord of 1933
- 4. A More RecentExample of the Model of 1933
- 5. The Model of1981 has a Better Record
- 6. What Starts Recessions?Recessions start in part because of public policy errors. Policy can re-enforce bad economic behavior or create incentives that undermine innovation Non-productive assets (labor and capital) must be rearranged to create value Thus, many assets must be “liquidated” or given new economic assignments.
- 7. What Ends Recessions?Economic evidence shows that two factors are important: Appropriate, timely actions by the monetary authorities to support transition in the financial sector. Reductions in the cost of capital and labor and the business costs associated with regulation. Entrepreneurs lead the way out of recessions because they discover how to reconfigure the productive assets of the economy.
- 8. What Can CongressDo? Example: Sen. Jim DeMint’s American Option tax plan. Reduces business taxes from 35 to 25 percent Simplifies tax rates to three: 10, 15, and 25 Reduces the death tax rate to 15 percent & $5 million exemption per person Makes the tax relief of 2001 and 2003 permanent
- 9. Toe-to-Toe WhoWins? 1933 or 1981
- 10. P.S. How Bigis Obama Plan
- 11. The most fundamentaleffect of this reckless spending are the mountains of debt