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Competing Views on Economic Growth

By Dr. John Hilston

September 4, 2012 - Many small business owners on the Space Coast are voicing concerns about the challenging business environment as the slow post-recession recovery continues.

In examining the issues involved, one approach that has gained favor among some economists is the study of what they call “economic freedom.” One of the pioneers of this research is Florida State University’s own Dr. James Gwartney.

Gwartney and others contend the economic freedom of a nation depends upon the size of its government, the strength and security of its property rights, access to sound and stable money, freedom to trade internationally and the extent of business regulation.

To that end, the World Bank tells us that "countries that favor free choice — economic freedom and civil and political liberties — over entitlement rights are likely to achieve higher sustainable economic growth.”

The most recent Economic Freedom of the World Index states the U.S. has moved backward on economic freedom the last few years. This slide is due to increased government spending and borrowing caused by the recession and concerns about private property rights.

As most consumers are aware, more borrowing now means less spending and financial flexibility later.

A long-term concern for the small business sector is that government borrowing might crowd-out private investment. How could that happen?

Well, if the government borrows too much, there’s the real possibility it could drive up interest rates. This has not happened yet, but any increase in interest rates could be hastened if government borrowing doesn’t slow soon.

Also, any increase in interest rates would decrease capital acquisition, which is essential to economic growth.

Other economists says the best way to spur economic growth is by increasing government spending in key investment areas that include technology, infrastructure and education.

They point to President Kennedy’s Apollo moon-landing program as a classic example because it launched the U.S. computer industry and countless commercial spinoffs. It also made the modern Space Coast that Brevard County residents call home.

President Eisenhower’s interstate highway program is another successful case study in a large government spending program that spurred enormous economic growth that continues to this day.

The bottom line is there are competing views on the best way to move the economy forward and create prosperity, views that are front-and-center in the presidential campaign now underway.

Dr. John Hilston is an associate professor of economics at the Brevard Community College Palm Bay campus.