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American tigers

Posted by Richard on July 22, 2006

Nicholas Vardy, who makes his living offering global investing advice, took a break from discussing opportunities in China, India, Brazil, etc., to talk about what’s happening right here in the U.S.A., and why. In his latest email newsletter, he wrote:

The next time you hear a mind-numbing statistic about China, remember this: the U.S. economy has increased in size by $2.2 trillion just since June 2003. That’s the equivalent of a whole new China in just 36 short months. China and India are economic juggernauts to be reckoned with in the future. But it’s also time to give the U.S. economic tigers — the fast growing regional states — their due.

… The most dynamic growth economies on the planet are right under your nose. Last year, Arizona’s economy grew 8.7%. That’s just under the 9.3% of China, but above the 8.3% in India. Just behind India was Nevada with 8.2% and Florida with 7.8%. All this, with the headwind of an Iraq war that cost $300 billion and the $40 billion+ damage inflicted by Hurricane Katrina.

If each U.S. state were a country, they would occupy 6 of the top 10 growth positions in the global economy.

Vardy pointed out that this is truly remarkable because it’s far easier to achieve such growth in a relatively poor, underdeveloped economy:

But Chinese-style growth rates occurring in the heart of the most advanced economy in the world is virtually unprecedented.

How do the world’s other large economies compare? Last year, Japan, the world’s second-largest economy, emerging from 15 years of stagnation, grew at 1.2%. Ditto Germany; the world’s biggest exporter grew at 1.2%. Europe’s most market-oriented economy, the U.K., grew at 1.8%, while cross-channel rival France grew by 1.4%. This, in a year where global growth had never been stronger.

So, what explains the dramatic difference? I discussed this recently while taking the NYTimes to task. Vardy knows:

Yes, Americans are pragmatic, entrepreneurial and work hard. But the right policy mix also matters. There are many examples in the world — Ireland, the former Communist countries of "New Europe", Chile, and Israel — where the right policies have kickstarted otherwise moribund economies.

Tax policy is crucial, no matter which country, whether rich or poor. With dollars flowing into the U.S. Treasury up 11% this year — twice the White House’s original forecasts — it turns out the supply-siders were right. Tax cuts spur economic activity, widen the tax base, and stimulate the rising tide that lifts all boats. And what do the fastest growing U.S. tigers — Nevada, Arizona, and Florida have in common? No state taxes.

He means no state income taxes — they rely on sales (consumption) taxes for much of their revenue. The fastest-growing states — and countries — also tend to have lower taxes overall, less red tape, and fewer regulatory barriers.

Of course, moribund, low-growth countries like France and Germany (or at least, their electoral majorities) have pretty much consciously chosen to sacrifice wealth creation in order to pursue other goals — more leisure, lots of "free" government services (many of which subsidize irresponsibility and bad choices), discouraging "too much" innovation and change (favoring stasis), and punishing "too much" success (promoting egalitarianism). The consequences are predictable and unavoidable.

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