Last year, while lounging on the beach in the Caribbean…oops, I mean while doing off-site research, I developed the first iteration of a rule to describe how fiscal policy should operate.
Good fiscal policy exists when the private sector grows faster than the public sector, while fiscal ruin is inevitable if government spending grows faster than the productive part of the economy.
My motivation was to help people understand that America’s fiscal problem is excessive government spending, not red ink. Deficits and debt are undesirable, of course, but they are best understood as symptoms. The underlying disease is a bloated federal budget that diverts resources from the productive sector of the economy and subsidizes dependency.
But after getting feedback, I realized that the rule was too wordy. So, after a bit of tweaking and market testing, I came up with “Mitchell’s Golden Rule.”
The purpose of this rule isn’t to make me famous, like Art Laffer with the Laffer Curve. Instead, I’m hoping that this simple construct will help policymakers focus on the most important variable.
Countries that follow the Golden Rule, such as Hong Kong and Singapore, enjoy long-run prosperity. But the Golden Rule also shows how nations in fiscal trouble can get back on the right track with periods of spending restraint, as shown in this video featuring Canada, Slovakia, New Zealand, and Ireland.
And this video shows how the United States made progress during both the Reagan years and the Clinton years.
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