Economic Recovery--What Actually Works

Fraser Nelson notes at The Telegraph:

Take Estonia, a tiny country at the mercy of its much larger neighbours, which has ample reason to blame “global forces”. But throughout the crash, it defiantly kept its taxes low (at a 21 per cent flat rate) and took the tough decision to cut state spending by a tenth. It is now celebrating the fastest growth in Europe. The much-larger Sweden responded to the crash with a permanent tax cut for the low-paid. This encouraged so many people back to work that the extra revenue covered the cost of the policy. Socialist Sweden has proven the existence of a phenomenon that the Tories had been taught no longer exists: a self-financing tax cut.

The more we learn about America’s recovery, the more the Keynesian analysis (demand is the problem, spending is the solution) is being disproven. A recent University of Chicago analysis suggests that most American job losses are accounted for by the change in relationship between taxes and welfare. From Tampa to Tallinn, a new thesis is being etched out: high taxes are retarding the recovery. Austerity, when combined with high taxes, will not help. But if you rebalance things in favour of job creation and work, magical things can happen.