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How Markets Fuel Growth

July 17, 2012 3 minute Read by W. Michael Cox

The macroeconomic side of growth is straightforward enough: Incentives shape individual choices, and good choices lead to productive activities. Economic growth accelerates when people choose to get an education in a field the economy values highly, when they choose to work full time and hone their productivity, when they choose to save, invest and take business risks, when they choose to start companies and hire workers, when they choose to innovate and create new products, and when they choose to seize the business opportunities around the world. Market signals steer individuals and companies toward the productive activities that grow an economy.  Markets tell us to get an education. Among 25-34 year olds, workers with bachelor’s degrees earned an average of $62,960, more than double the $28,202 for high school dropouts. Markets tell us to invest in private companies. Since 1925, average annual returns have been 8.8% for small company stocks and 6.7% for large company stocks, well above the 2.4% on long-term government bonds. Markets tell us to innovate and start new companies. Microchip-based economic activity expanded from $164 billion in 1977 to more than $1.6 trillion three decades later, adding nearly a half percentage point to the nation’s annual growth rate. Big Government does a lot of damage when it interferes with markets’ orderly and consistent incentives. Higher income taxes, for example, erode the rewards for education, hard work, saving, investing, innovating, and growing businesses. Government handouts frequently reduce the urgency to go to school and find a job. Onerous regulations divert money and manpower from productive activities. Big Government holds back the economy, slowing growth and making it difficult to create jobs and raise living standards. The U.S. economy has been in the doldrums for nearly five years. Market incentives are the key to getting out of the funk. The path to 4% growth lies in greater economic freedom.

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