The Size Of Governments And The Effect On Their Economies

| About: WisdomTree Euro (EU)

I believe governments around the world have been focusing too much on steering the economy these days. By enacting stimulus measures and creating more and more regulation, the governments are hindering free market capitalism to flourish by itself. These measures create unintended consequences like the Nasdaq bubble in 2000 and the housing bubble in 2007. I'm sure that governments are the root cause of all the problems in Europe today and soon the problems will escalate to the United States through contagion.

In this article I want to give an overview of several key countries of this world and their government involvement in their economy. The best measure to rate government involvement would be the amount of spending as a percentage of the country's GDP. We will discuss the effects of a big government on the country's economy and give advice to investors on how to act on this knowledge. We will see that the biggest governments are found in Europe, while government involvement in Asia is the smallest.

Following Chart 1 gives the amount of government spending as a percentage of the country's GDP:

Chart 1: Government Spending as a Percentage of GDP

We can note here that most developed countries (United States, Europe) have a lot of government spending, while emerging markets like Brazil and especially countries in the Asia-Pacific region (China, India, Hong Kong, Singapore, Taiwan) have less government. Government spending is the highest in Sweden, France and Belgium (55%). The United States has a moderate spending ratio of 42% of GDP. Hong Kong, Singapore and Taiwan have little government spending, the ratio is as low as 17% of GDP. Based on this chart we can already conclude that the stronger economies are the ones with the least government (Hong Kong, Singapore, Taiwan), while countries like Sweden, France and Belgium would have a very inefficient economy due to large government involvement.

Let us first look at unemployment in each of these countries. The mainstream media wants to make us believe that government spending is good for employment, but I think this is not the case. It would seem obvious to me that countries with a lot of government spending would create unemployment. The reason is that a welfare state tends to eliminate the urge for people to look for jobs. As we add the most recent 2012 unemployment numbers to Chart 1, we get Chart 2. As you can see on Chart 2, countries with higher government involvement have as a consequence: higher unemployment. So there is a direct correlation between the size of government and unemployment. The PIIGS of Europe are the countries with highest unemployment in the world.

Chart 2: Government Spending (% GDP) VS. Unemployment (%)

Second, let's take a look at the government debt to GDP for each country. As more and more government is involved in the economy of a country, politicians will tend to spend more and more (at the expense of the tax payer). The more government in a country, the more government debt as a percentage of GDP. The two countries that have the highest debt in the world are Japan and Greece with debt above 150%. The countries with the best government budgets are Saudi Arabia and Russia.

Chart 3: Gov. Spending (% GDP) VS. Government Debt to GDP (%)

Finally, let's take a look at a normal individual's personal income tax rate per country. The national median income of an individual is around $US 40000/annum. If we add the personal income tax rate to Chart 1, we get Chart 4. Again, we can see that the size of government is in direct correlation with the tax rates. This also means that the European countries (with the most government) are the ones with the highest taxes. Higher taxation is most destructive to the private sector of the economy as it takes money from the competent people (free market capitalists) and gives it to the incompetent (government). Notable is that Saudi Arabia doesn't have income tax.

Chart 4: Gov. Spending (% GDP) VS. Personal Income Tax Rate (%)

I advise investors to invest their money in sound countries with the least government. These countries will have the wealthiest future going forward and most of them are located in the Asia-Pacific part of this world. You could buy these countries via funds: for example the Singapore fund (NYSE:SGF). If you would like to buy a more accessible country, you could go with Switzerland's iShares MSCI Switzerland Index Fund (NYSEARCA:EWL). If you are betting on China, Canada or Australia, you could buy commodities like gold (NYSEARCA:GLD), silver (NYSEARCA:SLV) and copper (NYSEARCA:CPER). On the other part of the equation, you should avoid countries with big government. These are basically all European countries and their government bonds. So stay out of the WisdomTree Dreyfus Euro ETF (NYSEARCA:EU).

Disclosure: I am long GLD, SLV, PSLV, AGQ.