Here’s an interesting look at the Rahn Curve as applied to Canada:
Canada, the Rahn Curve, and the Size of Government
Daniel J. Mitchell | Mar 25, 2014
Last month, I shared a very interesting video from Canada’s Fraser Institute that explored the link between economic performance and the burden of government spending.
There’s now an article in the American Enterprise Institute’s online magazine about this research.
The first half of the article unveils the overall findings, explaining that there is a growth-maximizing size of government (which, when put onto a graph, is shaped like a hump, sort of a spending version of the Laffer Curve).
One recent addition to the mounting evidence against large government is a study published by Canada’s Fraser Institute, entitled “Measuring Government in the 21st Century,” by Canadian economist and university professor Livio Di Matteo. Di Matteo’s analysis confirms other work showing a positive return to economic growth and social progress when governments focus their spending on basic, needed services like the protection of property. But his findings also demonstrate that a tipping point exists at which more government hinders economic growth and fails to contribute to social progress in a meaningful way. …Government spending becomes unproductive when it goes to such things as corporate subsidies, boondoggles, and overly generous wages and benefits for government employees. …Di Matteo examines international data and finds that, after controlling for confounding factors, annual per capita GDP growth is maximized when government spending consumes 26 percent of the economy. Economic growth rates start to decline when relative government spending exceeds this level.
This is standard Rahn Curve analysis and it shows that the public sector is far too large in almost all industrialized nations.
The quoted material has a lot of links to other good stuff in the original, so “hit the link”…
The article referenced this article from which they lifted the graph, that I’m lifting here too. It would be better with numbers on the axis, but Economists often like to leave off actual quantifiable stuff in the interest of avoiding needing to do actual work and / or research… Oh Well…
While I’m always cautious about drawing sweeping conclusions from any single piece of empirical research, these results make a lot of sense.
Rahn CurveThe Rahn Curve (which is sort of a spending version of the Laffer Curve) is based on the theory that a very modest level of government, focusing on providing core public goods, is associated with better economic performance. But once government gets too big, than the relationship is reversed and higher levels of spending are associated with weaker performance.
So it’s no surprise that bigger government has particularly bad effects in nations that already have bloated public sectors. Here’s the video I narrated on the Rahn Curve, which provides additional analysis.
Just a snippet to give you the flavor. Hit the link, lots of good stuff on the other end…
There’s a wiki on it, that isn’t very good, Oh Well..
The Rahn curve is an economic theory, proposed in 1996 by American economist Richard W. Rahn, which indicates that there is a level of government spending that maximises economic growth. The theory is used by classical liberals to argue for a decrease in overall government spending and taxation. The U-shaped curve suggests that the optimal level of government spending is 15–25% of GDP.
That’s it. The whole thing (other than references). I’ve bolded one bit.
FWIW, I came to this topic via another page that looks to have ‘reinvented it’ on their own. One of the comments basically said that, and that got me thinking maybe this would be something other folks had not heard of before.
A bit irreverent (have I mentioned that I like irreverent?…) and not as academic as most things Economic. But the guy looks to have actually gathered data and graphed real world stuff. Unfortunately, while he has numbers on his graph, he didn’t bother to put any labels on the numbers… so you get to guess which axis is a what… He generally found a downward sloping curve, which isn’t all that surprising given that he was mostly looking at developed economies with large governments. At this point, with the passing of Hong Kong into China, I’m hard pressed to think of a country with less than 15% GDP sucked up by government.
Rantings and tirades of a frustrated economist.
Wednesday, March 30, 2016
More Proof Freedom is the Best Economic Policy
Arguably one of my best charts I ever compiled proved me correct – government spending as a percentage of GDP versus economic growth. Albeit boring and now making your eyes glaze over like Ben Stein in Ferris Bueller’s Day off, the chart showed a NEGATIVE correlation between government spending and economic growth with a correlation coefficient of around .3.
The problem is that was 20 years ago and the data I had was not the greatest, merely what was available on the OECD at the time. So I figured it was time to pull new data and see if this relationship still held true. And boy howdy has it!
Here he has a graph with a line sloping from upper left to lower right and numbers on the sides. But not labeled what is a which… I think the vertical is government as %GDP, but the lowest value on the graph is an outlier at about 28%, well over the 25% upper range for optimal. The horizontal is single digits that I presume are %GDP Growth Rates. About 5% at the best end, about 0.5% to 1.5% when government share of GDP hits 50%. At some time in the past I heard a quote (attribution escapes me right now…) that ~”No government long survives once Government is over 1/2 of the economy” which might explain why all his highest data points stop at about 52%. Perhaps an accidental existence proof of that saying…
Not only did the relation between government and economic growth continue to be negative, but the strength of the relationship increased to a correlation coefficient of -.55 (-.56 if you only use a decade’s worth of data).
Now like all economic studies there are caveats and considerations. The data above does not include Japan, Canada, New Zealand, Mexico, China or Greece. I have NO idea why the OECD doesn’t have enough data on these countries to make a 20 year study, but they simply don’t (though the 10 year correlation I calculated DOES include Japan). So it’s merely the data I had to work with. And of course, the OECD does not include most 2nd and 3rd world nations. Only the nations who have been providing them with their economic data. Still, all these asides, if we are to look at the EMPIRICAL EVIDENCE economic growth is VERY NEGATIVELY correlated with the size of government. Even more so since you’d think SPENDING as a percentage of GDP would correlate positively with economic growth…but that is in a deluded Keynesian wet-dream world.
Regardless, this new data only merely re-proves what we all know to be logical and common sense:
A freer people are a more productive people. If you let people keep the majority of their wealth and fruits of their labor they will work more, create more, innovate more, and your economy will grow more. It’s not only logical and empirically proven, it’s simply moral. Of course, the parasites of society will whine and contest and complain otherwise, desperate to use the force of government to enslave you to support them, but it doesn’t change the fact that a smaller government results in a better and ever-more progressing society. The issue is simply if society wants to vote for parasitism and dependency of excellence and independence.
So there you have it. Both a theoretical Named Curve and a plot of real data for the portion of the curve that exists in the real world and is able to report data…
I think it’s pretty clear that the reason the world is “trapped” in about 2% economic growth is because we have about 35% to 50% “government”. It is a bit unclear from his graph if that allows for any State and Local government costs. In the USA, last I did the numbers, Federal was about 35% GDP but add in State and Local we’re on the edge of 50%. (From memory, but the article is posting in here somewhere ;-) or maybe it was in a comment… why I like things related to the thread, so I can find them later…)
It’s also pretty clear that it’s darned hard to get large economic growth with a Fat Assed Government sitting on your face and eating your lunch. Want more economic growth and more prosperity for all? Both Laffer and Rahn (and a LOT of economic history) all point to the same thing: SMALL GOVERNMENT!!! Preferably between about 15% and 25% of GDP. MAX. That means one giant diet for The Federal Government and a wholesale Liposuction for the EU.
The notion that you can “spend your way to prosperity” via loads of Government Debt and ever expanding government is just broken. The data shows it.
So please, policy makers: STOP the debt train. CUT government. Get the whole thing down below 1/4 of the entire economy, and just get the hell out of the way. We’ll all be better off for it.
Sadly, I have no idea how to get facts and reality into the brains of folks afflicted with Socialist, Social-Liberal, or Progressive attitudes. They seem to have a thought style that starts with “Does this idea or information please me? Yes, accept it uncritically and fabricate whatever is needed to protect it. No, reject outright and commence character assassination and insults. Critical analysis need not apply.” They are “fact resistant” and “reason as a last resort, if ever” based in their thinking. It seems essential to get some kind of feel-good endorphin rush before they will accept or remember anything. (Not a slam, just a lifetime of observation filtered through Occam’s Razor. I have other complaints about many “heartless” uber-analyticals who never seem to feel or give a damn at all about others… but that’s not the problem here.)
So my only recommendation is that one needs some of those more ‘heartless’ types in positions of power since they, at least, can be motivated by greed to cut the Government so as to get more growth in the economy and in their own stock portfolios.
I wish there were a “rational analysis” party… but there isn’t. Sigh.