The Rahn Curve: Government vs. Growth

NOGA_001(edit1)By George Noga

Economist Richard Rahn, the eponymous creator of the Rahn Curve, makes connections between the rate of economic growth and the size of government. The Rahn Curve suggests there is an optimal level of government spending (as a share of GDP) that maximizes the rate of economic growth.

As a corollary, once government exceeds this optimal share of GDP, the economy and everyone in it suffers; the more it exceeds it, the more everyone suffers.

It is obvious with government at either 0% or 100% of GDP there will be no economic growth; in one case there is anarchy, while in the other absolute statism. As government begins to rise from zero percent of GDP, initially it spends to protect life, liberty and property; as this happens the economy surges. When government makes people safe, enforces contracts, protects liberty and enforces property rights great things begin to happen.

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As government continues increasing, it next spends on infrastructure. Such spending further accelerates economic growth. It is clear that a little government does a lot of good. At this point government’s share of GDP is between 10% and 20%. During the time the United States developed and grew, from its founding to circa 1930, it was around 10% on the Rahn Curve. There is universal agreement among Rahn adherents that optimal government share of GDP is 10% to 25%, with most also agreeing that no more than 20% is ideal.

Once government takes a greater share of GDP to spend on things other than life, liberty, property and infrastructure, the benefits diminish and GDP growth begins to slow. Once government’s share of GDP passes 25% it has a profound chilling effect on the economy. Once it reaches 50%, as in much of Western Europe today, it results in stagnation.

As the chart shows, places like Singapore and Hong Kong, in which government takes about 15% of GDP, are growing at a real (inflation-adjusted) and sustained rate of over 4%. The US, where government takes about 40%, now is growing at less than 2.5%. Western Europe, where government routinely takes 50%, or even 55+%, has anemic growth of ≈1.7%. It is equally crystal clear that a lot of government does little good. Consider this. In an economy (Europe) growing at 1.7%, after two generations the top 30% of its population will be only as prosperous as the bottom 30% in an economy growing at 4.5%.

 “Conclusion: Poor people always are better off in a rapidly growing economy rather than taking the opiate of government assistance. The best form of compassion is to maximize economic growth!”

But critics are sure to bleat: “More government spending helps poor people.” And perhaps it may in some immediate, limited and transient sense. But poor people always are better off as part of a rapidly growing economy. An economy booming for a generation will lift most out of poverty. Not only will the poor be better off economically, their lives will be enriched by the self respect of holding real jobs in the private sector versus demoralizing public assistance. Of course, those who are not poor also will be infinitely better off in a thriving economy.

A few caveats are needed. The Rahn Curve is not precise and many things other than government can and do affect economic growth. It applies more to developed economies than to those in a low state of development. Governments may spend money more or less efficiently and also may embrace goals other than economic growth. Nevertheless, the Rahn Curve is backed by considerable empirical evidence, not to mention logic.

 “If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be.”
«Thomas Jefferson»

 Media Watch: Central Florida’s Most Influential of 2010

I cancelled my subscription to the local newspaper 18 months ago. On New Year’s Day the carrier accidentally left a paper in my yard. It required only 5 minutes for me to remember why I cancelled my subscription. The paper listed the 25 most influential people of 2010 in central Florida. Of the top ten, eight were in government; of the top 25 people, 16 were on the public payroll. Of the 9 non-government people, 6 were all the usual suspects, i.e. CEOs of the area’s largest companies. Only 3 out of 25 were folks outside of government and big business.

The paper’s list is puerile and nescient, if not morbidly predictable. They are clueless that entrepreneurs are the ones who create wealth, jobs and shape an area’s culture. How about people of faith, medicine, letters, science or the arts; none is included in the top 25? How about trendsetters, intellectuals, community activists, idealists and those whose individual acts inspire others; again, none is to be found in the paper’s top 2 5 in all of central Florida.

“The most damning omission was the leaders of the most influential movement of 2010, i.e. the tea party; it is within their power to defeat many of the 16 politicians on the paper’s list. Bias? You Betcha!”

The most damning omission was the leaders of the most influential movement (by far) of 2010, i.e. the tea party. These folks have it within their power to vote out of office many of the politicians on the paper’s top 25 list. The folks who started the tea party in central Florida, at least one of whom is a leader of the national movement, should have been number 1 on the list. Could it be this omission was due to bias? You Betcha!

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