The Rahn Curve at Work
July 7, 2010
UPDATE: For more about the Rahn Curve, including an estimate of the effects of government spending on the rate of growth in the United States, see “Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth.”
The Rahn Curve — named after its creator, Richard W. Rahn — posits the following relationship between government spending and economic growth:
Source: Sven R. Larson, “The Economic Case for Limited Government,” Center for Freedom and Prosperity.
The theory behind the Rahn Curve is simple — but not simplistic. A relatively small government with powers limited mainly to the protection of citizens and their property is worth more than its cost to taxpayers because it fosters productive economic activity (not to mention liberty). But additional government spending hinders productive activity in many ways, which are discussed in Daniel Mitchell’s paper, “The Impact of Government Spending on Economic Growth.” (I would add to Mitchell’s list the burden of regulatory activity, which accumulates with the size of government.)
Both papers cited above offer abundant empirical evidence for the Rahn curve. Mitchell presents the following quantitative estimate of the curve:
The curve is dashed rather than solid at low values of government spending because it has been decades since the governments of developed nations have spent as little as 20 percent of GDP. But as Mitchell and others note, the combined spending of governments in the U.S. was 10 percent (and less) until the eve of the Great Depression. And it was in the low-spending, laissez-faire era from the end of the Civil War to the early 1900s that the U.S. enjoyed its highest sustained rate of economic growth.
The working of the Rahn Curve can be seen in the following graphs, which I have imported from some earlier posts (the first, second, and third links at the bottom of this post):
Related posts:
The Commandeered Economy
The Price of Government
The Mega-Depression
Does the CPI Understate Inflation?
Ricardian Equivalence Reconsidered
The Real Burden of Government
