Readers Question: Does the Rahn Curve support the empirical evidence? If not, why not? Essay on how to prove that there is a relationship between the level of Government Spending and GDP growth.
The Rahn Curve suggests that there is an optimal level of government spending which maximises the rate of economic growth.
Diagram of Rahn Curve
Proponents of the rahn curve tend to use it as a tool to argue that government spending hinders economic growth. For example the Centre for Freedom and prosperity point to empirical studies which suggest that the optimal level of government spending is between 15 and 25% of GDP. [link] That page also shows links to other reports and empirical studies which would be worth investigating for your paper. However, you should bear in mind.
Note Government spending in US is approx 37% of GDP, in UK approx 43% of GDP, in western europe some countries have more than 50%
The ideological stance of this particular organisation. It is not surprising they highlight studies which show results favourable to their belief in reducing the role of government
The tenuous link between growth rates and levels of spending. There are many factors that influence rates of economic growth and I am dubious that people can ever isolate just one factor (levels of government spending) and prove that this causes high growth low growth.
For example, when countries are in a certain stage of development growth tends to be higher and government spending a smaller % of GDP. However, this does not necessarily prove the high growth is caused by low spending. A more convincing explanation would be that at certain stages of development it is easier to maintain high growth rates (e.g. China and India) and it maybe that these growth rates could have been even higher if the government had invested in infrastructure improvements.
Government Spending is Too Vague. To say that the optimal level of government spending is 20% is like plucking a figure out of the sky. It depends on what the government spends its money. If the government is spending money on generous benefits for the unemployed it is unlikely to be boosting growth rates. If the government is spending money on overcoming market failure such as providing education, training and infrastructure improvements then these can be helpful in increasing growth rates. Some argue with ideological fervour that government spending is always ‘inefficient’ But, this is lazy economics; some government spending can be inefficient, but, there is no reason why it has to be always inefficient.
I am rather dubious of the Rahn Curve; there are too many difficulties in deciding whether the level of government spending can influence the rates of economic growth. It would be more useful to examine whether privatisation of state owned industries can have a noticeable impact on influencing growth rates.
There is also another issue which can get lost – the fact that maximising growth rates is not necessarily the government’s highest priority. Issues of equity, fairness and concern for the environment are arguably more important than maximising rates of economic growth.
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[...] I answered part of this question here on the Rahn curve [...]
Large government are bad for growth because growth is not its number one priority
i want to know about the large gorvernment are bad for growth?
question is the south africa gorvernment arbnomally large or should its role be increased
The RAHN is logically correct.
First: It is obvious that Anarchy (0% Government), nor Communism (100% Government) promotes growth.
Second: The Economic system is the chosen method for decision making:
Anarchy (Somalia, Sudan, Afghanistan) transitional lack of government usually occurring during civil war or revolution
Capitalism (free markets- Dubai, Singapore)- allows everyone to participate in making economic decisions
Socialism (France, Germany)-the ruling class makes the economic decisions
Communism & Theocratic (Russia, Saudi Arabia, Iran)- the elite political party makes all economic decisions
Dictatorship- (N Korea, Zimbabwe, Nigeria, Myanmar) one person essentially making all economic decisions
Abundant empirical evidence confirms that economic growth follows the RAHN.
The article does nothing to answer the question of whether empirical evidence supports the Rahn Curve, but only postulates on why it might NOT be accurate – without empirical evidence to support the criticism.
I looked at empirical evidence for the United States, the European Union – 15, and China for the last 15 years, and the growth rates appear to be very consistent with the predictions of the Rahn Curve. While it may have some minor fluctuations over time, it does appear to be supported by empirical evidence historically.
Governments role is NOT “equity, fairness and concern for the environment”. Govenrment’’s role should be limited to providing for the common defense and creating a general legal environment where citizens are reasonably assurred of the outcome of their decisions. Any thing other than that reduces personal freedom and leads to enslavement by the government. Regardless of how magnaimous the intent.
Also the author was afraid to answer the question.
The Rahn curve also explains why the US is currently in a state of decline after 200 years of explosive economic growth and growing world power. Welfare spending ticked sharply upward in the 1930s and as a result, GDP and productivity drop, and government spending is a higher percentage of the economy. This pattern was repeated 30 years earlier in England, which used to dominate the entire world prior to 1900, but when Socialism and Transfer spending took over the economy, the nation began a rapid collapse that accelerated after the world wars. The author needs to explain the strong correlation between economic collapse and government spending. Exibit B would be Zimbabwe, formerly Rhodesia.
“If the government is spending money on overcoming market failure such as providing education, training and infrastructure improvements then these can be helpful in increasing growth rates.”
To the extent this may be true, these government expenditures are within the 15%-25% optimal figure for expenditures.
The Rahn Curve provides empirical evidence to support a very simple concept – That each additional dollar taxed and spent by the government (although perhaps with good intentions) is another dollar that cannot be invested by the private sector in creating economic growth and jobs, thereby depressing economic growth.
I have yet to see any examples wherein significant economic growth is a BAD thing.
“here are too many difficulties in deciding whether the level of government spending can influence the rates of economic growth.”
To test this out how about we pretend that I am the government and you my citizen. You give me all your money as a mock 100% taxation experiment. We will see how long you continue working under these conditions producing products that grow our economy. If you don’t feel your job is worth working for 0% pay and cease to do so then you will have proven if “government spending can influence the rates of economic growth”.
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