Video: The Rahn curve and the albatross of too much government

posted at 11:36 am on June 30, 2010 by Ed Morrissey

Too little government, says Daniel Mitchell for the Center of Freedom and Prosperity, means very low economic growth.  Anarchy means that people cannot defend their property rights and have little incentive to invest and build.  Interestingly, too much government means … well, just about the same thing.  Richard Rahn, an economist at Cato, created the Rahn Curve to show the diminishing growth of an economy when government gets too large.  In his latest Econ 101 video, Mitchell explores the meaning of the curve and asks the pertinent question — How much government is just right?

The good news? We’ve found the Golden Mean of Government. According to 1998 testimony to Congress, it’s a total amount of government cost that consumes roughly 17.5% of GDP, presumably efficiently. The bad news? The last time we had a government that ate only 17.5% of GDP was … 1965. So where are we at today? Er … 40% of GDP, for all levels of government. Hong Kong has a right-sized government, while we’re a lot closer to France than Hong Kong.

Mitchell notes that “government today is far too big, and it’s hurting growth.” The economic indicators of the last few weeks, which were supposed to have improved thanks to government intervention, is a testament to that.

Update: The video isn’t entirely clear on this point, but I believe the numbers represent the total cost of government, not just the federal government, both in 1965 and now.  I wrote “federal,” which was my error, not Dan’s.

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We’ve found the Golden Mean of Government. According to 1998 testimony to Congress, it’s a federal government that consumes roughly 17.5% of GDP, presumably efficiently.

Does that 17.5% of GDP in 1965 include states? Or is it only for the feds, as I suspect?

Not a good idea to be trying to mix data, Ed.

BradSchwartze on June 30, 2010 at 11:40 AM

I hope this get’s out better than those e-mails from B.P. to the M.M. Whatever the initials were ..

wheels on June 30, 2010 at 11:43 AM

I believe it’s consistently measuring the total cost of all government, not just federal government, and I’ll fix that — that was my error, not Dan’s.

Ed Morrissey on June 30, 2010 at 11:44 AM

How are union thugs supposed to get by without the government providing them with contracts, go out and find work for themselves??? Think of the children.

Bishop on June 30, 2010 at 11:44 AM

It’s named after a pirate? Cool.

Dash on June 30, 2010 at 11:44 AM

Mitchell explores the meaning of the curve and asks the pertinent question — How much government is just right?

That’s like asking Al Gore “What’s it like to be a nice person and an alive one“.

The private sector new jobs report for June is another indication how true this is.

Biden and Obama will lie, along with the media. The U.S.American people know better, or so one hopes. If they are fooled, again, by this bunch, they deserve them.

Schadenfreude on June 30, 2010 at 11:45 AM

It’s kind of like the carburetor on my lawn mower. There’s too lean, too rich, and somewhere towards the lean end of the setting gives the most power.

RBMN on June 30, 2010 at 11:45 AM

At this point, I pretty much want the federal government to collapse, and consume 0%. The states’ national guards can patrol our borders while we re-form a government that follows the constitution.

Vashta.Nerada on June 30, 2010 at 11:45 AM

Ed Morrissey on June 30, 2010 at 11:44 AM

Are you sure? 17.5% in 1965 seems extremely low for all levels of government, considering the Great Society spending that was being ramped up.

Thanks, though, for looking into it.

BradSchwartze on June 30, 2010 at 11:46 AM

Love the eye patch. Anyone with an eye patch is too cool to be ignored.

keep the change on June 30, 2010 at 11:48 AM

Exactly how many charts and graphs and pie charts and statistical graphics are needed to just get down to the point that we are facing a major economic clusterf**k of epic proportion and that the idioctic antics that government is imposing to try to fix the issue is only making matters worse?!!!!

pilamaye on June 30, 2010 at 11:51 AM

If you want, you can also call it the Rahm curve.

Shy Guy on June 30, 2010 at 11:53 AM

Cost of government? Graphed to show a conservative idea. This is stupid.

PrezHussein on June 30, 2010 at 11:54 AM

Cost of government? Graphed to show a conservative idea. This is stupid.

PrezHussein on June 30, 2010 at 11:54 AM

It’s graphed to show reality, and yes, reality is a conservative idea. How do you think stock analysts get wealthy? They graph what actually happens in real life, based on history and current variables, and they end up looking smart. They’re not that smart. They just have more information than you.

RBMN on June 30, 2010 at 12:01 PM

So… hypothetically if the goal is to kill growth, massive spending is the way to go. Got it.

Kenosha Kid on June 30, 2010 at 12:02 PM

Brad, 1965 was just before all of that Great Society spending hit the books. I think it’s right. Dan Mitchell confirmed to me that the figures relate to total government spending, not just federal.

Ed Morrissey on June 30, 2010 at 12:05 PM

Hmm, what happened in 1965?

Medicare.

It’s been all downhill ever since. ObamaCare is just going to finish off our once-titanic economy.

rockmom on June 30, 2010 at 12:05 PM

So… hypothetically if the goal is to kill growth, massive spending is the way to go. Got it.

Kenosha Kid on June 30, 2010 at 12:02 PM

The Obama Administration is either extremely dumb, or extremely diabolical. You have to pick. Sometimes a close call.

RBMN on June 30, 2010 at 12:07 PM

Cost of government? Graphed to show a conservative idea. This is stupid.

PrezHussein on June 30, 2010 at 11:54 AM

The liberal idea is that all government spending has a multiplier effect. If that were true, our economy right now should be booming and we should have zero unemployment. Simply looking at reality over the last two years proves this graph is correct!

rockmom on June 30, 2010 at 12:08 PM

Perfect timing – from Headline thread

The national debt will reach 62 percent of gross domestic product (GDP) by the end of this year, the nonpartisan Congressional Budget Office (CBO) said Wednesday.

Schadenfreude on June 30, 2010 at 12:10 PM

A portent: Lawyer Finds Image of Karl Marx in Code of Federal Regulations

Mervis Winter on June 30, 2010 at 12:13 PM

I think of it like this;

Government is overhead. In any business we know we have to have some overhead but we want it to be as small as possible.

Often, as a business grows people start building empires within the company and people rationalize more costly expenses and perks. If this goes on unchecked the company will go bust.

Our country is on the very brink.

TheSitRep on June 30, 2010 at 12:13 PM


Update: The video isn’t entirely clear on this point, but I believe the numbers represent the total cost of government, not just the federal government, both in 1965 and now. I wrote “federal,” which was my error, not Dan’s.”

The video’s editorial is speaking to the total cost of government, but the supporting studies that flashed across the screen all reference only federal government. There’s great material there, and it’s presented in easy to follow language, but it’s an unfocused mess academically and doesn’t come near proving cause and effect. Good to send to a-political or like minded friends, but not to progressives who are capable of critical thinking.

elfman on June 30, 2010 at 12:21 PM

You mean to tell me that if a leech sucks of 40% of your lively hood it means no growth???!!???

Get out of town!

jukin on June 30, 2010 at 12:26 PM

but I believe the numbers represent the total cost of government

Perhaps the total hard number cost of government, but how does one calculate the cost of regulations? The cost of compliance? The cost or perceived or anticipated cost (and therefore risk) of potential future regulations? This why the “Cost of Government Day” is always sometime in July. The drag on the economy can perhaps be estimated, but how does one measure the jobs not created because of the risks not taken due to uncertainty of future laws and of the bureaucrats who capriciously write regulations that have the force of law?
Remember, Mr. Mitchell was clear that his presentation attempted to be narrow in focus. I believe he left it up to us to draw conclusions such as the ones I’ve mentioned.

Amendment X on June 30, 2010 at 12:28 PM

This is why some capitalists and libertarians annoy the hell out of me. Capitalism isn’t the law of the jungle, and it actually hurts the cause of defending it when someone makes that argument. Government has a very important role in free market economics, from enforcing contracts, through weights and measures, to making sure theives can’t steal your inventory.

On the other hand, it’s been apparent to me for most of my life that the government was growing all out of proportion to any possible future revenues.

So this is actually a very moderate position if you think about it, very in line with a constitutional republic.

Now if only we could get the FBI to take liking the constitution off their list of indicators of domestic terrorism.

Beagle on June 30, 2010 at 12:29 PM

Has there ever been a study to show that increasing government social welfare spending EVER caused a long-term increase in GDP?

Is there any evidence AT ALL to support that claim?

People keep screaming “Keynsian!” as if that word were a magic talisman, ending all argument on the subject of infinitely increased government spending before it begins. Newsflash: That was just some guy’s name. It proves absolutely nothing whatsoever.

And, as the guy said, the 17.5% number is not really a nominal figure; it is a theoretical maximum, based on empirical data. We know that economic growth increases steadily as government spending lowers to that level — but no country in the past 70 years has ever even TRIED to see if the trend continues beyond that point.

Common sense dicates that it the trend would continue. Of course no country spends 17% of GDP on enforcement of property rights — no country ever has ever spent anywhere near half that much. Nowadays a standing military is a necessity, but even with that, the optimum growth rate is probably well below 15% of GDP.

logis on June 30, 2010 at 12:30 PM

This is my theory;
The genesis of all wealth is exploiting natural resources ie,
Mining, drilling, farming, ranching, fishing etc.

The wealth created in those industries then gets paid to;
Manufacturing, building and processing industries.

Then on to logistics, merchandising etc.

All along the way wealth is spread to various service industries like
Accountants, teachers, lawyers, government etc.

But you have know this, nobody could ever have a damned thing until a fish is caught, a tree is felled, a mine dug or an oil well drilled

The first time I heard some dumb ass economist say that the U.S. Was going to have a service based economy, I thought my god, what has this tard been smokin’.

TheSitRep on June 30, 2010 at 12:36 PM

The Laffer Curve and the Rahn Curve are two concepts that the libtards will never, ever come to grips with. They illustrate that boosting taxes and the size of the government beyond optimum levels can harm an economy. To them, bigger is always better, reality be damned, and the optimum levels are a tax rate of 100% and government spending equal to GDP.

ya2daup on June 30, 2010 at 12:43 PM

It’s graphed to show reality, and yes, reality is a conservative idea.
RBMN on June 30, 2010 at 12:01 PM

That’s why liberals hate reality so much. I’d love to see a graph charting liberal FEELINGS for once.

“This graph shows how spending other people’s money makes me feel better about myself. And this inflection point riiight… here… is where spending other people’s money stops making me feel like a bigger man.”

Where, exactly, does that point lie? Last year, in addition to increasing institutional federal entitlement spending by 30%, Barck Obama allocated 150% of the previous year’s GDP to new future government spending.

Has anyone detected any signs at all that he is anywhere near reaching his personal “saturation point” yet?

logis on June 30, 2010 at 12:44 PM

Common sense dicates that it the trend would continue. Of course no country spends 17% of GDP on enforcement of property rights — no country ever has ever spent anywhere near half that much. Nowadays a standing military is a necessity, but even with that, the optimum growth rate is probably well below 15% of GDP.

logis on June 30, 2010 at 12:30 PM

The primary purpose of our military is to protect our property rights.

Slowburn on June 30, 2010 at 12:46 PM

Anybody read Tom Clancy’s “Executive Orders”?
Parts of it read like a manifesto for the Tea Party, and it was published in 1996.

Count to 10 on June 30, 2010 at 12:46 PM

TheSitRep on June 30, 2010 at 12:36 PM

This is correct. GDP is merely a measure of how much money has changed hands, even if it is counting the same dollar multiple times. Wealth is a measure of how many dollars there are (assuming they are real dollars and not inflated dollars)

If plumber John gives artist Paul $10 for a crummy oil painting, and Paul then gives that $10 back to John to fix his leaky tap, the GDP counts that as $20 of economic activity. But it’s still the same $10. No new wealth was created. This is why a service economy can not produce wealth.

The only way for a nation to become richer, and by extension, pay for the luxury of additional socialism, is to either produce riches from the environment, or get them from other countries through trade surpluses. America doesn’t do much of neither anymore while at the same time it’s increasing its spending.

keep the change on June 30, 2010 at 12:48 PM

If plumber John gives artist Paul $10 for a crummy oil painting, and Paul then gives that $10 back to John to fix his leaky tap, the GDP counts that as $20 of economic activity. But it’s still the same $10. No new wealth was created. This is why a service economy can not produce wealth.

keep the change on June 30, 2010 at 12:48 PM

Uh, no.
Paul has an oil painting that was presumably worth at least $10 to him (and less than $10 to John), and the fix to the tap was worth at least $10 to John. Wealth has increased. Services produce wealth (its just that the most common services we see are immediately consumed, and not horded).
Granted, just keeping track of the money that changes hands doesn’t account for production that people do for themselves (home improvement, etc.), but it also doesn’t really account for some of the costs of production (how much that oil painting was worth to John, for instance).

Count to 10 on June 30, 2010 at 12:58 PM

Remember the crash of ’29? Followed by the election of Franklin Roosevelt in ’32? There was all kinds of government in the years leading up to WW II and it did not do any good, essentially. The Japanese got us out of that mess. Have a look:
http://blog.heritage.org/2009/01/14/were-spending-more-than-ever-and-it-doesnt-work/

LarryG on June 30, 2010 at 12:59 PM

Count to 10 on June 30, 2010 at 12:58 PM

It’s the same $10. No new wealth was produced. The whole thing could have been done in a barter economy.

keep the change on June 30, 2010 at 1:02 PM

Wealth has increased.

Where’s the new wealth?

If wealth could be increased that way, then John and Paul could trade that same $10 back and forth a million times and they would both be millionaires. The tap continues to need fixing, and the oil paintings are replaced with new oil paintings. Lots of GDP and not a cent of new wealth.

keep the change on June 30, 2010 at 1:05 PM

It’s the same $10. No new wealth was produced. The whole thing could have been done in a barter economy.

keep the change on June 30, 2010 at 1:02 PM

Yes, it could have. That has nothing to do with the fact that it still marked production. If this is what you meant, all you are doing is pointing out that bartering is one of the ways that production can be overlooked in the official count of GDP — you are not in any way showing that services are ‘bad’.

Count to 10 on June 30, 2010 at 1:24 PM

TheSitRep on June 30, 2010 at 12:36 PM

Another way of thinking about that is there are a number of critical industries which are essential to national security, and not just precious metals or high tech.

And your final point is something I think about all the time. Those in charge are so far removed from actually harvesting, mining, or making anything – and philosophically opposed to it in any case – they’ve forgotten the foundation of society which makes the rest possible. Feminist legal theory or quantum gravity doesn’t qualify someone as an expert on oil or food production.

It’s a good thing these utopian ideas don’t ever get out of hand and cause millions of people to starve or anything.

Oh…

Beagle on June 30, 2010 at 1:25 PM

If wealth could be increased that way, then John and Paul could trade that same $10 back and forth a million times and they would both be millionaires. The tap continues to need fixing, and the oil paintings are replaced with new oil paintings. Lots of GDP and not a cent of new wealth.

keep the change on June 30, 2010 at 1:05 PM

If John can produce that many paintings for less than $10, and has that many taps for which it is worth $10 to have them fixed, they would be a million dollars better off than if they just sat on their thumbs.
You are missing entirely that, in a market economy, the best value of a commodity is established by what, collectively, buyers and sellers are willing to exchange for it.

Count to 10 on June 30, 2010 at 1:28 PM

Just because a theory can be graphed does not mean that the theory is true. A graph illustrates a theory; it does not prove it. This particular theory does happen to be true, but only an idiot would come to accept it on the basis of this graph alone.

I prove this with the graph below. The Y axis is the percentage of time a person is correct, and the X axis is the percentage of time a person agrees with me. I call it The Suget Effect. (Not coincidentally, the graph is of the line y=x)

|            /
|        /
|    /
|/
————-

hicsuget on June 30, 2010 at 1:39 PM

hicsuget,

If government spends money it taxes or borrows, it stands to reason there is a point at which the financial drag on the economy makes any further growth of government fiscally disasterous.

Silly point about graphs notwithstanding, as we watch European naton after European nation crash and burn, wouldn’t it be prudent to notice we’re making the exact same mistakes they made years ago?

How many social democracies have to have stagnant economic growth, ever-increasing public sectors, and exploding deficits before we can call it a trend, irrespective of how you graph it?

Beagle on June 30, 2010 at 1:45 PM

keep the change on June 30, 2010 at 1:05 PM

Wealth is measured in money, but wealth is not the same thing as money.

(It is amazing how persons with no education in economics think they are both a) qualified to speak on the subject, and b) know more about it than professionals in the field.)

hicsuget on June 30, 2010 at 1:48 PM

Beagle on June 30, 2010 at 1:45 PM

I think you missed an important phrase in my post. Allow me to repeat it:

…This particular theory does happen to be true,…

hicsuget on June 30, 2010 at 1:39 PM

hicsuget on June 30, 2010 at 1:50 PM

Great post, but a majority of the electorate is in a dependency posture. Reason suggests they will see greater opportunity from policies seeking a freer and more robust private sector, but if our dependent neighbors were operating on reason, most of them wouldn’t be in dependency, would they?
Maybe we need to re-institute the poll tax, a lot of good might come from allowing only productive people to vote at the polls.

Mark30339 on June 30, 2010 at 2:04 PM

Maybe we need to re-institute the poll tax, a lot of good might come from allowing only productive people to vote at the polls.
Mark30339 on June 30, 2010 at 2:04 PM

That would solve every problem that America faces today.

Once non-taxpayers are allowed to vote on how other people’s money is spent, it is only a matter of time.

logis on June 30, 2010 at 2:22 PM

Does that 17.5% of GDP in 1965 include states? Or is it only for the feds, as I suspect?

Not a good idea to be trying to mix data, Ed.

BradSchwartze on June 30, 2010 at 11:40 AM

The question is; If you are speaking of the same statistic, does it matter?

Franklyn on June 30, 2010 at 2:29 PM

These studies are “too little too late”.

There is no going back. The trillions will never be paid and government is going to only get bigger. For all intents and purposes we are being turned inside out. No one over 30 will recognize the US or world in 25 years. For most folks under 30 the current progression seems normal. Basically being told by the “state” what to do, how and when.

Soylent Green modernized.

patrick neid on June 30, 2010 at 2:30 PM

Update: The video isn’t entirely clear on this point, but I believe the numbers represent the total cost of government, not just the federal government, both in 1965 and now. I wrote “federal,” which was my error, not Dan’s.

Ed, did you just plead guilty to a “federal” offense?

Dr. Charles G. Waugh on June 30, 2010 at 2:57 PM

This is all good, but it doesn’t go far enough. The idea that it doesn’t matter what government is doing, it only matters how much it costs in relation to GDP, gets a pass here.

And it shouldn’t. It matters hugely that minimal government services to forestall anarchy are so, well, minimal. There’s a moral difference for humanity that erupts across the continuum of government’s cost. The continuum doesn’t represent the same political, moral, or societal proposition all the way across it. It’s not just the financial burden of government that makes the difference.

There’s a reason why Ben Franklin didn’t say “A 17.5% of GDP government, if you can keep it.”

J.E. Dyer on June 30, 2010 at 3:48 PM

I’m a big fan of Richard Rahn. His latest column in the Washington Times is: Obama’s fiscal fantasyland,
Only true Keynesians still think we can spend our way to prosperity. http://www.washingtontimes.com/news/2010/jun/29/obamas-fiscal-fantasyland/

burt on June 30, 2010 at 4:13 PM

Another over analysis of a simple question.
You cannot compare the cost of American government to any other,because American government is not like any other.So, to suggest that there is an optimum level of spending to insure good government is an exercise in absurdity,since in order to do so neccesitates a comparison among various forms of government,which is impossible since America has a unique form of government.
Our laws,therefore our government, are based on a simple principle–all of us have the right to do what we wish. My rights end where your rights begin.We often hear that “we are a nation of laws”.We are not a nation of laws,we are a nation of rights.The Constitution says nothing about your life or property,only your RIGHTS to that life and property.
Pardon the deviation but the relevence of my last statement is that if looked upon in the sense that government in America exists only to insure the rights of the individual,(which I believe was our founders’ intent)the optimum cost of government would be much lower that the Cato Institute’s estimation.

DDT on June 30, 2010 at 6:24 PM