The Rahn Curve: A little government spending is good for growth
Anything more than a little is bad, however.
If you follow politics and economics, you’ve probably heard of the Laffer Curve. Simply put, the Laffer Curve shows taxation rates on the x axis and government revenue on the y axis and posits the notion of a sweet spot on the curve at which tax rates produce the maximum government revenue. If rates are too low, the government takes in less revenue; if rates are too high, taxpayers alter their behavior and either produce less or shield their money from taxation, and revenue falls. (Here is a tutorial of the Laffer Curve from Dan Mitchell at Cato.)
Back at the beginning of May, Mitchell posted a video on a different kind of curve: The Rahn Curve. The Rahn curve is similar to the Laffer Curve, except its focus is government spending. The x axis is size of government and its y axis is economic performance. It all sounds a little inside-baseballish, but it’s really quite simple. (Unlike politicians, I believe we Americans ARE capable of grasping more complex concepts.) The video explains it quite well.
Final note before the video: The “little” amount of government which falls below the sweet-spot threshold is primarily a government devoted to providing basic public goods like security, justice, and infrastructure. Once governments go beyond that to start providing welfare and “entitlements,” they almost surely cross the line to the downslope of the Rahn Curve.