Tag Archives: size of government

Missing the Bigger Story

Here’s a letter I recently sent to the Washington Post:

Editor, Washington Post:

Anita Kumar’s November 29 Virginia Politics blog post “McDonnell recommends eliminating agencies, boards, commissions” incompletely details Virginia Gov. Bob McDonnell’s “ongoing effort to reshape and shrink state government.” By deregulating three professions, eliminating two state agencies, and merging 19 others, $2 million could be trimmed from the commonwealth’s budget if the legislature approves the proposal.

She does not mention that Virginia’s budget is set to increase by $1.1 billion in 2012. This new spending outweighs the proposed cuts by a factor of 550. Gov. McDonnell may be modestly reshaping government, but he certainly isn’t shrinking it.

Ryan Young, Washington
The writer is a fellow at the Competitive Enterprise Institute.

The Rahn Curve

A little government can do a lot of good. A lot of government can do little good.

Rules protecting life, liberty, and property can create the stable conditions that entrepreneurs need to flourish. It works best when these rules are simple, clear, and few. But problems emerge when government takes on other missions.

Rules that are complicated, opaque, and numerous create instability. Entrepreneurs are less likely to invest or innovate if they fear the rules of the game might change tomorrow on a whim. Complying with regulations takes up time and effort that could be spent creating wealth. When governments get involved in business, businesses will involve themselves with government. This is an invitation to corruption, rent-seeking, and regulatory capture. Many backs get scratched, but economic growth suffers.

Dan Mitchell‘s latest video introduces the Rahn Curve, named after top-notch economist Richard Rahn, to illustrate that concept visually. Most academic studies on the subject estimate that governments that take up 15 to 25 percent of GDP is about the right size. The U.S. government consumes roughly 40 percent of GDP. That wide range is because different government policies have different effects, and because the complexity of even the smallest economies makes any macro-level study uncertain.

The academics might be guessing too high, though. Historical data from the 19th century show that the best-performing economies had governments around 10 percent of GDP. That includes the U.S. and most of Europe.

Returning to that size government wouldn’t even be particularly austere. the U.S. government would have a $1.4 trillion budget. Roughly what we had during the Clinton years.

I hope you’ll take a few minutes to watch. The Rahn curve contains valuable insights.