Mr. Romney needs to meet Mr. Rahn

If it were within my power to do so, I would like to introduce Mitt Romney to  Richard W. Rahn. Undoubtedly you all remember Art Laffer and his now famous Laffer Curve. The Laffer Curve demonstrated that up to a point increasing taxes supported economic growth; but beyond that point increasing taxes were detrimental to economic growth. President Ronald Reagan thought Mr. Laffer¡s curve made sense and he bold reduced taxes and lw and behold the economy got better. The Laffer Curve was vindicated. Well Dr. Rahn has developed a Rahn Curve. The Rahn Curve is very similar to the Laffer Curve except it demonstrates that increasing government spending as a percentage of GDP is very beneficial to economic growth up to a point, beyond which it has a very negative effect on economic growth.

Dan Mitchell of the CATO Institute has put together a A Fiscal Policy Tutorial that includes four videos. Below is the video that deals with the Rhan Curve, which I hope you will watch.

So, from the video we learn that empirically the optimum level of government spending is between 15% and 25% of GDP. That is a significant spread. However, we know for sure that for the US, the optimum level of spending is a whole lot less than our current level of about 40% of GDP. We also learn from the video that as bad as thing are here in the US, the situation is much worse in the European Union. Why then does Obama and the Democrat progressives want us to follow the European model. Its pure insanity.

Observing the reactions to the austerity programs in Europe we know that it is much easier to give than to take back. But it is not impossible. It has been done successfully. In another Dan Mitchell article, he shares two such success stories. I love this first example of New Zealand in the 1990s because Dan quotes an ex-minister who is rightly proud of what they achieved.

When we started this process with the Department of Trans-portation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee.… We achieved an overall reduction of 66 percent in the size of government, measured by the number of employees.[34]

Can you imagine something similar taking place in the United States? That would be something to watch. Another success story is Slovakia:

  • Slovakia is a more recent success story, but it may prove to be the most dramatic. After suffering from decades of communist oppression and socialist mismanagement, Slovakia is becoming the Hong Kong of Europe. With a 19 percent flat tax and a private social security system, Slovak leaders have charted a bold course that includes significant reductions in the burden of government. As Chart 3 demonstrates, government spending has plummeted in just seven years from 65 percent of GDP to 43 percent of GDP.

Well, 43% spending is still high, but if they keep going they may indeed become the Hong Kong of Europe.

Now you know why I would like for Mitt Romney to meet Richard Rahn.  Who knows? Maybe Mitt Romney could be the next Ronald Reagan. A fella can dream, can’t he?

Well, that’s what I’m thinking. What are your thoughts?

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13 thoughts on “Mr. Romney needs to meet Mr. Rahn

  1. It will take a whole generation of kids to educate about how our systeme works to get Americans on board. Even then, something for nothing has an allure that is hard to resist.

  2. It is a long and painful journey from Ron Paul to Mitt Romney. Welcome home, Jim. You will be a winner this November, and no, it won’t corrupt you.

    As for the Rahn curve, you again made another interesting post that brings to the attention of people the importance of debt in economic growth. (Nothing new except for the Rahn graphic).
    As with the Laffer curve, it shows the dangers of debt and the misconceptions under which government policy makers labor in their implementation. The Laffer curve is, however, more precise because it deals with primary sources of data (tax revenue which is straight forward). The Rahn curve is dealing with secondary and subsequent multiplying sources of data because GDP figures are the product of multiple and complex inter-active economic inputs – GDP growth is dependent on many more factors than just levels of government inputs (expenditures). At the end, it is a correct concept, wherever the summit lies.

    I think Romney is very well aware of the issue (Hubbard, his economic advisor is for sure). The ones that need to be introduced to Rahn are the Europeans.

    As a corollary I like to use the topic to come again to the defense of Keynes (at least put the record straight) who has been unfairly abused by tying him up with the Obama stimulus spending policies. I always argue that Keynes never envisioned that government spending could be use to stimulate the economy at the debt levels that we have today. The Rahn curve proves my defense right. Keynes stated as much by categorically pointing out that maximizing growth could be reach at 25% government spending to GDP. And we have been operating well above that for several years now while branding the policies as “Keynesian”. Unfair!

  3. Romney is smart and his background should give him a strong grasp of this situation. His background makes him uniquely qualified to untangle this mess, but it worries me what his remedies would be.

    Ironically, the best thing he could do would be to take a cold, gimlet-eyed survey of the situation and go Bain-style slashy-burney. That is what he has done best in his career, and we need it here. Unfortunately, I think it is politically unviable and I don’t think he has it in him.

  4. “Why then does Obama and the Democrat progressives want us to follow the European model. Its pure insanity.”

    I believe it gets real simple. Obama’s crowd is not interested in the United States being prosperous. Their priority is social justice, whatever that is. It is not that they don’t understand economics (they don’t care), it is that their world view has everything to do with their ideals.

    Interesting thing about the Rahn curve.

    However, not just any government spending creates economic growth, not matter the point of the Rahn curve. My case in point is the silly Obama $852 Billion stimulus package that combined flawed infrastructure spending with union and political payoffs. More growth oriented government spending would be in defense spending, where you are harnessing parts of the economy that private sector would not normally address.

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