Is “Big Government” thwarting economic Growth?

Monthly Market Commentary: July 1, 2014

Science fiction author Frank Herbert opined that, “All governments suffer a recurring problem: Power attracts pathological personalities.”

Friedrich Hayek thought that, “the more the state ‘plans’ the more difficult planning becomes for the individual,” and John Stuart Mill wrote already in Principles of Political Economy (1848) that, “In all the more advanced communities the great majority of things are worse done by the intervention of government, than the individuals most interested in the matter would do them, or cause them to be done, if left to themselves.”

Economist Richard Rahn, the eponymous creator of the Rahn Curve, makes the connection between the rate of economic growth and the size of government. The Rahn Curve suggests there is an optimal level of government spending (as a share of GDP) that maximizes the rate of economic growth. As government begins to rise from zero percent of GDP, initially it spends to protect life, liberty and property; as this happens the economy surges. When government makes people safe, enforces contracts, protects liberty and enforces property rights great things begin to happen. As government continues increasing, it next spends on infrastructure. Such spending further accelerates economic growth. It is clear that a little government does a lot of good. At this point government’s share of GDP is between 10% and 20%. From its founding to circa 1930, total US government spending was around 10% on the Rahn Curve.

In general, I have great sympathy for the Rahn Curve, which essentially states that the larger the government becomes beyond a certain point (about 20% of GDP) the slower economic growth will be. Under the influence of the neo-Keynesian interventionists and the professors at the Fed, the public has been brainwashed into believing that governments can revive economic growth. But as Ronald Reagan pointed out, “Government is not a solution to our problem, government is the problem.” Barry Goldwater warned that, “The government that is big enough to give you all you want is big enough to take it all away.

My friend Simon Hunt, the principal of Simon Hunt Strategic Services (simon@shss.com; www.SHSS.com), has a deep knowledge of the copper industry, China’s economy, and history and geopolitics. He has kindly given me permission to share his thoughts on the recent upheaval in the Middle East under the title: “The Middle East: Expect the unexpected.” I have the highest respect for Simon’s intellectual integrity and vast historical knowledge, and I highly recommend his advisory services. I am pleased to enclose his report with this mailing.

It’s holiday season. Therefore please remember that, work is the greatest thing in the world, so you should always save some of it for after your holidays.

And if you are visiting friends don’t forget that, as Oscar Wilde remarked, “Some cause happiness wherever they go; others whenever they go.”

I wish all my readers you a wonderful summer
Yours sincerely
Marc Faber

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