U.S. Economic Growth: Rahn Curve and Components of Government Spending

Abstract

The controversial Rahn Curve is the relation oThe controversial Rahn Curve is the relation of government spending with economic growth. It is argued that government spending is inefficient and should therefore be negatively related or uncorrelated with the growth of Gross Domestic Product (GDP). Whether there is a Rahn Curve is an empirical question which has been examined with mixed results for the U.S. economy. There has been little effort to disaggregate federal expenditures to see if there are components which are highly correlated with economic growth. However, some components of government spending which are theoretically related to economic growth, e.g., social security, funding of research grants, infrastructure building, and education. On the other hand, other expenditures such as debt service, police protection, even military spending does much to aid GDP growth. This paper uses components of federal expenditures as the explanatory variable for GDP growth.f government spending with economic growth. It is argued that government spending is inefficient and should therefore be negatively related or uncorrelated with the growth of Gross Domestic Product (GDP). Whether there is a Rahn Curve is an empirical question which has been examined with mixed results for the U.S. economy. There has been little effort to disaggregate federal expenditures to see if there are components which are highly correlated with economic growth. However, some components of government spending which are theoretically related to economic growth, e.g., social security, funding of research grants, infrastructure building, and education. On the other hand, other expenditures such as debt service, police protection, even military spending does much to aid GDP growth. This paper uses components of federal expenditures as the explanatory variable for GDP growth.