MaggieMae
Reality bits
- Apr 3, 2009
- 24,043
- 1,635
- 48
the fact is that government spending is out of control. And since taxes are the largest source of government revenue, it follows that taxes will follow government spending and rise for everyone not just one class or another.
at what point does government spending hamper growth?
Government Size and Economic Growth
Borrowing a graphical technique popularized by Arthur Laffer, Representative Richard Armey, an economist by training, developed what he termed the Armey Curve (see Figure 1).1 In a state of anarchy, output per capita is low. Similarly, where all input and output decisions are made by government, output per capita is likewise low. Where there is a mix of private and government decisions on the allocation of resources, however, output often is larger. The output-enhancing features of government dominate when government is very small, and expansions in governmental size are associated with expansions in output. At some point, however, further expansion of government no longer leads to output expansion, as the growth-reducing aspects of government grow larger, and the growth-enhancing features of government diminish. Further expansion of government contributes to economic stagnation and decline.
As governments grow, the law of diminishing returns begins operating. While the construction of roads initially assists output expansion, the construction of secondary roads and upgrading primary roads start to have less added positive impact per dollar spent. Moreover, the taxes and/or borrowing levied to finance government impose increasing burdens. Low tax rates become higher. New taxes, such as income taxes, are added to low consumption levies, with increasingly adverse effects on human economic behavior. Tariffs are raised, thwarting trade. New government spending no longer enhances economic growth.
The data here suggest that a further reduction in government size to 17.45 percent of GDP would be growth enhancing.
So what percentage of GDP is Obama using to fund government?
Over 22%.
where does that put us on the Armey curve?
Do do nothing (no infusion of money), then we would be looking at a 200-300% of GDP just in credit obligations.