SECTION: What is the FCP all about

LEVEL 2 SECTION: What are the policies of the FCP?

LEVEL 3 SECTION: What is the optimum?

YOU WERE READING:

...this curve has a maximum point somewhere in between

WHAT MAXIMUM POINT?

The STING curve (Society's Total Investment in Government) looks as follows:

The optimum point is the point producing the maximum return on investment, when government has the most revenue and can implement the best programs for the really needy.

The exact quantification of the optimum point is not easy. 

The bulk of research seeks to measure the relationship between the size of government and economic performance. This scholarship shows that economic growth suffers as government expands.¹ 

The effect of government spending on economic performance has been studied, for example, by looking at government consumption with respect to GDP: An article in Economic Inquiry reported: "The optimal government size is 23 percent (+/–2 percent) for the average country. This number, however, masks important differences across regions: estimated optimal sizes range from 14 percent (+/–4 percent) for the average OECD country, 16 percent (+/–6 percent) in North America and 33 percent in South America."²

Another study analyzed "government size"³ in African countries and found that the optimum was 20% (+/-3 percent) of GDP⁴.

The Heritage Foundation analyzed government size with respect to total taxation and found that the optimum total individual taxation level in North America would be between 25% and 30%.⁵ 

The ability to know and maintain the total investment in government close to the optimum point would have enormous positive implications for society.

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NOTES AND REFERENCES:

[1] "The Impact of Government Spending on Economic Growth" Supplemental Appendix, ByDaniel J.Mitchell, Ph.D.

[2] Georgios Karras, “The Optimal Government Size: Further International Evidence on the Productivity of Government Ser­vices,” Economic Inquiry, Vol. 34, (April 1996), p. 2..

[3] Here government size is defined as the sum of government consumption expenditures GC plus government investment expenditures GI with respect to GDP, or (GC + GI)/GDP.

[4] "Empirical evidence on the optimality and productivity of government services in sub-Saharan countries", By Rita Babihuga. The Elgar Companion to Public Economics, Attiat Ott and Richard Cebule - Editors. Edward Elgar Publishing, 2006.

[5] Heritage Foundation, Washington DC, Verbal communication.