Government Consumption & Economic Growth
What is the optimal size of government? The Armey curve hypothesis suggests a non-linear (inverted-U) relationship between government size and growth. Small governments under-provide public goods; large governments crowd out private investment and create distortions through excessive taxation.
This analysis tests the Armey curve hypothesis using government consumption share (csh_g) from the Penn World Tables. Try switching to quadratic regression to visualize the potential inverted-U shape.
The Armey Curve
Try switching between linear and quadratic regression to see if the data support an inverted-U relationship between government size and growth.
📊 Mixed Evidence
Cross-country evidence for the Armey curve is weak. While the quadratic term is sometimes significant, the "optimal" government size varies widely by region, time period, and how you measure government activity.
⚠️ Composition Matters
Government consumption share (csh_g) mixes productive spending (education, infrastructure) with consumption. The growth impact depends heavily on what the government spends on, not just how much it spends.