OPTIMAL SIZE

THE NEW VISION FOR CONSERVATIVES – RIGHT-SIZED GOVERNMENT By Lewis K. Uhler, President National Tax Limitation Committee

My reading of history convinces me that most bad government results from too much government.

Thomas Jefferson

Republicans, who have long argued for controlling the size of government but have nonetheless allowed it to expand enormously in recent years, can now stake out the high ground in pursuit of the limited government goal.

Their map to that high ground lies in a body of research on the optimal, or “right,” size of government. The research creates an objective standard and moral imperative for limiting government. It posits that excessive government stunts national economic growth and impoverishes the people.

GOVERNMENT TOO BIG

The late economist Gerald Scully, who studied the “optimal” size of government for years, has shown that at approximately 35 percent of GDP (the 2008 number, which has since grown to nearly 40 percent), governments at all levels in the United States are far beyond the 20 percent or so of GDP he has identified as optimal. Here are the key elements of Scully’s analysis:

  • Beyond the optimal level of spending, government becomes a net drain on the economy. Up to that level, every dollar spent by government provides more than a dollar’s worth of economic growth. Beyond the optimal level, every additional dollar in spending costs more than a dollar in economic growth. At today’s spending level, the next dollar in taxation costs the Nation at least $2.75 in lost economic growth.
  • Total spending by federal, state and local governments in the United States in 1948 was about 23 percent of GDP, but it had grown to 35 percent by 2008. During that time the average annual compound growth rate of the economy was 3.5 percent. If governments had not increased their shares of GDP, the annual growth rate of GDP would have been 5.8 percent per year. Scully calculated that this would have resulted in $37 trillion more real GDP By 2004. The average American family would be three times wealthier today as a result.
  • Low income – or other – Americans would not have needed to “sacrifice” government largesse to achieve this result. At a 23 percent of GDP spending level, with comparable tax rates, government at all levels would have collected over $60 trillion more in taxes, enough to have funded all spending programs without public debt.
  • Going forward, if spending were reduced to 20 percent of GDP and tax rates systematically reduced to maximize growth, by 2030 real GDP would be double what we anticipate under current spending/taxing plans.

Other economists have urged even lower total government shares. After all, total government spending as late as the 1920s represented only 10 percent of the Nation’s income: seven percent for state and local governments, about three percent for Washington. Allocation of spending authority as between levels of government in today’s world has changed. Of the total, probably two-thirds would be national, with one-third state/local. But as Milton Friedman was fond of saying, if 10 percent was the right church tithe, why should government be entitled to a greater share?

 

OTHER STUDIES CONFIRM GOVERNMENT SPENDING IMPACT

 

Further confirming the Scully analysis, a Federal Reserve Bank of Cleveland study reviewed total government spending from 1946 to 1989 and found it had risen from 13.7 percent of GDP to over 22 percent. This led to a decline in the Nation’s economic output of over two percent on a permanent basis.

Economist and Cato scholar Dan Mitchell performed a worldwide survey of studies on “The Impact of Government Spending on Economic Growth” in 2005. Consistently he confirmed that as governments increase in size, a Nation’s rate of economic growth is substantially adversely affected. He recommended reducing government’s size to 10 percent of GDP to maximize economic output.

 

MODERN WEALTH OF NATIONS

A seminal work on the economic-growth-maximizing size of government, as a share of GDP – “The Scope of Government and the Wealth of Nations” – compared nations worldwide and nations with themselves at different times in their histories. The authors – economists James Gwartney, Randall Holcombe and Robert Lawson – determined that there is “a strong and persistent negative relationship between government expenditures and growth of GDP … (but) where nations reduced their government expenditures by an appreciable amount, this reduction in size of government was correlated with an increase in the growth rate of real GDP. [“The Scope of Government and the Wealth of Nations,” by James Gwartney, Randall Holcombe and Robert Lawson, Cato Journal Vol. 18, No. 2 (Fall 198),pp. 186-187]

The authors concluded, “What level of government expenditures would maximize economic growth? The data analyzed here can only present an upper bound because there is no evidence that any country in the data sets examined in this paper had a level of government expenditures insufficient to maximize growth. Some nations had government expenditures between 15 and 20 percent of GDP; those countries had higher rates of growth than nations with government expenditures in the range of 20 to 25 percent of GDP. There is no evidence that any of the nations examined here had governments so small that they inhibited growth.

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