Over the last few decades, many economists have done studies on the “optimum” size of government. A new study just completed shows the optimum size of government is less than 25 percent of GDP.
Optimum is defined as that point just before government becomes so large as to reduce the rate of economic growth and job creation. Governments are created to protect people and property. A government too small to establish the rule of law and protect people and their property from both foreign and domestic enemies is less than optimal.
The American Founding Fathers also believed government had public health functions (as contrasted with spending on private health), such as draining swamps where malaria‐infected mosquitos thrived; and some public works functions (e.g. building and maintaining roads, and ensuring basic education — but not necessarily state‐operated schools).
The American Founding Fathers also understood that government could easily become too large, which would diminish the liberties of the people and discourage them from engaging in productive activity. The socialist utopians were in denial of the basics of human nature, which scholars like Adam Smith and the American Founders well understood.
Nevertheless, countless socialist schemes to enlarge the size of government have been sold to naive people. After two centuries of experimentation and the unnecessary loss of hundreds of millions of human lives, most of mankind now understands that pure socialism leads to tyranny and economic stagnation.
The question remains: Between the extremes of virtually no government and a pure communist state, how much government is necessary and desirable, and when does it become a drag on both liberty and economic well‐being?
Economists have tried to quantify the question by looking at the experience of countries (and economic/political entities) over time as the size of their government grew or contracted, and by making comparisons of governments of various sizes. Most studies measure the size of government as a share of GDP (realizing it is an imperfect measure because it does not measure counterproductive regulation, restrictions on liberty and other factors, but is a reasonable approximation).
Wise observers have well understood that free markets and uncontrolled prices do a far better job in allocating resources (labor and productive investment) than politicians, who tend to resort to deciding what they believe is best for other people and, of course, rewarding their friends.
Most of the studies of the optimum size of government made by reputable scholars in recent decades have indicated that total government spending (federal plus state plus local) should be no lower than 17 percent, nor larger than about 30 percent of GDP. In a just completed paper, economists at the Institute for Market Economics in Sofia, Bulgaria, have provided new estimates of the optimum size of government, using standard models, with the latest data from a broader spectrum of countries than had been previously available. Their conclusion is that there is a 95 percent probability that the optimal size of government is less than 25 percent of GDP.