The Proper Size of Government

A common charge voiced against libertarians is that they should promote social and political anarchy. “Why don’t you move to Somalia?” critics wonder about proponents of limited government as though the poor East African country were a textbook example of a free society. Such rancor misses the point entirely. Laissez-faire doesn’t prosper in lawlessness.

A free market cannot exist without a set of objective rules, codified in law. The proper function of government is to uphold those rules which protect men against violence, force and fraud. As Ayn Rand would have it, the purpose of government is threefold: to protect its citizens from criminals, from invasion and from the infringement of their natural rights. As such, it has to provide a police force, a national defense and courts of law. Any government that oversteps these boundaries risk succumbing to frustrating men’s rights instead of protecting them.

Government’s spending is a clear indicator of whether or not it restricts itself to its proper functions. Daniel Mitchell, a tax policy expert with the Cato Institute, argues that “there is a growth maximizing level of government spending. Once the budget exceeds that point, economic performance begins to slip.”

Different studies profess that the tipping point lies somewhere between government spending amounting to 15 and 25 percent of GDP. For comparison, public spending in the United States has steadily increased over the past ten years or so from 35 to almost 40 percent of GDP today. It is likely to increase even further in the years ahead.

The exact, ideal amount of government spending is difficult to pinpoint for as Mitchell explains, the statistics are “constrained by a lack of data from countries with limited government.” Even in Hong Kong, otherwise a little free market paradise, the state controls almost 20 percent of the economy.

Yet the correlation between the size of government and economic growth is abundantly clear. The 2010 Index of Economic Freedom published by the Washington-based Heritage Foundation and The Wall Street Journal leaves no doubt that countries with low government spending along with a solid protection of property rights and free business environments economically outperform countries where government overspends and regulation is stringent.

No matter what exactly constitutes a healthy level of public spending, what’s clear, says Mitchell, is that “government today is far too big and this is hurting growth, undermining prosperity and reducing competitiveness.” This is true for the United States as it is for many countries and political parties both left and right are to blame. “If we want a strong economy,” notes Mitchell, “we need to dramatically reduce the burden of government spending.”

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