Size of Government

An interesting discussion by Matt Yglesias and Kevin Drum on how big we on the left believe government should get.  Kevin is arguing that the Government should not grow to be more than about 50% of GDP, where it is about 40% now.  Matt thinks that trying to set an arbitrary limit doesn't make much sense, as the economy grows and changes the extent to which government expenditures will rise and fall may be very different from what is appropriate in today's economy.  It is far more important, in Matt's opinion, for the government to be looking for more sensible ways to earn and spend revenue.  By sensible ways to earn revenue he is talking about placing costs on things like the use of roads, or dumping carbon into the atmosphere, where there is a social good in reducing the activity.

I'm very much on Matt's side in this discussion.  In fact, I'm rather of the opinion that the discussion of the fraction of GDP accounted for by government is a very misleading statistic.  It seems to me that government, by its nature, provides a number of services that are very valuable.  And by valuable, I mean in an economic sense.  If these services were not provided by the government people would pay money, or what is the same thing, exchange their labor for these services. Among these services are certainly basic security.  But in today's world would also include copyright protection, licensing the airwaves, risk avoidance via incorporation, and a number of other such services.  Let's assume the government is going to provide $100M worth of such services, copyright protection for example, to some group of citizens.  If the government provides this service to these citizens for free, with no requirement of anything in return, then the government's share of the GDP is unchanged.  The government is only becoming bigger then if it provides this service, charges some money in exchange for the service and then spends the money on some activity of public interest.

It seems to me, however, that this later case, trading the service for something of public interest rather than giving it away, is prefereable to just giving it away.

The problem is that giving the value of the services provided by the government, government is, and always will be, something like 90% of GDP and there is nothing that can be done about it.  Get rid of government services and the government expenditures will go down, but so will the economy and the result will be a poor country were 90% of the GDP is due to government activity.  For what it is worth, I prefer a rich country where government is this large share of GDP to a poor country where government is a large share of GDP.

This is not to say that the intrusion of government cannot be greater or lesser.  This argument is only to say that fraction of GDP is a useless statistic for guaging how intrusive government is.