The optimum size of government


Richard W. Rahn, senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth, has an interesting article in the Washington Times on the optimum size of government. 

Rahn explains that economists from the Institute for Market Economics in Bulgaria have determined new estimates of the optimum size of government. They conclude that its optimal size is less than 25 percent of GDP.

Rahn claims that: “Rather than increasing the size of government, the empirical evidence shows that sharply reducing taxes, regulations, and government spending down to at least 25 percent of GDP would do the most to spur economic growth and create more jobs over the long run". As the excellent Peter Schiff has also argued, reducing its size is the one thing that governments can do to lessen the impact of the financial crisis.

There are of course problems with just looking at GDP as an indicator of the impact of government upon the economy. Through various regulations, the government has so many other ways to lesson the economic competitiveness of the people. Just take a look India before and after Manmohan Singh rightly threw much of License Raj in the intellectual dustbin of history. It is strange that while developing countries are continuing to unburden themselves of regulation with such profound effects on the lives of people, the UK and other more developed countries are heading in quite the opposite direction.

Frankly, 25 percent of GDP does not go far enough for me. This would take us back to pre-WWII levels; instead, we should be aiming to return to pre-WWI levels of less than 15 percent. However, given that UK public spending is over 40 percent of GDP, 25 percent would be a very welcome step.

There are more than pragmatic reasons to believe in small governments, but economic analysis such as this should be enough to convince individuals on the fence, though not many politicians I suspect.