NCPA - National Center for Policy Analysis

THE OPTIMUM GOVERNMENT

January 29, 2009

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, asks Richard W. Rahn, a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth?

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 gross domestic product (GDP).

However:

  • Because most governments are -- and have been for many years -- larger than the optimal, there are insufficient data to give a point estimate as to the best size, other than it is less than 25 percent.
  • Other studies have shown small-population homogeneous countries, such as Finland, may have slightly higher optimal government sizes than heterogeneous countries, such as Switzerland and the United States.

The ramifications of this study and previous ones are important for the current debate going on in the United States and many other countries, about having the government spend more to "stimulate" the economy -- i.e. create jobs and increase growth rates, says Rahn.

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, says Rahn.

Those members of Congress and parliamentarians in other countries who vote for a "stimulus package" that increases the size of government will be voting for slower economic recovery and higher rates of unemployment over the long run, based on both solid empirical evidence and theory, says Rahn.

Source: Richard Rahn, "The optimum government," Washington Times, January 29, 2009.

For text:

http://www.washingtontimes.com/news/2009/jan/29/the-optimum-government/ 

For study:

http://ime.bg/en/articles/the-alternative-budget-of-ime/ 

 

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