Thursday, August 26, 2010

How does one go about calculating the right size for government?

There is plenty of chatter about whether and how to cut the federal budget to reduce if not eliminate the federal budget deficit, but nobody is raising, let alone addressing the key question of how exactly should we be calculating the optimal size for the federal budget or even the size of the federal government itself. And this is just a fraction of the overall problem of grappling with overall government, including state and local government. I think most people are willing to accept that during a crisis, economic or otherwise, it is temporarily okay to run a federal budget deficit, even a significant budget deficit, until the crisis passes to moderate the crisis itself, to moderate the impact of the effects of the crisis and to help accelerate recovery from the crisis. Judging the acceptable size of a short-term budget overrun is hard enough, but at the same time we need to remain cognizant of managing the underlying non-crisis bulk of the budget and size of government itself so that once the crisis passes we will find ourselves back "on budget."

One key problem is that a good fraction of the growth of the economy over the previous decade was basically "fake" in the sense of based on unsustainable finance and business practices which led to the recent crisis, such as companies that would not even exist if credit hadn't been so cheap and readily available. Government itself grew in response to the economy growing, but now that we have "reset" the economy to be more sustainable (with more work still to do), we need to consider how to "reset" government itself. This means we need an extensive and open debate in two areas: 1) how much and how to shrink the baseline size of the federal government to reflect a sustainable growth rate (once all current artificial stimulus is removed), and 2) what areas of government actually need to be beefed up and by how much to assure "good governance" that will avoid a repeat of the difficulties of the past decade.

Ultimately, the key question is what level of "services" does the government need to provide to society to assure that public safety, civil rights, and economic security are "protected." This depends on also answering the questions of what roles and responsibilities should be played by individuals, families, local and state governments, businesses, and private organizations. And of course we have the issue of what the federal government needs to do as opposed to state and local governments.

Maintaining the status quo is always a bad answer, especially in a society and economic system that is growing and as dynamic as ours. As a trivial question, if population grows by X% and GDP grows by Y%, what Z% should government grow by? I have seen nobody even begin to address these types of questions.

I am not ready to propose answers here because to me the first step is that we have to get the questions right. If we as a society cannot even agree on what the "right" questions, agreement on the answers is moot.

To put the question simply, if you didn't know the size of the federal government and its budget, how would you go about calculating what size both should be?

-- Jack Krupansky


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