Why the Size of Government Matters:

In his inaugural address, President Obama said that “The question we ask today is not whether our government is too big or too small, but whether it works.” This is a commonly heard argument in response to concerns about the growth of government. Who could possibly be against government when it “works”? Why not instead consider each proposed expansion of the state on a case by case basis, supporting those that “work” and opposing any that don’t?

Taken seriously, this argument leads to the rejection of any systematic constraints on government power. Why should we have a general presumption against government regulation of speech or religion? Why not instead support censorship when it “works” by improving the marketplace of ideas, and oppose it when it doesn’t? Think of all the misleading speech and religious charlatans that government regulation could potentially save us from!
The answer, of course, is that government regulation of speech and religion has systematic dangers that are not unique to any one particular regulation. Given those systematic flaws, it makes sense to have a general presumption against it.

The same holds true for government intervention more generally, including in the economy. It too has systematic flaws that justify a presumption against it. Three of those flaws are particularly relevant to current policy debates.

First, government officials have poor incentives relative to the private sector. Because the resources they spend are not their own money, they are more likely to waste them or divert them to favored interest groups. These poor incentives are visible in almost every major government spending bill, where large amounts of money are spent on porkbarrel projects and the like. The current stimulus bill is no exception, with its handouts for a variety of interest groups.

Second, as I have often emphasized in my academic work and on this blog, the quality of government policy is severely compromised by widespread voter ignorance. The majority of voters know very little about public policy and make poor use of the information they do have. Voter ignorance and irrationality are perfectly rational, because the chance that any one voter’s knowledge will make a difference is infinitesmally small. Still, they routinely result in voters supporting flawed policies and doing a poor job of evaluating the performance of elected officials. For example, they blame politicians for bad weather, and routinely support protectionism despite the overwhelming evidence against it. The dangers of voter ignorance are likely to increase as government grows. The bigger government gets, the more of it there is for voters to monitor, and the more difficult it will be for them to have even a superficial knowledge of all its functions.

Third, even relatively well-informed voters and well-intentioned government officials will often lack the information they need to allocate resources more effectively than the market would in their place. As F.A. Hayek argued in his classic essay, “The Use of Knowledge in Society,” government planners lacks the kind of information that the price system routinely provides to market participants. Thus, they usually have no way of knowing whether the projects they want to spend tax money on will yield benefits that outweigh their costs.

These systematic shortcomings of government are particularly dangerous in times of crisis, like the present. Given widespread voter ignorance and their own perverse incentives, government officials often use crises to justify harmful expansions of government power by selling them as emergency measures – even if they have little or no real connection to the emergency in question. This is why White House Chief of Staff Rahm Emanuel says that “[y]ou never want a serious crisis to go to waste” because it is “an opportunity to do things you could not do before.”

The current spending bill before Congress is no exception. It is being marketed as a “stimulus.” Yet only 8% of the new spending will occur this year, and only 41% in the next two years – too late to provide stimulus while the recession is still ongoing. This suggests that most of the new spending isn’t really about stimulus and has more to do with other policy priorities that are being misleadingly sold as emergency measures.

These points don’t prove that all government interventions are undesirable. It is possible for them to be outweighed by other considerations in any given case. They do, however, show that there is reason for systematic concern about the size of government, and for a strong but not insuperable presumption against its expansion. In the same way, we have good reason for a presumption against government regulation of speech and religion, even though that presumption cannot be absolute. We can, for example, ban shouting “fire” in a crowded theater, yet still have a general rule against censorship.

To put it in Obama’s terms, our society will “work” a lot better if we can prevent government from getting too big. And that requires paying a lot more attention to the state’s rapidly expanding waistline than the president wants us to.

UPDATE: I should have noted that the 8% figure is for the percentage of spending in the current fiscal year (which ends September 30), rather than calendar year. I don’t think this difference of three months is critical, but I do want to correct the error.