THE BLOG

The Proper Size of Government is Big

02/26/2015 11:00 pm ET | Updated Apr 28, 2015

What is the proper size of government? We debate this question endlessly but fail to put it in any context. Americans would be well served by a basic understanding of the size of our government (federal, state and local), as a percentage of GDP, versus the rest of the world. To wit, the wealthiest nations on earth include a significant public sector, bar none. There are roughly 200 countries in the world today and the 34 member nations of the Organization for Economic Cooperation and Development have the highest living standards with an average total public sector of roughly 46% as a percentage of their GDP; the United States is now about 40% and in the lower third of these major countries. President Clinton was fortunately dead wrong when he claimed that the "era of big government is over."

Government foes should identify what they believe should be the proper mix between the private and public sector as a percentage of GDP, as opposed to offering gauzy pronouncements about "smaller government." We often hear some version of President Reagan's old saw that "government is the problem," but the facts hardly bear this out. Americans might want to ask themselves if they were forced to choose between reducing the public sector by 15% versus increasing it by 15%, which would they prefer? The former would equal Mexico's 25% government mix and the latter France's 55% public sector. I think most Americans would choose France. Perhaps because of his experience leading a giant government operation as Allied Commander, Republican President Eisenhower believed firmly in government. Thus, in addition to signing the Federal-Aid Highway Act (the largest public works project in American history at that point), he founded new agencies like NASA and the precursor to DARPA that is credited with funding the initial building blocks of today's internet. The private sector imaginatively leveraged these public investments to which we all benefit greatly.

In fact, the wealthiest nations on earth are all characterized by economies with a dynamic and robust public-private partnership. That this fact isn't patently obvious to most citizens is puzzling. There are key functions for government including investment (education, infrastructure, R&D), civil justice, public safety, public health, national security, and safety nets. Many people do not realize the value of these functions until they lose their own benefits. Moreover, government size isn't positively correlated with government debt because many countries choose to actually pay their bills through adequate taxes instead of heavier borrowing; Canada, Germany and Sweden all have bigger public sectors but smaller government debt as a percentage of their economies. Total U.S. Federal tax collections as a percentage of GDP remain below their postwar annual average.

Government detractors often cite the superior capital allocation mechanisms in the private sector as the basis of their thinking but engage in cherry-picking of the highest order. For instance, often cited is the government's investment in Solyndra as proof positive that the government doesn't know how to invest. However, modern day computing clearly rests on government defense initiatives in England and America. The US Department of Defense's DARPA division noted above is most often cited as where today's internet was born. Polio and cholera are no longer threats because of Uncle Sam's contributions and today we all vitally depend on the scientists working at the Center for Disease Control. Many of the returns from Uncle Sam's initiatives are too far out into the future to attract private investors.

I'm a committed private-sector loving guy who invests capital for a living, so why the appreciation for the public-sector? For one, I've seen first-hand for nearly 30 years how private allocators of capital often get it terribly wrong, too. In 2011 Hewlett Packard bought Autonomy Corporation, PLC for $11 billion and in 2012 wrote off $9 billion. Oops. In fact, perennial corporate write-offs from over paying for acquisitions are routine in the private sector and in each instance represents a poor capital allocation decision.

Second, it's clear to me that public sector investments enable private market success in a myriad of ways and are necessary to a vibrant, fair and productive society. As a resident in the nation's Capital area I meet and know lots of fabulous, hard-working government employees. My friend Woody who works at NASA is the first to leave our block early in the morning and the last one home at night. Before he retired, Vince used his PhD from MIT to insure the safety of our nation's drugs at the federally funded FDA. The Clean Water Act of 1972 that Steve helps implement at the EPA has been a hugely successful piece of bipartisan legislation that relegates the burning of the Cuyahoga River in 1969, the result of corporate polluting, to a distant past.

Government haters remind me of adolescents pumping their chests to proclaim that they don't need mom and dad. And then Katrina, Sandy or Ebola hit and the most ardent detractors, and often their Republican Governors, come crawling to Uncle Sam asking for help. Or a malady strikes a family member and the erstwhile detractor supports a big government-funded research effort in that disease. Representative Ryan wants to reduce government social spending but when his father unexpectedly died when he was 16, it was Uncle Sam showing up in the form of a social security survivor's check that helped him pay for college. Was he one of Romney's "takers" during this period?

To be clear, public-sector spending could benefit from private-sector discipline, investments should be carefully weighed with a return in mind and accountability should rule. But the current Republican Party, hijacked by government haters, has boxed itself off from its more balanced history. Imagine a Republican Party animated by its 1958 Platform which said, "We are proud of and shall continue our far-reaching and sound advances in matters of basic human needs--expansion of social security, broadened coverage in unemployment insurance, improved housing and better health protection for all our people." Socialism? Government is a collective insurance policy from which we all draw wherein taxes are the annual premium. Yesterday's Republicans didn't argue that very simple point and yesterday's Democrats didn't shy away from defending that truth.