Right wing forces in this country are obsessed with the size of government, but the fundamental debate we should be having is not the size of government but what the goal of government should be: What should government's central mission be?
There are four major views on this question in modern American politics, two in each political party.
The first Republican view is very simply boiled down to the central organizing principle that government should be as small as possible. That's it. Size (the small variety) not only matters, but is the only thing that matters. Any mission or goal that government has is over-ridden and overwhelmed by the urgent desire to make it smaller. Whether cuts in the size of government are rationally planned doesn't matter, as their rhetoric on the sequester makes clear. Whether cuts in the size of government hurt people or hurt the economy as a whole doesn't matter either, not a whit. I have heard heart-breaking stories, for example, of parents with disabled kids lobbying against the cuts that will devastate the programs that help their children, with Republican Congressmen telling them it doesn't matter, we just have to cut the size of government. Grover Norquist famously said that he wants to make government so small that he can drown it in a bathtub, and his Tea Party comrades are clearly trying to do exactly that at the cost of everything else.
While all Republicans talk about wanting to make government smaller, the other Republican view on what the mission of government should be is less focused on size, and more focused on this central thing: serving the needs of big business. This idea was most famously (or infamously) articulated by the former Republican chair of the House Committee on Financial Services in 2011 when he said "In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks." However this philosophy has long been the establishment Republicans' central organizing principle when it comes to what government should be doing. George Bush and Karl Rove, for example, were happy to add a drug benefit to Medicare as long as it was structured around maximizing big drug companies' profits. And for decades now, all the Republican talk about local control tends to magically disappear when big business comes to lobby for the feds preempting pesky state and local regulations. The fact is that the size of government exploded under Bush's watch because drug companies and Wall Street and other industries wanted sweetheart deals, subsidies of all kinds, and bailouts, and Rove and Bush never blinked when those industries came asking for government largesse.
The first of the modern Democratic Party theories about the mission of government is the most complicated of the 4. This theory says the mission of government should be that it should make some investments in our people and the economy, that there should be a safety net for the poor, but that (most importantly) government should work to steady and stabilize the status quo. I became intimately familiar with this philosophy in the Clinton White House by working with Bob Rubin and his acolytes. Bob, to his credit, believed very much in putting money into programs for the poor, even opposing the welfare reform Bill Clinton ended up signing; he was always for making investments in schools and infrastructure and R&D; but his central focus was on preserving the status quo, or even strengthening the position of, the business community. He was consistently opposed to doing anything that would upset major businesses too much, and if big banks made bad loans or investments or speculative bets in foreign currencies, he was always for bailing them out. This generation's Rubin has been one of his protégés, Tim Geithner, who was passionately focused on one big thing throughout the financial crisis and the years since: preservation of the financial status quo. When given a choice of restructuring or simply reviving the financial system, Geithner in each and every instance chose simply reviving it.
The final philosophy about the central mission is that of the progressive populists, who argue that government's central mission should be strengthening and expanding America's broad middle class. There is clearly some overlap between this mission and the other Democratic philosophy, as both of them argue for helping the poor and making investments in education, infrastructure, and other things that help create middle class jobs in the long-term. But progressive populists believe that government should be pushing for higher wages and better benefits, and for workers to have the ability to unionize and have more rights at work. Just as importantly, progressive populists believe that big businesses who impact negatively on the middle class by concentrating industry power, manipulating markets, crushing their smaller competitors, damaging our environment, and driving down wages and benefits should be strongly regulated and stopped from harming the poor and middle class. If that means being disruptive of and challenging to the establishment status quo, as it frequently does, progressive populists are happy to be disruptive.
Many Democrats, including President Obama and my old boss Bill Clinton, have always had one foot in one camp and one in the other of these 2 Democratic philosophies. The rhetoric, especially lately, has moved more toward the latter philosophy, but the policy specifics and appointments have too often stayed with the former. But you can tell the energy is rising in the Democratic Party in the latter camp, as demonstrated by the strong following Elizabeth Warren has built when she hammers away on the establishment. Here's a clip of her pushing Fed Chief Bernanke on the Too Big To Fail question:
And in a widely viewed clip of her very first hearing as a member of the Banking Committee, she got tough on Obama administration appointees for settling for status quo (and not very effective) banking regulation:
When politicians like Warren take on the establishment in order to fight for the middle class, Democratic activists get very stirred up, and the rest of the party needs to take note.
Neither Republican philosophy about the mission of government will ever become a majority in American politics -- the Republicans have to pretend those aren't their views to have a chance at getting elected. But for both policy and political reasons, the Democrats need to firmly pick the side of middle class and low income Americans, and not worry so much about preserving and protecting the establishment.