Don't let government's size exceed its value

American families and businesses, already battered by the worst economy in decades, face even greater burdens if government raises taxes to insulate itself from the recession it helped create. Tax hikes highlight a fundamental public budgeting problem that threatens long-term economic stagnation or decline.

Private companies can increase their revenues only by delivering more value to others. They must find ways continually to do more with less to beat their competition and thereby retain their existing business and get new business. So, over time, economic competition drives down costs while improving quality, value and consumer choice - and competitive sectors take declining percentages of our resources while delivering ever-increasing value.

As one example among many: in 1925, 25 percent of the family budget was spent on food; today it's only 10 percent, yet we get a more nutritious, varied and enjoyable diet. Thus, the private sector works efficiently, promotes human well-being, and serves the public interest.

Government budgeting, without regard to value delivered, piles up spending increases with unsound formulas ("roll-ups," etc.) and new ventures of usually dubious merit, while greatly ignoring needs for productivity gains the private sector continuously makes. By increasing taxes to pay for its faulty budgeting, government evades the public-interest need to do more with less, which is essential to human progress.

Due to this built-in inefficiency and for other political reasons, American government has grown from 8 percent of a small economy a century ago to about 33 percent of a huge economy now. The situation is even worse in Old Europe, Canada and Japan.

An extensive economic literature uses data from many countries over decades to verify the well-established theoretical point that there's an optimal balance between the public- and private-sector shares of the economy. Because every dollar taken in taxes is an act of destruction of human well-being, the public-sector size needs to be limited to levels at which benefits from public spending exceed the damage from taxes.

The empirical research shows that the optimal fraction of modern economies devoted to the public sector is about 22 percent (perhaps less), much lower than the percentage we reached long ago. So, the current size and reach of government slows economic growth, diminishes human well-being and is contrary to the public interest. Net increases in taxes, public spending and regulation relative to the economy makes matters worse and are justified only for circumstances such as World War II (which this is not).

Research on the optimal extent of state and local government shows that state/local fractions in most states are too large. The state/local total has remained modest relative to Nevada's economy " a major reason why, for half a century, we've had the fastest growth rates in population and our state economy. In a free country, people vote with their feet (to the chagrin of statist liberals).

Note what's clear in this discussion: Government is absolutely necessary and should not be cut too far - but its share should be greatly cut at the federal level and in many states, and its growth strictly restrained in modest-government states like Nevada. Many statist liberals lie about this matter by claiming that limited-government advocacy is just anti-government rant motivated by ignorance and self-interest, if not evil. Ignorance and self-interest is really their problem: they confuse the public sector with the public interest, but an excessive public sector is contrary to the public interest.

Public-sector growth is not sustainable and is driving our economy toward stagnation and decline. Already, statists have shunted off to our children the burdens of untenable promises on Social Security, Medicare, public-employee pensions and benefits, guarantees for unreasonable defined-benefit pensions, ineffective "green" programs, etc. Now they seek to socialize health care and add bail-outs, not just for financial institutions, but for anything they can label "investment" or "infrastructure".

America truly faces now what Ronald Reagan decades ago called, "A Time for Choosing". At the very least, let's not let them turn Nevada into East California.

n Economist and University Regent Ron Knecht, of Carson City, has spent half his working life in government and half in entrepreneurial small business.