Ryan's Wrong Assumptions About the Size of Government

One recurrent element of Paul Ryan's budget ideas, which is present in his new fiscal blueprint released today, is that government revenues and spending should be consistent with "historic norms." Ryan wants to see tax revenues at roughly 18 to 19 percent of GDP in coming decades, and spending levels at about 20 percent. In contrast, Obama imagines a somewhat heavier tax burden, just over 20 percent of GDP, and spending at about 23 percent of GDP.

Ryan is not alone in wanting future tax and spending levels to reflect historic norms. This same call has been made for a few years now by an array of conservative politicians and organizations. Even Democrats like Senator Claire McCaskill have called for capping federal spending at around 20 percent, citing historic averages.

Two flawed assumptions underlie these calls: First, there is an almost religious view that increasing the size of government by a few percentage points of GDP will necessarily dampen economic growth. But it is rarely made clear why this might be so. Certainly that has not been the U.S. historic experience. For instance, government spending as a percentage of GDP grew by over 25 percent during the 1950s -- but the economy grew, too, during that decade. Looking abroad, other countries have also seen periods of growth coincide with increases in government spending. Just look at China, where public spending as a percentage of GDP is now up to 24 percent. Indeed, many of the East Asian economic powerhouses rose to prosperity partly thanks to an activist state and expanded government spending.