At The American Sean Speer and Charles Lammam lay out the case that once the size of government has exceeded some fixed percentage of GDP that further increases in the size of government will be accompanied by declines in economic growth:
Di Matteo examines international data and finds that, after controlling for confounding factors, annual per capita GDP growth is maximized when government spending consumes 26 percent of the economy. Economic growth rates start to decline when relative government spending exceeds this level. In other words, there is a hump-shaped relationship between the size of government and economic growth (this relationship is often referred to as the Scully Curve, named after the economist Gerald Scully).
According to OECD data, the size of government in the United States was approximately 40 percent of GDP in 2012. While Di Matteo’s estimate of the tipping point is based on international data, it suggests that President Obama should reduce government to boost the U.S. economy. This conclusion is supported by a larger literature (see here, here, here, and here) that has also found that a smaller size of government than what currently exists in the United States would translate into higher annual economic growth.
While I’m open to the possibility that the assertion is correct, they don’t convince me that it is or that you can make that determination using the methods that are being employed. For one thing, I’m skeptical that all economies react the same way to big governments and most of the studies of the relation between government size and economic growth have been international.
I’m much more interested in ways and means for increasing production since I think that the particular problem of the U. S. economy is that we don’t produce enough of what we consume.
However, I’m suspicious about the premise as well. Do we really care about maximizing GDP? If we could add $10 trillion dollars to GDP and all of that $10 trillion would be put into the hands of one individual, would it be a policy we’d want to pursue? A hundred people? A thousand? Why?