Mitt Romney pitches smaller government: Is his target realistic?

Among the many themes that reverberated in the first presidential debate, perhaps none summarized the contest so much as this: President Obama defended a sizable and active government as a building block of economic growth, while challenger Mitt Romney said healthy job creation depends on sharply rolling back the federal government's scale.

"Spain spends 42 percent of their total economy on government. We're now spending 42 percent of our economy on government. I don't want to go down the path to Spain," Mr. Romney said in the debate in Denver on Wednesday night.

His reference to a European nation in crisis came as the candidates sparred over how to curb federal deficits. That should be done via spending cuts, not tax hikes, the former Massachusetts governor said.

"The problem with raising taxes is that it slows down the rate of growth and you could never quite get the job done," he said. "I want to lower spending and encourage economic growth at the same time."

Mr. Obama, by contrast, said that even though deficit reduction is important, so are public investments that can help generate economic growth. And he derided Romney's call to cap federal spending at 20 percent of gross domestic product.

"The magnitude of the tax cuts that you're talking about, Governor, would end up resulting in severe hardship for people, but more importantly, would not help us grow," Obama said to his Republican rival.

Where does the truth lie in this debate? Is it feasible – and economically helpful – to try to hit Romney's 20 percent target?

To some extent, the answer will be in the eye of the beholders. Voters will render a ballot-box verdict on whose overall vision they find more persuasive, this issue included.

But as US citizens weigh the candidates and their plans, economists and policy analysts offer the following points, which could help clarify the choice:

Romney's "20 percent of GDP" target for federal spending is ambitious. For context, if federal spending were cut by four percentage points of GDP (about $600 billion) immediately, that would represent cutting about $1 for every $6 spent. Romney would want to achieve this goal by the end of a first term.

The leaders of Obama's bipartisan fiscal commission, Erskine Bowles (D) and Alan Simpson (R), came up with a deficit-reduction proposal that aimed to bring spending down to 21 percent of GDP. Obama's budget calls for a spending total of 22.2 percent of GDP in 2017, the fourth fiscal year after the next presidential term begins.

All those targets come in below what the Committee for a Responsible Federal Budget, a nonpartisan group that urges deficit control, calls a "realistic baseline" based on current policies, in which spending would stay above 23 percent of GDP.

Romney's spending plans are short on detail. He has pledged that "by the end of my first term, I will bring federal spending as a share of GDP down from last year’s staggering 24.3 percent to 20 percent or below."

By the way, why is the 24.3 percent figure so different from the 42 percent one he cited in the debate? The answer is that higher figure is one that includes state and local governments, tallied by the international Organization for Economic Cooperation and Development.

Romney hasn't offered a full plan on how to reach his goal, says Maya MacGuineas, president of the Committee for a Responsible Federal Budget. Voters deserve more specifics, she argues, so they can weigh the idea's costs and benefits.

Obama tried to nudge Romney on this point in the debate: "You know, his running mate, Congressman Ryan, put forward a budget that reflects many of the principles that Governor Romney's talked about. And it wasn't very detailed. This seems to be a trend. But ... if you extrapolated how much money we're talking about, you'd look at cutting the education budget by up to 20 percent."

"I'm not going to cut education funding," Romney replied.

What he has specified is a three-pronged strategy on spending cuts: eliminate unneeded programs using a China test (is it so important that the United States would borrow money from China to pay for it?), turn other programs back to the states (with block grants to help them pay, in the case of Medicaid and worker training), and "sharply improve the productivity and efficiency" of government.

In the debate, Romney generated Internet buzz by naming Big Bird of "Sesame Street" (along with the Public Broadcasting Service generally) as something he liked but that wouldn't pass his China test. Separately, he has identified Amtrak, funds for family planning, and foreign aid for cuts.

He says he'll cut the federal workforce through attrition and try to repeal the "union giveaway" called the Davis-Bacon Act.

So some guidelines and nuggets have emerged. But those remain different from releasing a detailed plan with line items for each federal agency.

Whether Romney's target is "realistic" is a matter of politics more than economics. There's no magic number for the correct size of government, and budget experts don't call 20 percent impossibly small, given Romney's call for Medicaid block grants to states and his different approach to health-care reform. 

But is his plan viable politically? That's a different question. Ms. MacGuineas is one of many budget experts who say that entitlement reform and other elements of a debt solution will ultimately require bipartisan support. US public opinion appears split, with voters supporting efforts to streamline government but also wary of a "spending cuts only" approach to fiscal reform.

Many economists expect the solution will require a mix of tax hikes and spending cuts. And even if Romney's goal were pursued aggressively over the next decade, some economists doubt the 20-percent-of-GDP level could be sustained against the backdrop of rising baby-boomer retirements after 2020.

"Pressure is just going to grow over the longer term," argues Diane Lim Rogers, chief economist at the Concord Coalition, another group supporting fiscal reform. "Romney really is proposing a much smaller government," going well beyond merely cutting waste, she adds.

Economists in the Romney camp argue that mainstream budget experts don't give enough credit for the added economic growth that could result under Romney, as businesses feel greater certainty about low tax rates, a favorable regulatory climate, and shrinking deficits. 

Neither candidate has won widespread acclaim on deficit reduction. Each side has its partisan cheerleaders at think tanks and in academia.

By some forecasts, Romney has an edge in this arena. A budget plan put out by Rep. Paul Ryan (now Romney's wingman in the race) calls for outstanding federal debt to fall from about 74 percent of GDP today to 62 percent by 2022. That plan from Ryan and House Republicans may offer the best proxy for a Romney budget. (Romney hasn't embraced all elements of the House proposal, but he has expressed general support for many of its ideas.)

The Congressional Budget Office estimates that Obama's proposed budget would leave federal debt at 76 percent of GDP in 2022. For reference, the CBO projects that a current-law base line would bring debt down to 61 percent of GDP by that year. Note that "current law" assumes that the Bush tax cuts expire, so the debt reduction happens largely on the tax-revenue side, whereas Romney would rely entirely on spending cuts.

Although Romney's backers say his plan should do better in practice than the CBO projects, others say there's no guarantee of that – with uncertainty about both his spending-cut plans and his aim for a revenue-neutral streamlining of the tax code.

Where the House Republican plan aimed for the federal deficit to be about 1 percent of GDP in 2022 (and for much of the next decade), Obama's budget has the deficit at 3 percent of GDP in that year. This could prove to be dangerously high, given that the nation's economy may not grow as fast as 3 percent in coming years.

Romney's economic argument has some evidence to back it up. Some economic research finds that, all else equal, nations with smaller government enjoy faster economic growth.

In a 2011 study for the Research Institute of Industrial Economics in Sweden, Andreas Bergh and Magnus Henrekson found "most recent studies" conclude that as the size of government goes up, the pace of economic growth is harmed. Noting that Sweden has enjoyed strong growth alongside a large government, they still argue that "this does not mean low-tax countries can increase taxes without expecting negative effects on growth."

To cite one example from the study, a group of English-speaking nations with relatively small governments in the period from 1995 to 2004 posted per capita growth of 2.3 percent per year, compared with 1.5 percent for a group of larger-government nations on the European continent. The English-speaking countries were the US, Britain, Canada, and Australia.

That said, many economists also agree with Obama's point that public investments play a role in growth. The Sweden-based survey itself argued that investments in human capital (education) can increase growth.