Sometime soon, politicians in Washington DC will decide whether to lift the statutory limit on federal borrowing, the so-called ‘debt limit.’ In thinking about this monumental issue, it would be inappropriate to side completely with either the Democrats or the Republicans. The whole matter has careened so far out of control that the abundant blame for this unfortunate impasse has to be shared on both sides of the aisle.
Nonetheless, before assigning blame, it is best to chart the correct course of action. Here, the first question is not how to fund government expenditures, but what in principle is the proper size of the federal government? It is not sufficient to simply argue that government is either too large or too small. Rather, the challenge is to take each class of expenditures separately, in order to determine whether the last dollar spent on any particular area produces a gain that is greater than the next best use of those dollars. It could be the case, therefore, that the overall size of government is too large, even if certain types of expenditures are too low.
