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Mitt Romney pitches smaller government: Is his target realistic?

While President Obama sees sizable government as fostering economic growth, Mitt Romney wants to cap federal spending at 20 percent of GDP. Is that goal feasible – and economically helpful?

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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. 

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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.

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