When it comes to the size of government, smaller is better: better for the economy; better for the taxpayer; better for freedom.
What politicians decide will be the size and scope of the government is of great importance to our economic recovery. It would have helped two years ago—when Obama first got into office—if we had discussions about what to cut. But since we didn’t we are now more in debt because of government deficit financing and other big government ventures.
If we shrunk the size of the government, which means unproductive jobs—and all government jobs are unproductive because they drain the private sector—are lost, labor will be free to pursue productive jobs in the private-sector. Moreover, the taxpayer would not be on the hook for the excessive benefits government workers receive that have no parallel in the private sector.
The Cato Institute has been very helpful in outlining which Departments—yes whole departments—of the U.S. Government to cut. They proposed 15 different departments that could be cut in a very short document. This short work is important because Democrats always stick the same question to Republicans, "Well, what would you cut?", as sort of a defeater for Republicans; and when they can't, and usually don't answer, they get big Democratic eggs on their faces (The non-answers, of course, don't justify the persistence of Democrats keeping projects like Social Security and Medicare publicly-funded; nor does it justify expanding the size and scope of government). When Republicans do answer, it is usually something small; something that would hardly fix anything. (I am reminded of the response a few weeks ago that they will cut spending to 2008 levels, as if that is hardly enough!)
If I were a Republican, I'd begin where everyone is criticizing me at: Defense Spending. That means immediately ending the wars, closing the 100+ overseas bases, and, in a Jeffersonian move, shrinking the size of the military as well. Then I'd move on to privatizing Social Security and Medicare. As for cutting out American's unemployment insurance, I would not. Unemployment insurance is just a fraction of the budget. It can stay for a while.
I'd also cut those 15 departments that the Cato Institute recommended. And while many people will hurt short term, because of the release of the thousands of government and military employees, overall the economy will get better just like it did after World War II ended. For those who don't know, the Great Depression ended because government cut spending, and the year after we had the most productive year in all of U.S. history.
The guys at Cato also have produced a book called “Downsizing Government” that is now available on their website and is free for a limited time only. Also, they have a website of the same name, which serves as a "department-by-department guide to cutting the federal government's budget," that I highly recommend.
It is worthy to note that "Big Government" in itself is not the cause of our current economic downturn. However, it is making the recovery a lot harder because resources are not being freed to go where the private sector would have otherwise put them. The culprit of the current economic crisis is Federal Reserve System and our fractional-reserve banking system.
Big Government can, however, bankrupt us, which is why many economists in the Austrian School (and some outside, I guess) believe that a "Great Default" is coming.