When has the government shrunk in a good way?

In the U.S., abolition of the Civil Aeronautics Board and the Second Bank of the U.S., plus deregulation of trucking and communications in the 1970s reduced the scope of government slightly. Alfred Kahn, the unsung hero. Cypherpunks defeated the idea that the government should treat cryptography as a munition and control it's use.

In New Zealand in the mid 80's, budget and foreign exchange crises forced major reforms including privatization of public monopolies. Not sure whether it had so much lasting effect. I'm sure almost no one in New Zealand thought the crisis was a good thing. I think Canada went through a similar but milder crisis more recently.
Switzerland and Hong Kong were never that big to begin with.

Pretty underwhelming. Is government like cancer, it gets bigger until you die?

We don't want the government to collapse, because it will damage many lives as it falls. We need it to evolve. O'Reilly Press was touting the idea of "gov 2.0" http://gov20.govfresh.com/social-media-fastfwd-defining-gov-2-0-and-open-government-in-2011/, the idea being that we should exploit the Internet to make government more transparent, flexible, and accountable. I guess I am looking forward to gov 3.0, which will be polycentric, contractual, and voluntary.