Earlier quoted context omitted.
In an interesting way it is also an exploitable facet of small government. If the private sector is susceptible to moral policing then then government downsizing implies a larger attack surface.
Are you suggesting that government (big or small) is immune to moral policing and that it's confined to the private sector? Any centralized system is subject to attack, the bigger the better.
If the private sector is more susceptible to moral policing than the public sector, then (all things being equal) if public services are transferred to the public sector(ie: smaller government) then the attack area increases.
There are two conditions, and one conclusion. If you don't agree that the premises apply, then the argument doesn't really matter and also doesn't apply.