In his classic 1960 book entitled The Semisovereign People, political scientist E.E. Shattschneider laid out the central dynamic of politics--conflict.
According to Schattschneider, it is the nature of the ruling group or groups to attempt to minimize the scope of conflict by limiting the inclusion of competing ideas and groups within the political process. This is done in two ways. The first step is more formal and consists of configuring the rules so as to prevent conflicts from becoming a part of the political process. The second step is less formal and consists of trying to delegitimize the conflicting ideas or groups in question.
So, when we consider the conservative refrain of "limited government" we should recognize that what they are attempting to accomplish is this second style, delegitimizing of political conflict in some area that is beneficial to them and their patrons. In the case of the "limited government" appeal in particular, the desire is to delegitimize and prevent the expansion of conflict in regards to the economic system, by those--such as consumer groups, unions, welfare advocates, what have you--that would contest the established power of major corporations. The idea is to ensure that certain ideas and debates are not heard and thus are prevented from being considered by the political process and its institutions.
In terms of economic reform, this is the conservative's game. They want to limit the scope of conflict and prevent certain ideas from entering the political and social domain.
Conversely, conservatives are playing the opposite game when it comes to matters of sex and religion. Like their liberal economic counterparts, social conservatives--such as the various "pro-family groups" like FONF, FRC, etc--desire to expand the scope of conflict to include now largely private concerns like abortion, sexual preference, and religious devotion to be a matters of decision for the public sphere.
So, on the one hand, when conservatives repeat the "limited government" phrase it is usually in the context of economic decision making, and they are attempting to limit the public's involvement in economic decision making by way of its constitutional institutions and representives. On the other hand, the conservative's desire for "limited government" does not extend to so-called issues of sexual morality and religious practice, which conservatives would like to make the jurisdiction of the state, rather than the domain of individuals.
[Now, many people would object to my apparent failure to distinguish between what we might call economic conservatives or libertarian conservatives on the one hand, which prefer "limited government", and social conservatives on the other hand. But I am purposely lumping the two groups together because for all practical purposes, they are one and the same. To the extent their ambitions do not overlap and conflict with each other, they are united. And that I would suggest is an apt depiction of the current political situation.]
So progressives should not be intimidated by conservative calls for "limited government" or give in to requests by the media, the other party, or even fellow members of its own party, to, for the sake of phantom popularity, to abandon its goals for a more economically just and inclusive economic and welfare system. Progressives should also recognize that such conservative rhetoric is largely bullshit in so far as it fails to accurately describe much of the conservative's own agenda when it comes to limiting and eliminating the past century's growth of individual rights and privacy.