The Electric Commentary

Saturday, May 06, 2006

How We Supersize The Beast's Cheeseburgers.

Jonathan Rauch has an outstanding column in this month's Atlantic (subscription required) on the failure of "Starve the Beast" politics.

Republicans have long argued that cutting taxes will shrink government by forcing the government to reduce spending. There's just one problem with this idea:

Even during the Reagan years, Niskanen was suspicious of Starve the Beast. He thought it more likely that tax cuts, when unmatched with spending cuts, would reduce the apparent cost of government, thus stimulating rather than stunting Washington’s growth. “You make government look cheaper than it would otherwise be,” he said recently.

Suppose the federal budget is balanced at $1 trillion. Now suppose Congress reduces taxes by $200 billion without reducing spending. One result is a $200 billion deficit. Another result is that voters pay for only 80 percent of what government actually costs. Think of this as a 20 percent discount on government. As everyone knows, when you put something on sale, people buy more of it. Logically, then, tax cuts might increase the demand for government instead of reducing the supply of it. Or they might do some of each.

Which is it? To the naked eye, Starve the Beast looks suspiciously counterproductive. After all, spending (as a share of the gross domestic product, the standard way to measure it) went up, not down, after Reagan cut taxes in the early 1980s; it went down, not up, after the first President Bush and President Clinton raised taxes in the early 1990s; and it went up, not down, following the Bush tax cuts early in this decade.

Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “no sign that deficits have ever acted as a constraint on spending.” To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.


Tax cuts without spending cuts don't starve the beast at all. They simply subsidize government growth by insulating all of us from the true cost of government. If true (and it makes a great deal of sense to me) this creates an interesting catch-22 for both parties, as a tax increase may actually reduce the size of government, and vice versa.

4 Comments:

  • They simply subsidize government growth by insulating all of us from the true cost of government.

    It seems so simple when you put it that way. Here's to hoping this catches on and there's no more hiding the ball.

    By Blogger Nye!, at 7:54 PM  

  • I have never bought the "starve the beast" argument, but until I read this I couldn't fully articulate why I didn't buy it. Unfortunately, I don't think this very logical argument is going to persuade many people. I think the current administration has shown that the politicians who have traditionally labeled themselves as believers in small government are really no such thing.

    By Blogger MDS, at 8:50 PM  

  • "Starve the beast" never made too much sense to me, although I didn't really know why. I guess it always seemed like they really paid no attention to the debt anyway so all it was doing was making the problem worse until somebody with the right mentality stepped in.

    I should also point out that the more debt, the more interest to pay, which doesn't help any.

    By Blogger Scott H, at 3:54 PM  

  • Come on now, we all know that political rhetoric and even the simplest of economic principles rarely coincide.

    By Anonymous Rashid Z. Muhammad, at 3:00 PM  

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