June 25, 2008
On “starve the beast”
While browsing Greg’s blog (see previous post) I also noted his item on “starve the beast”–the idea, popular with conservatives, that cutting taxes forces public spending lower. He says that a recent column by Paul Krugman implicitly endorses the theory, much as Paul may deplore its application, since it argues that the Bush tax cuts will tie the hands of the next administration. (Yes! That is what they were supposed to do, the White House would say.)
Perhaps I am misunderstanding, but Greg’s point seems to be that Paul has somehow contradicted himself by endorsing “starve the beast”. How so? One can perfectly well believe that the “starve the beast”/”poison pill” theory is true, and still deplore big tax cuts, so long as you also think that big increases in public spending are warranted (as Paul does). Indeed, the theory, if true, is the best reason for liberals to oppose tax cuts, just as for conservatives it is the best reason (or maybe second-best) to advocate them.
Question: Is the “starve the beast”/”poison pill” theory in fact correct? There is evidence pointing both ways–including the fact that Obama is promising to extend almost all of the Bush tax cuts, which would tend to support the idea. Still, on the whole I don’t buy it. Here is a piece [pdf] on the subject I did for National Journal last year, which says why. It references a study by Christina and David Romer, which although certainly not the last word on the subject is for now, I think, the most authoritative word. The abstract of the Romers’ study says this:
The hypothesis that decreases in taxes reduce future government spending is often cited as a reason for cutting taxes. However, because taxes change for many reasons, examinations of the relationship between overall measures of taxation and subsequent spending are plagued by problems of reverse causation and omitted variable bias. To deal with these problems, this paper examines the behavior of government expenditures following legislated tax changes that narrative sources suggest are largely uncorrelated with other factors affecting spending. The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, they suggest that tax cuts may actually increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases. Examination of four episodes of major tax cuts reinforces these conclusions.
I hope the Romers are right, as my NJ column explains:
The worst thing about “starve the beast” is the idea that a straightforward argument for low taxes and spending cannot be pressed successfully. You have to cut taxes, which the voters will like, and let them think they can have high spending, too. Later, if all goes according to plan, they will see they were mistaken. It is a strategy based not only on outwitting the Democrats, but on outwitting the electorate as well. It would be a pity if it worked.
Clive,
Posted by: steve jennings | June 26th, 2008 at 12:37 pm | Report this commentit doesn’t matter who is being fooled or lied to, the aim is to eliminate government. Wea re talkinig about Ayn Randt types here who simply despice government and want to shrink it to the point where they can ” drown it in the bath tub”. Do you honestly think that this has anything to do with sound finances or democratic process ? Reducing taxes makes the rich far far richer than it does the poor, and the rich don’t care all that much whether social security has to be shut down because of it. Regan’s cuts led to a boom time for the wealthy as did Bush’s cuts. That taxes have to be raised later to stem the sea of red ink does not enter into the discussion. The hope is for a permanent Republican majority so that zero taxes can be enschrined in the constitution regardless of what effects that has on anything at all.
Surely you know this and are for some reason pretending otherwise?
SJ
Anybody who has read David Stockman’s “The Triumph of Politics: Why the Reagan Revolution Failed” can see that the only people who were fooled were the “starve the beast” supplier side advocates. Ten trillion in debt is ten trillion in taxes deferred. I would guess the electorate would be for SSA etc and see the US retreating militarily with the money coming out of the defense budget. Voters are going to ask does the US need troops in 81 countries for American security? We will see the mood of the voters soon. Will they vote like the Europeans for butter and not guns?
Posted by: td | June 26th, 2008 at 3:23 pm | Report this commentWe have had 28 years of general economic growth, low inflation and low unemployment.
It would be great if “supplier side advocates” keep fooling us so that everyone else can enjoy a healthy economy.
JBP
Posted by: John Powers | June 26th, 2008 at 3:36 pm | Report this comment“Beast”- does not the language used ,however conventional in conservative circles, give away a will to diabolise? If so why?
Posted by: Scooter | June 27th, 2008 at 3:59 pm | Report this commentMy hope is that ,one day, the rich realise that adequate taxes are a small price to pay for not having to live with barbed wire around the places they live in.
Posted by: ron | June 27th, 2008 at 4:17 pm | Report this commentToo much to hope that they could see them as a just sharing of the resources in our societies.
“My hope is that ,one day, the rich realise that adequate taxes are a small price to pay for not having to live with barbed wire around the places they live in.
Too much to hope that they could see them as a just sharing of the resources in our societies.
Posted by: ron | June 27th, 2008 at 4:17 pm”
In order to create this most perfect Union, and to ensure this redistribution of wealth works out correctly, will Red ron give up all of his wordly possessions? For the Greater Good, that is…
Posted by: DMO | June 27th, 2008 at 5:15 pm | Report this comment