Starve the beast means feed the machine

Joseph Daniel Ura and Erica Socker report (pdf):

The notion of starving the beast has been an important justification for major elements of the fiscal program advocated by many Republicans and conservatives over the last three decades. While the idea of restraining government spending by limiting government revenues has an intuitive appeal, there is convincing evidence the reducing federal tax rates without coordinated reductions in federal spending actually produces long-term growth in spending. This seemingly perverse result is explained by Buchanan’s theory of “fiscal illusion.” By deferring the costs of government services and benefits through deficit financing, starve the beast policies have the effect of lowering the perceived price of government in the minds of many citizens. We assess the principal behavioral prediction of the fiscal illusion strategy. Incorporating estimates of the effects of federal deficits into a standard substantive model of Stimson’s mood index, we find strong support for a subjective price-driven theory of demand for government. In particular, we find that the size of the federal budget deficit is significantly associated greater demand for government services and benefits.

Comments

My goodness, what a shock! If you offer folks more of something they want, at a lower cost, they want even more of it. [sarcasm off]

When I was a young man, the Democratic Party was considered by many to be the "Tax and Spend" party, while the Republicans of Taft and Eisenhower characterized themselves as the "Party of Fiscal Responsibility." Interestingly, of course, if the taxation was sufficient to cover the spending, that still was fiscally responsible, so the real point of contention was the size and role of government. A legitimate subject for discourse and disagreement.

Sadly, though, that was a long time ago, before the politicians discovered the secret to winning elections -- give 'em what they want and don't make 'em pay for it. Now we have NO party of fiscal responsibility, and when a bipartisan bunch of old fuddy-duddies get together to make some serious fiscal responsibility suggestions, they are derided from both sides.

Ken, your points are not bad, but your evenhanded criticism of both parties would be more persuasive if (1) there had not been an annual surplus when Clinton left office, (2) there had not been strong Republican majorities and a Republican president when Medicare D and the Iraq and Afghanistan wars were added to spending, (3), and if at the same time the same actors had not been pushing through large tax cuts.

In addition, while it's true that few Democratic Party voices are calling for immediate tax increases or budget-balancing expenditure cuts, there is at least a serious (if controversial) theory behind the Democratic approach (Keynsian stimulus now, followed by tax increases on some and cuts in the growth of health spending in the next 10 years). In contrast, the Republican approach continues to be "cut small amounts of discretionary spending, cut large amounts of tax revenue, and the budget deficit will magically vanish right away (and we will also get a pony)."

Clinton proved that Democrats acting to balance the budget results in even greater deficits. Consider the budget policies of both president and Congress before 1993; Reagan hiked taxes to pay for spending. HW Bush hiked taxes to pay for spending. The difference between Reagan and HW is in how their tax hikes were described - Reagan did revenue enhancers, HW hiked taxes; Reagan got reelected, HW didn't.

The Tea Party worked to defeat HW, pushing Perot, and electing Clinton. So, Clinton reconsidered his priorities and made budget balance a top priority. He drove Democrats to vote for tax hikes and spending cuts, knowing that this would result in losses in 1994, though certainly not to the degree that resulted. But his losses, Democratic losses, were related to dealing with entitlement costs: out of control health care costs.

Then Clinton blocked tax cuts for the rest of his term, with the exception of the pump and dump promoting tax cut policies, which helped drive the NASDAQ bubble.

Clinton blocking Republican tax cuts and hikes in defense, with defense spending being a major Republican source of economic development and targeted Keynesian stimulus, Clinton really frustrated Republicans, like telling children no while holding $20 in the candy store.

Once Clinton was gone and Bush had his tax cut and spending programs and the minor recession, Republicans couldn't be stopped from pigging out on candy, like the candy store owner had left the store so the kids could take as much candy as they wanted without paying for any of it.

The only way to reduce the deficits is with both tax hikes and spending cuts, and the spending cuts need to be in defense and health care. (Cutting the very small Social Security benefit will only increase the spending on Social Security Supplemental on top of the existing low income uplift, or otherwise increase the burden on the welfare system.)

Obama addressed health care costs by using the Republican reform plan, already passed in Mass and signed into law by Obama's most likely reelection opponent, who would have promised "free market health reform".

On deficit reduction, Obama anticipated the Tea Party reappearing as it had in 1989-95, so Obama has not called for tax hikes like HW or Clinton did, instead doing as Reagan did and sought economic incentives that would enhance revenue, like Milton Friedman's pollution tax instead of regulation. And Republicans were the ones who argued for pollution taxes instead of regulation, calling cap and trade more successful and cheaper them regulation. Even Newt called for Republican support for carbon credits when it looked like Obama had the upper hand.

The Obama fiscal commission said tax hikes had to be part of the solution.

In 2001, Pat Moynihan noted that no government policy can be passed with votes from only one party and have public support. HW basically ignored that and lost. Clinton ignored that and lost. Obama ignored that and lost.

But Obama did pick the one thing that won't be easily reversed - health reform. Republicans won't be able to reverse it because Democrats won't support that action, and the Republicans will lose public support if they do it alone.

Not only is it impossible to balance the budget using cuts alone on Republican terms, they won't be able to make cuts that the public supports without Democratic support, so that requires tax hikes. Gaming theory requires Obama to wait for Republicans to figure out how to hike taxes. He can't win by being first to force tax hikes. And the odds are better he will win reelection if he simply waits, and at the worst, he loses, leaving a Republican president with the budget crisis and the problem of getting Republicans to hike taxes.

I have heard from others--many times on this site!--that "Starve the Beast" was NOT a policy being pursued by "many Republicans and conservatives".

But, maybe the converse of this post could true: raise taxes and we will cut spending with incentives to do so.

I could envision a program where you get a rebate based on your tax contributions if spending cuts are achieved over a given time period, with the money held in escrow. In the past, such a program would not have been feasible, but with information technology, anything is possible. Today, we have just the opposite: we raise, for example, payroll taxes to fund deficits created by irresponsible tax cuts and then later say: it is those entitlements (SS) that are the problem because the bonds are coming due to the trust fund and we will have to raise taxes on those who got the benefit of reduced borrowing costs.

Well, duh! Seriously, to control spending, you actually have to control spending? This is what passes for insight these days?

Clinton controlled spending and increased revenue without Republican support, and his balanced budget did not have public support. Thus it vanished as soon as he was gone.

Sheesh, mulp. Spending was controlled because the government was split between 1995 and 2001, or do you simply deny this?

Starve the beast proponents take on this is if it hasn't worked we just haven't tried hard enough and we need greater and greater deficits until we can justify defaulting on them. They believe the result will accrue to their advantage, but while their opponents want to avoid this, they also believe the result will accrue to their advantage. But if the proponents were likely to succeed they would not need this strategy which is a strategy of losers.

Democratic Presidents have been far better than the GOP ones on fiscal REALITY ever since Reagan. Both parties have spent like drunken sailors, the GOP even spending more; but we Dems did more to pay the nation's credit card. Reagan was particularly bad, with truly unaffordable defense levels as well as his tax cuts. If you doubt me, I encourage you to check the budget facts yourself.

Obama's the sole exception, because first thing on his plate was a GOP-worsened econ crisis that had to be dealt with. I expect after eight years, he'll be back to the normal responsible Dem pattern.

Both parties spend big on our different patronage patterns. The GOP patronizes war and big companies. We Dems spend on post offices and helping the little guy.

It's wrong Reagan attacked "Tax and Spend". Patronage differences aside, there are plenty of things both sides do spent on. Even our founder, Jefferson, whom ran the tightest ship ever, spent on a handful of bureaucrats and the Louisiana Purchase. Taxing and spending, of course, is how you spend responsibly.

Both parties spend big on our different patronage patterns. The GOP patronizes war and big companies. We Dems spend on post offices and helping the little guy.

Quite possibly the funniest thing I have ever read.

I think the present pols are beginning to recognize that problem.

Dbltap never heard of Korea or Viet Nam or Bosnia. Look at the tax code passed by Dems and tell me there are no favors for big business. Every big business in the country is bailing out of Obamacare.

You mean all those small businesses adding health benefits for the tax credits are being bailed out by national Romneycare. And even the big businesses are responding to the incentives in the reform.

Granted, many conservatives are very actively looking for ways to game the system by shifting from employer health insurance to the government health insurance system, which basically argues that some form of "single payer" universal coverage system as in Japan or France or Canada is best for corporations.

The proposition has some plausibility based on Public Choice theory.

One thing we know for sure: increasing tax rates raises average revenues, and leads to permanent increases in spending. Higher tax rates also usually increase revenue volatility. When revenues fall during recessions, the spending is slow and late to follow. Expenditure growth should be MUCH slower than revenue growth, not equal to it, because when a recession hits, revenues will decline at precisely the time there is greater need for public expenditures.

Politicians of all stripes are going about budgeting the wrong way. We need to determine the minimally sufficient and legally permissible level of government involvement (public goods, externalities, regulation of monopolies, etc) and find the most efficient way to raise that much revenue. One problem with this is that the set of admissible projects for public goods and externalities is likely infinite, but this does not mean we should or can implement ALL of them.

We spend too much time arguing about how to maximize revenues, which is not the objective of government. Rather, we should rank-order admissible projects and closely explore when the total benefit of the marginal project is less than the excess burden of the tax increase needed to fund it.

People also treat tax revenues as if they belong to government (and are earmarked to current uses) by default. This has got to stop. I'm tired of hearing people ask how much a tax cut will "cost." Taxes imposes costs - tax cuts eliminate them.

"...We spend too much time arguing about how to maximize revenues, which is not the objective of government. Rather, we should rank-order admissible projects and closely explore when the total benefit of the marginal project is less than the excess burden of the tax increase needed to fund it... "

Did anyone else realize this was a shining truth?

Perhaps its time to put some attention on the legislative process as a means to spend; as opposed to old cliches on which party is worse at taxing and spending.

"Taxes impose costs – tax cuts eliminate them."

This is one of the great myths on the right. A huge one that gets in the way of communication between the parties.

Tyler, please please PLEASE post a careful rebuttal of this. You seem to have some cred with the right. Maybe they'll listen.

Seriously, Kent, there is nothing wrong with that formulation, unless you simply accept that your money is not your money. A tax on you or me is a cost imposition, the removal of that tax is a cost removal. If you want to improve communication, stop trying to deny simple realities.

If you think there's nothing wrong with that formulation, you are incredibly naive as to how government is financed.

Uh, no. It might be an appropriate cost imposition, but it is a cost imposition. To judge net benefit, you must start there. To claim that taxes are not a cost imposition is to simply concede there are always net benefits, which is simply not true. Yours is the naive position.

The traditional formulation is taxes rates costs and reduce demand leading to deadweight costs, but spending of those taxes lead to increased demand leading to what ?liveweight benefits?. It is by no means apparent taxes impose costs.

Is there similar, peer-reviewed, research that shows that increasing taxes *also* results in increasing spending?

Contact the GOP HQ and request the GOP commissioned study by their GOP fiscal scientists who studied GOP data on non GOP spending during non GOP administrations and it concludes irrefutably that the non GOP fiscal policies increase taxes and commiserate spending which has never happened ever under any GOP administration. GOP

and you’ll be back out riding the waves of the Internet in no time.

Hit the “back” button on your browser. It’s perfect for situations

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