Category: Political Science

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.

Slocum writes:

Nonetheless it is naive to think spending cuts can do the job alone, and insisting on no tax hikes drives us faster along the path of fiscal ruin.

This is a political, not economic judgement on Tyler's part — that a majority won't accept the necessary cuts. But I think it's much less politically feasible to imagine enacting VAT (which, in the past, has been Tyler's preferred approach). That's an idea that practically demagogues itself (A EUROPEAN-style Tax! A regressive, HIDDEN tax on EVERYTHING you buy! A tax that will hit the savings of RETIREES the hardest –people who 'worked hard and played by the rules' who were taxed when they earned and saved the money and are now going to be hit by a REGRESSIVE, EUROPEAN, HIDDEN TAX on EVERYTHING when they try to spend the money).

Republicans are so married to 'no new taxes' and Democrats to 'higher taxes only for the rich', that a VAT (or any other new broad-based tax) seems out of the question. So I can much more easily imagine spending cuts eventually getting bipartisan approval with only nominal tax increases included in the bargain.

A few points:

1. A VAT has never been my preferred outcome, rather I warn that it may be necessary if we do not act soon.

2. Balancing the budget within five to ten years with spending cuts alone would be difficult but by no means impossible.  I am all for doing that, but a) it won't happen as stated, and b) it still won't balance the budget over a ten to twenty year time frame.

3. The path toward long-run fiscal balance involves recalibrating Medicare, Medicaid, and Social Security to lower rates of indexation, reimbursement, benefit increase, and so on.  We need to start that process now.  It cannot be done overnight or even over a few years' time.  It takes a long time for those gains to come in, cumulatively.  No one is going to vote for a "thirty percent cut to Medicare, today," although they might vote for changes in rates, which over time would amount to large reductions.  

4. The time for a Grand Fiscal Bargain is now.  If we don't do it fairly soon, we won't get spending under control at all.  Furthermore the number and percentage of elderly voters will only increase, which will make spending cuts more difficult as time passes.

5. Let's say a proposal for long-run balance were presented, with $3 in spending cuts for every $1 in tax hikes.  That is still a good deal for the anti-tax, anti-spending conservative.  Rejecting such a deal means we will end up with something closer to $3 in tax hikes for every $1 in spending cuts.  (And no, I don't know what is the "break even" point for a good bargain in this regard.)

6. Bill Niskanen's research shows that by taking tax hikes off the table we simply encourage governments to spend more.  Spending then looks like a free lunch.  

7. Making it a priority to "avoid any tax hike today" is the same kind of short-run view which brings us to fiscal catastrophe in the longer run.  In the medium-run, much less the long run, this attitude will lead to higher taxes.  However much it may masquerade as a low-tax attitude, it is in reality a high-tax attitude.  Unintended consequences is a fundamental economic idea and it is very much operating here.

8. If I called on President Obama to push for a budget deal, and I cite CAP in support, it was not to criticize the Democrats, or Obama (as DeLong and Krugman mysteriously suggested), but rather because I see him as by far the most influential player in this process.

In short, I am asking for the true fiscal conservatives to step up to the plate, and bring about lower taxes in the long run, rather than simply "playing team on the tax issue" in the short run.  Time is not on our side, and if we think it is we are fooling only ourselves.

T., a loyal MR reader, asked for a compendium.  This is my off-the-cuff list, but in the interests of fairness I'm doing one on market-oriented economists as well.  What are some of the common views found on the left which I consider not just disagreements but more along the lines of a mistake?  

By no means is everyone is guilty of these mistakes, nor does it have to mean that the associated conclusions are wrong.  Still I see these frequently:

1. Suggesting that money matters in politics far more than the peer-reviewed evidence indicates.

2. Evaluating government spending on a program-by-program basis, rather than viewing the budget as a series of integrated accounts.  Cross check with the phrase "Social Security," or for use to take many discretionary spending cuts off the table.

3. A reluctance to incorporate sophisticated "public choice" theories into the analysis of favored programs.  

4. Sins of omission: there are plenty of bad policies, such as occupational licensing, which fail to come under much attack from the left.  Sometimes this is because the critique would run counter to the narrative of needing more government or needing more regulation.

5. Significantly overestimating the quality of the political economy of an America with more powerful labor unions and underestimating the history of labor unions as racist, corrupt, protectionist, and obstructions to positive change.

6. Overestimating the efficacy of fiscal policy, underestimating the power of monetary policy, and sometimes ignoring or neglecting how the two interact ("the monetary authority moves last").

7. Citing weak versions of structural unemployment theories and dismissing them with a single sentence or graph, while relying on stronger versions of structural theories in other, non-cyclical contexts.

8. Lack of interest in discussing ethnicity and IQ as relevant for social policy, except in preferred contexts.

9. Overly optimistic views of the fiscal positions of state governments.  Since the states don't have the same tax-raising powers that the feds do, and since state government spending is favored, there is a tendency to see these fiscal crises as not so severe, or as caused by mere obstructionists who will not raise taxes to the required levels.

10. A willingness to think that one has "done one's best" in the realm of policy, and to blame subsequent policy failures on Republican implementation, rather than admitting that a policy which cannot be implemented by both political parties is perhaps not a good policy in the first place.

11. Use of a strong moral argument for universal health care coverage, combined with a fairly practical, hard-headed approach to the scope of the mandate, and not realizing the tension between the two.  Failure to indicate where the "bleeding heart" argument actually should stop and at what margins we should (and will) let non-elderly people die, if only stochastically.

12. Implicitly constructing a two-stage moral theory, which first cordons off the sphere of the nation-state (public goods provision, etc.) and then pushing cosmopolitan questions off the agenda in the interests of expanding a social welfare state.  (In fairness, many individuals on the right don't give cosmopolitan considerations even this much consideration, although right-oriented economists tend to be quite cosmopolitan.)

13. What about countries?  Classical liberals are increasingly facing up to the enduring successes of the Nordic nations.  There is not always a similar reckoning with the successes of Chile and Hong Kong and Singapore; often this is a sin of omission.  (Addendum: comment from Matt here.)

14. Reluctance to admit how hard the climate change problem will be to solve, for fear of wrecking any emerging political consensus on taking action.

In most cases you can find evidence and links by searching back through the MR archives.  

This is a companion piece to my post on left-wing economists; see the caveats in that post.  Not everyone commits these, nor are the associated conclusions necessarily false, nor am I postulating any equivalence of mistakes across the two groups.  I am simply serving up two lists.  Here goes:

1. There is excess fear of inflation and hyperinflation in the current economic environment.  Further there is often an excess estimate of the costs of inflation in the two to five percent range.

2. We know much less about the causes and drivers of economic growth than we like to admit, and when pushed on this issue we fall back to citing relatively simple cases with extreme differences, such as East vs. West Germany.

3. Lower taxes don't spur economic development as much as it is often claimed, at least not below the "fifty percent or less of gdp" range.

4. There are many climate change issues of relevance here, not mostly economics, but it seems remiss not to mention them.

5. I'm all for Health Savings Accounts, but unless done on a Singaporean scale, and with lots of forced savings, they're not a health care plan to significantly benefit most Americans.  There is less of a coherent health care plan, coming from this side, than one might like to think. 

6. There is already considerable health care cost control embedded in the ACA, most of all for Medicare, and this is not admitted with sufficient frequency.

7. When it comes to the historical determinants of the Industrial Revolution, the Great Divergence, and the like, the importance of state-building in that process is often neglected.

8. The story of steady and significant economic progress for most Americans is accepted too readily.

9. The role of market failure in the recent financial crisis is underestimated.  It is also believed that we can somehow commit to a policy of no future bailouts.  Promoting that myth will make future bailouts more likely.

10. Relying on liability law, whether or not it is a good idea, is not intrinsically more pro-market, more libertarian, or less interventionist.

There are more, but those are what to come to mind right away.  If you wish, you can interpret this list as saying more about me than about the doctrines I am referring to.  Again, you can very often Google back to find more detailed discussions of these individual points.

Paul Krugman writes:

Brad DeLong is mad at Tyler Cowen, with reason – for Cowen writes about US fiscal irresponsibility, fairly sensibly, without mentioning the elephant, and I do mean elephant, in the room: the role of the post-Reagan GOP.

Look: until 1980 or so the United States generally paid its way; the ratio of debt to GDP generally fell over time. Then starve-the-beast came to power, and fiscal realism went away. That’s the story; anyone who glosses over that, who makes it a plague-on-both-houses issue or, worse, makes it seem as if Obama is the villain, is in an essential way misleading his readers.

Brad DeLong offers further comment.