Garett Jones  

Tax Hikes, then Spending Cuts: Not What "Starve the Beast" Predicted

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In the last few months here in the U.S. we've had a tax increase followed by a sequester.  Tax hikes coupled with slower spending growth: Here on the internet, we call that "austerity."

But for decades, much of the American Right boldly proclaimed that this kind of austerity was nigh-impossible. People didn't say it in those words, of course---prudent people choose their words wisely. Instead, they said that the best way to shrink government was through tax cuts, and that if you ever gave the government more money to spend the politicians would just spend it. The wise goal was to "starve the beast" by cutting taxes at every opportunity so that government spending would shrink. No less a light than Milton Friedman proclaimed that if taxes were cut
"...the resulting deficits will be an effective restraint on the spending propensities of the executive branch and the legislature..."
It's all common sense, of course: Less money coming in probably means less money going out. But as I've said before, common sense is a bad way to learn astronomy so maybe it's a bad way to learn economics.

The alternative to Starve The Beast was what I call the Puritan/Partier model, or the Ant and the Grasshopper theory:

The_Ant_and_the_Grasshopper_-_Project_Gutenberg_etext_19994.jpg Either you run government like a sound business by maximizing revenues and minimizing costs, or you run the government into the ground with lower revenues and higher costs.  

The last few decades of U.S. history fit the Ant and the Grasshopper story pretty well: We've gone back and forth between Ant (Puritan) and Grasshopper (Partier). Bush 41 and Clinton were Ants, Reagan and Bush 43 were Grasshoppers, and Obama, with the help of John Boehner, appears to be an Ant. During Ant mode, politicians cut (the growth of planned) spending and raise taxes and during Grasshopper mode they give the voters what they want.

There are at least 3 overlapping ways of thinking about Ant and Grasshopper periods:

1.  Individual politicians focus on either "responsibility" (Ant) or "voter demands" (Grasshopper).

2.  The two major political parties either get trapped in a prisoner's dilemma by giving their bases the spending hikes and tax cuts they crave (Grasshopper); or the parties find some fix for the dilemma and end up disappointing their bases but shrinking the deficit (Ant).

3.  Politicians run the government from the bondholders' long run point of view (Ant) or from the elderly voters' short run point of view (Grasshopper).

It's the late William Niskanen, one of the founders of the Cato Institute, who deserves the credit for attempting to destroy the Starve the Beast ideology among the American Right. He was blunt when he was fired from Ford for complaining about its protectionist policies, he was blunt in disagreeing with his boss, President Reagan, and he was blunt when saying that Starve the Beast probably grew the Beast. If the Ants rise again among the American Right, I hope they adopt the chronic bluntness of their intellectual father.

Coda: This time around, I think Channel #2 was heavily at work. A few weeks ago Speaker Boehner told the President, "You got your tax increase," so in return the House of Representative was going to cut spending. The House had been somewhat cooperative on the tax hikes, and in return they expected the President to cooperate by not railing too harshly against the sequester.  We'll see if cooperative austerity holds as an equilibrium....

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COMMENTS (36 to date)
Julien Couvreur writes:

This is not surprising if you consider that truly starving the beast requires not only cutting taxes but also controlling debt.

It seems reasonable that demand for government services would fall if the funds come from taxpayers rather than from another source (debt).

But it is less intuitive why government should refrain from using debt even after you increase the taxes.
Why would the beast ever get satiated on taxes only, when debt is still an option?

Garett Jones writes:

Perhaps because tax increases are part of a political equilibrium: It's not 'tax hike, then independently choose spending level'. It's 'tax hike *because* it's paired with spending cut'.

Two-party version: If my side has to eat spinach, I'm not letting your side eat ice cream.

Self-control version: I'm either 'watching my weight' (few calories in, lots of calories burned) or 'on holiday' (eat, stop working out). Ants watch their weight all the time---they're a different type of politician.

So whether we frame it as game theory or as self control, tax hikes are the natural companion of spending cuts, tax cuts are the natural companion of spending increases.

Of course, this is true partly because the US can borrow so easily. Our good credit helps make Starve the Beast false. STB is probably much truer at the state level....

Alexei Sadeski writes:

I'm not sure that I buy "Starve the Beast" as failed. You're not giving credit for all of the years which we arguably got to "enjoy" with slightly lower taxes. Put another way, is it better to have some periods with "lower" taxes and others with "higher" taxes, or to have high taxes all around?

Also, am I missing something, or is Obama actually the biggest Grasshopper of the five presidents mentioned?

Knowpd writes:

Slash of the debt rating notwithstanding, why is the ant theory rational in a world of ( maybe irrationally?) cheap credit? If credit is irrationally cheap, aren't the debters left holding the bag when the music stops rather than taxpayers? Spending can be subsequently cut. Enjoyed the post.

Effem writes:

Why is everyone so convinced spending is too high? As a fan of market-derived signals, I look to the market to tell me if we have a spending problem. Interest rates and inflation are near record lows so apparently there is no credit issue.

Is the assertion academics and/or politicians would be better informed than the free market?

Garett Jones writes:

Effem:

Low interest rates may just mean the US is unlikely to default. I've written that I think markets are right about that: Treasuries will pay off, likely in a low-inflation future. .

So if all one cares about is whether the US defaults, then yes, the federal government can spend more. That just means higher taxes (or maybe lower spending) in the future.

egd writes:

I'm not seeing how Obama is an ant. I'm willing to be persuaded, but ARRA (since rolled into baseline spending) and ACA were tremendous increases in federal spending.

stubydoo writes:

egd,

OK so apparently you are willing to be persuaded.

The spending proportion of ARRA is a little over half a trillion, substantially smaller than Bush's decision to invade Iraq.

And what's this about it being rolled into baseline? I suppose if somebody chooses to use the time ARRA was in full swing as their baseline, then sure. But most of the talk nowadays is relative to a currently planned 2013 spending level, or for later years - for either of these the influence of ARRA is seriously negligible.

I'll grant that ACA does involve spending increases, but the magnitude ain't enough to approach Reagan/Bush II levels of grasshoppertude.

A better test is to look at the overall spending level, and when you look there and adjust for items that clearly have nothing to do with anything Obama has done (e.g. more people aging into Social Security/Medicare), and as long as you avoid the dumb mistake of attributing everything in fiscal 2009 to Obama, it turns out Obama really has been more frugal than other recent presidents.

Effem writes:

Garrett,
The only options are not taxing and cutting spending. The US can print money as well. And I believe the market is saying that some reasonable amount of money printing is not an issue (if it leads neither to default nor inflation - as markets are signaling - then what is the issue?).

Aidan writes:

Julien,

Why do you assume that starve the beast ever had even a slight thing to do with controlling the debt?

James A. Donald writes:

These are not spending cuts, but cuts in planned increases in spending.

Suppose your family makes twenty thousand dollars a year, but spends thirty seven thousand dollar a year.

Last year you went on a carribean cruise. This year you plan to go on a tour of Europe: But wait, we need to save money, so we are going to spend five days in Venice instead of seven.

James A. Donald writes:

An actual spending cut would cut nominal spending relative to nominal GDP, which is not happening and not likely to happen.

An actual tax rise would increase nominal tax receipts relative to nominal GDP. This may well be happening, but because of Laffer limit, needs to be checked to see if it actually is happening rather than merely assumed to be happening because of a rise in tax rates.

James A. Donald writes:
Why is everyone so convinced spending is too high? As a fan of market-derived signals, I look to the market to tell me if we have a spending problem. Interest rates and inflation are near record lows so apparently there is no credit issue.

Inflation in everything I spend money on, such as food and gas, seems alarmingly high. I suppose this is supposedly compensated by enormous delation in ipads.

Official interest rates are official. Official inflation is official. In most of the word, "official" means "a lie".

Jon writes:

Garett,

http://research.stlouisfed.org/fredgraph.png?g=gUi

As this graph shows, you have identified the periods of spending restraint incorrectly.

Reagan, Bush I, and Clinton were ants. JKF, LBJ, Nixon, and Carter were all grasshoppers, and Obama has returned us to the pre-Reagan trend line as if the ants never reigned.

The reason you got this wrong is that you didn't consider per-capita spending and impact of the baby boom echo on mitigating the spending per capita under Reagan.

Note: this graph also shows that Yglesias is wrong. The series of budget control acts passed in 86 and continued until 2001/Bush II worked and worked quite effectively.

People should shouting from roof tops about this graph. Our problems are solvable. Reagan got a bum rap on spending growth due to high inflation and rapid population growth boosting nominal spending.

Harold Cockerill writes:

They won't stop spending until they have rendered the money unspendable.

egd writes:

stubydoo:

The spending proportion of ARRA is a little over half a trillion, substantially smaller than Bush's decision to invade Iraq.

I have no doubt that Bush was a grasshopper. Medicare Part D secured that title for him.

Bush being a grasshopper says nothing about whether Obama is an ant.

And what's this about it being rolled into baseline?
ARRA was supposed to be one-time spending/stimulus, but has since been rolled into the baseline federal budget. We have had an ARRA every year since '09.
I'll grant that ACA does involve spending increases, but the magnitude ain't enough to approach Reagan/Bush II levels of grasshoppertude.
ACA came in around $1T. You called Bush II a grasshopper for spending $1T in Iraq.
A better test is to look at the overall spending level, and when you look there and adjust for items that clearly have nothing to do with anything Obama has done
Why should we not attribute what happened during Obama's administration to him?

Again, look to the definitions provided: "During Ant mode, politicians cut (the growth of planned) spending and raise taxes and during Grasshopper mode they give the voters what they want."

I'll grant that Obama has raised taxes, but what has happened to planned spending?

Effem writes:

@James A. Donald

You make valid points. However, if the true issue is inflation, then I would think the anti-government-spending crowd would first attack the CPI. If it can be proved that the CPI is statistically bogus (which frankly, should be easy to prove), then you will have made the argument for lower spending without resorting to philosophical arguments.

Second, if interest rates are not a market price, but rather a government policy, then I think that leads to an interesting conclusion. To me, that would mean that the government has essentially subsidized asset owners and industries that benefit from credit creation (banks, real estate, etc) for many, many years. It would be pretty clear to me then that this has been a large driver behind the inequality gap. If that is the case, then the impact of deficit reduction should fall on the recipients of this unsustainable (and massive) government subsidy. Therefore higher taxation would be more fair than reduced spending.

Effem writes:

@Garrett

Your comment leads me to believe that you must fear inflation. As best I can tell there are only 3 reasons to fear government spending:
1) default
2) inflation
3) "crowding out" of private spending

You seem to agree that #1 is not an issue. And #3 is really only an issue if either #1 or #2 limit the total amount of spending that is possible. Therefore you must believe we have an impending inflation problem. Correct?

Jon writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring your comment. We'd be happy to publish your comment. A valid email address is nevertheless required to post comments on EconLog and EconTalk.--Econlib Ed.]

Effem writes:

@Jon

Yes, that makes sense. I guess I just see cause & effect the other way. A severe lack of private spending caused us to flirt with a deflationary bust, thus necessitating massive government spending. It is (very) unclear to me that private spending is able to pick up any slack created by lower government spending. In fact, it seems to me that people get less confident about the future when government pulls back. You could easily end up with lower private & public spending - i.e., a deflationary bust.

Thomas Boyle writes:

Starving the beast may make sense from an institutional strategy point of view, rather than a budgetary one.

It's not an original observation, that democracy - at least naive democracy - almost inevitably tends toward socialism. In the process, taxes and other redistributions rise, and gradually destroy the institutions the economy needs. By the time the collapse happens, the bourgeois values, social structures and economic institutions may be incapable of recovery. This is a real worry in parts of Europe, for example (and, arguably it has played out in parts of the former Soviet Union).

What is needed are democratic (in some sense) institutions that control spending, despite the voters' short-term wishes - the economic equivalent of the bill of rights, which say "no matter how people vote, you cannot do this". Unless that is done, and done properly (written constitutions are too weak), the democracy will run out of money: it may just go broke, but the society may even collapse. Evolution is not kind.

The challenge, then, is to protect the bourgeois institutions - the real economy, if you will - minimizing the period when the beast is bleeding them, preserving them until the crisis can happen. To do that, you let the beast spend, but not tax, as much as it wants.

Absent institutional self-control, the crisis is not optional - and it is unlikely to be pleasant. "Starve the beast" does not create the crisis: it is, arguably, just a way to preserve the real economy for as long as possible, so there is a chance it may survive the crisis.

Hunter writes:

The whole budget in a democracy is an exercise in the tragedy of the commons. Collectively we all put money into a common pool. At that point we all through our representatives try to get as much out of it as we can as well as provide for public goods (defense, law, infrastructure). Collectively we've ruined the commons of the budget by overusing it. No I don't have a democratic solution to this outside of some balanced budget admendment.

Hazel Meade writes:

I think the D's failed to recognize the psychological effect that the payroll tax increase would have on the general public. Everyone essentially saw a cross the board tax hike on Jan 1st, and as a result they were in no mood to hear about how cutting government spending by a marginal percentage was going to have a devastating economic impact. The payroll tax increase was a reminder to almost everyone that they were paying for the spending.

stubydoo writes:

egd,

Indeed, what has happened to planned spending?

Jim Glass writes:

The empirical evidence seems clear to me, Friedman was right, restraining revenue has clearly restrained spending.

And I don't see anything inconsistent between this fact and the ant/grasshopper model. The combination of tax hikes and spending cuts is exactly what Starve the Beast predicts in my view.

But first for a moment think of the opposite proposition: "Starve the Beast" simply
says spending is restrained by revenue. If that is not true, if spending is **not** restrained by revenue, then unexpected revenue increases will not result in increased spending by Congress. Because relaxing what is *not* a restraint has no effect. QED.

Who believes that? Politicians won't spend unexpected "free" (to them) revenue? Raise your hand. And while it is up in the air say, "Social Security Trust Fund", a totally unexpected flow of $2 trillion+ in revenue that was more than 100% spent by the politicians. Kent Smetters

"We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public....
"... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76."
If feeding the beast more results in greater government spending (and increased debt!) then how can not feeding the beast more not result in less large government spending?

Another look at history:

Serious PAYGO budget rules that restrained spending were in place during 1993-on -- causing spending as a % of GDP to fall -- specifically because deficits were large and projected to increase forever even after the Clinton tax increase. The surplus that was to arrive was totally unforeseen by anybody.

Then in 1998 the surplus arrived to the great surprise of everybody, due to the unexpected economic boom. And spending exploded right then, exactly *because* the deficit had disappeared. As the era's CBO head Rudy Penner told Brad DeLong, quote:
~~~~~
Rudy: ... One substantive point: You rightly praised how the BEA [Budget Enforcement Act and its Pay-As-You-Go restrictions] worked from 1990 thru 1997. But then it broke down completely...

Brad: So what happened at the beginning of 1998 to change things so completely? That's still not clear to me...

Rudy: I believe it was the surplus. PAYGO was originally designed to stop tax and entitlement policy from increasing the deficit. (Really, to preserve the gains from the 1990 budget agreement.) After 1997, it had the effect of preventing any reduction of the surplus and that didn't make much sense...
~~~

If that isn't Penner describing "starve the beast" as working -- deficits constrained spending, the politicians adopted and followed rules "to stop tax and entitlement policy from increasing the deficit" -- until the arrival of a surplus caused restraint to be abandoned and spending to explode, because restraining spending when there was no deficit "didn't make much sense" -- then what is it???

"tax hikes are the natural companion of spending cuts,"

Of course, because the essential of political deals is compromise. The greatest past example of future relevance was the 1983 Social Security re-write "saving" it when it went broke back then. The parties scored it then as being nearly exactly 50%-50% tax increase-benefit cuts. This is a pretty good model of what we can expect in our future (though the scale will be scary larger) because what else is politically possible?

But there is no inconsistency between this and "starve the beast". Keep today's revenue line lower, the future final compromise spending-revenue line will be lower. But increase the revenue line today and increase spending correspondingly, and that will be the higher starting point of future negotiations (instead of a possible ending point) and future final taxing-spending will be that much greater.

The objections to "starve the beast" seem to me based on misleading rhetoric. It was never an idea to actually reduce the size of government, Friedman used the word "restraint", as in restrain growth, exactly as Penner described happened and we see in the sequester today.

And contra Niskanen it was never going to restrain creation of new programs on a "micro" budget basis. Moderate sustainable deficits are never going to stop that. Of course Congress is always going to spend as much as possible up until it hits a real serious market/political budget constraint. But S-t-B lowers the level where that constraint is hit. See, well ... today.

But really, if "feeding the beast" will grow the government's size, then "starving" it *must* restrain that size. No?

Let's run a test: Impose a new national VAT for the USA and see if our government spends the money that comes in from it to grow in the way all the European governments have, or if it uniquely among all governments in the world saves saves the revenue to balance the budget. In which case S-t-B will be refuted.

Karl writes:

Spending as a % of GDP:

1978 20.7 Carter budget years
1979 20.2
1980 21.7
1981 22.2

1982 23.1 Reagan budget years
1983 23.5
1984 22.2
1985 22.8
1986 22.5
1987 21.6
1988 21.3
1989 21.2

1990 21.9 Bush 41 budget years
1991 22.3
1992 22.1
1993 21.4

1994 21.0 Clinton budget years
1995 20.6
1996 20.2
1997 19.5
1998 19.1
1999 18.5
2000 18.2
2001 18.2

2002 19.1 Bush 43 budget years
2003 19.7
2004 19.6
2005 19.9
2006 20.1
2007 19.7
2008 20.8
2009 25.2

2010 24.1 Obama budget years
2011 24.1
2012 22.8

Karl writes:

@ Jim Glass - As the above data shows, spending did NOT explode after FY 1998 as you allege. Spending as a % of GDP did not start going up until Bush 43 and his 2001 tax cuts.

I suggest you actually go look at the research of Niskanen at http://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2006/11/cj26n3-8.pdf.

When Reagan cut taxes in 1981, spending increased. When Bush 43 cut taxes in 2001 and 2003, spending increased. When Bush 41 raised taxes, spending started to decline. When Clinton raised taxes, spending continued to decline. The only exception to this model has been FY's 2010-2012, where we had tax cuts under Obama and also declines in spending.

MingoV writes:

Obama is the biggest presidential grasshopper in modern history. His one trillion dollar spending increase in his first year was the biggest increase (absolute and relative) since WWII. That increase was supposed to be for a one-time stimulus, but by not passing budgets in subsequent years, that massive spending became the norm. So how can Obama be an ant?

Thomas Sewell writes:

In modern times, Presidents don't seem to matter much when it comes to spending levels, so calling them Ants or Grasshoppers is nonsensical.

The "Ant" times come when Congress isn't increasing spending as much. That's it.

When's the last time a President vetoed an appropriations bill because it spent too much or too little? It's been a while, hasn't it???

See the graph at http://comeletusreasontogether.com/revenue-problem-or-spending-problem for which party controlled the House/Senate/Presidency and the actual spending and revenue each year.

It's fairly obvious the issue is that the Federal Government keeps spending more and more over time. The population has increased and gotten older, but that's not nearly enough to explain more than doubling spending from 1980 to the present.

Karl writes:

@MingoV - You claim President Obama had a "one trillion spending increase in his first year."

Two problems:

1. You are referring to FY 2009. As discussed above, FY 2009 (October 1, 2008 to September 30, 2009) was President Bush's last budget year, not President Obama's first. The fiscal year was about 30% in the history books when President Obama took office. But let's look at estimated FY 2009 spending just before President Obama took office in January 2009 to see how much he added to the FY 2009 spending (http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/99xx/doc9957/01-07-outlook.pdf, Table 5, p24/58) FY 2009 spending was estimated at $3.543 trillion in this January 2009 CBO report. Actual FY 2009 spending was slightly lower at $3.518 trillion.

2. In President Obama's actual first budget year, FY 2010, spending declined to $3.456 trillion. This was the first actual CUT in spending since FY 1965. Spending was also cut in FY 2012.

Jon writes:

Karl,

The notion that spending should stay proportional to GDP is not one that is obvious. Such a condition means spending growth exceeds the rate of inflation and exceeds it even under per-capita measures.

Daublin writes:

I agree about the awkward promises that have been made to voters.

The one burned into my mind is the long-running promises by Democrats to increase medical spending. Federal medical spending is already high, and is slated to grow faster than other spending areas. Due to these promises, Democrats don't want to agree to cut medical, but if you don't cut medical, it's impractical to balance the budget going forward.

On a broader note, I think we should bury "austere". It wouldn't be "austere" to reduce spending until it matches revenue. Not when we are talking about a revenue stream that, I'm guessing, is the largest of any single organization in history.

Jim Glass writes:

@ Jim Glass - As the above data shows, spending did NOT explode after FY 1998 as you allege. Spending as a % of GDP did not start going up until Bush 43 did not start going up until Bush 43 and his 2001 tax cuts.

Karl: If you invoke my name as if intending to respond to what I wrote, you should actually respond to what I wrote. Trying to understand it.

Because so far you seem to confirm everything I said, while somehow imagining you are challenging it.

1) Are you denying what Penner said about how the budget process changed when the surplus came in? That effective PAYGO rules had been put in place until then to restrain spending as a result of the deficits created in the Reagan era. And that when the surplus came in and the deficit disappeared, those rules were dropped? Thus easing spending increases going forward from there?

Are you claiming Penner was wrong about that change in the budget process, and the cause of it, that it isn't true? Just say so.

2a) "Total spending as a % of GDP..." is a bogus number for 1998-2000. The topic is *spending*. You might remember there was an historic GDP boom 1998-2001. Don't forget the surging denominator making "% of GDP" smaller... and that big defense spending cuts were occurring as a result of the fall of Communism, masking the other large spending increases that were starting ...and that when the budget process is changed as Penner described, resulting increases are legislated continuously over a series of *future years, compounding* ... and that the actual spending occurs with a lag of years after those legislative enactments.

So the effect of the changes Penner described would grow *into the future*. Every year's spending is mostly the result of decisions taken years (plural!) before. Citing 1998's budget number itself for anything is pretty naive.

2b) "...did not start going up until Bush 43", who took office with a surplus, and thus faced zero deficit-constraint on spending, plus freedom from the PAYGO legislative spending restraint rules that were dropped due to the surplus. So spending zoomed upward! And as deficits remained below the 40-year average size for his first six years they continued to be no constraint on spending, freeing spending to continue to surge.

Exactly so! Thank you for illustrating the point. (And, btw, all that exploding up *was* "after FY 1998", and its budget rules changes, pretty soon after.)

3) "When Reagan cut taxes in 1981, spending increased. When Bush 43 cut taxes in 2001 and 2003, spending increased."

So what? Nobody is arguing that cutting taxes reduces spending.

*Deficits* that are large enough to run into a political and/or market sustainability problem restrain spending. Read what I said in the comment you are responding to.

In fact, tax cuts are a form of spending by politicians so you'd expect them when deficits are *low* and the spending-restraint of deficits is lacking.

Which is exactly what we see with both Reagan and Bush I, they came to office with historically low deficits/surplus, and then both ran up vote-buying spending through both tax-cut-spending" and cash-payout spending.

Then over *subsequent years* the results of these policies (combined with the changing state of the economy) compounded to produce major deficits.

Then these *deficits* drove the creation of the spending constraints of the Budget Enforcement Act PAYGO rules of the 1990s and today's sequester.

Right? Both those effects of deficits constraining spending are clearly visible to the naked eye. No?

Now *IF* neither Reagan nor Bush had cut taxes at all, those deficits as we know them would never have existed. Would the BEA's Paygo rules of the 1990s or today's sequester exist nonetheless??

4) If you wish to refute the claim that "revenue is a constraint on spending" (aka "Starve the Beast") you have to say: "If Reagan and Bush II had enacted zero tax cuts federal revenue would have been much greater than in historical fact, but Congress would not have spent any of it in excess of actual historical spending levels, with the BEA's paygo rules of the 1990s and today's sequester still enacted as they were, despite the lack of the deficits that apparently motivated them, to keep govt spending at the same level in both alternative histories."

THAT is a challenge to "revenue is a constraint on spending" (aka "Starve the Beast").

But if the Reagan/Bush tax cuts in fact eventually produced deficits that resulted in effective spending restraints during the 1990s via the BEA PAYGO rules as per Penner, and in today's politics via the sequester etc, keeping spending lower than it otherwise would have been with much higher revenue, then reduced revenue has in fact constrained spending and Starve the Beast wins.

5) If you state #4 you are the guy raising your hand saying "'Feed the Beast's is false, revenue increases don't affect govt spending, politicians unlike all the rest of us *don't* spend more money when they have more to spend." In which case ... what happened to the $2 trillion+ of the Social Security surplus (and what's your explanation of Smetters' analysis saying Congress spent *more* than 100% of it)?

Does anybody else have a hand up with you?

Julien Couvreur writes:

Aidan,
I was mistaken. I thought starve the beast was about controlling intakes (tax, debt, inflation), but from looking at wikipedia it seems to target taxes only.
Thanks for the correction.

Steven Flaeck writes:

It's worth pointing out that if a sufficiently long period of deficit spending is viable, then "starve the beast" simply reduces the cost of government programs for present voters, causing them to demand more of them. "Starvers" hypothesized that either the public or the bond market would freak out, causing spending restraint. But what we've found is that the public prefers spending more than it freaks out and bondholders don't freak out when large, stable democracies rack up large amounts of self-denominated debt.

A large percentage of voters are not likely to outlive the deficit-spending period and another large percentage will be much wealthier when it ends than the present. So for one large group, government spending is basically free and for another, higher future ex- or implicit taxation is less of a concern either because their incomes will already subject them to the implicit tax or because the marginal dollar taxed in the future will be worth less than the marginal dollar now taxed (ex- or implicitly). A last bloc of voters isn't large but is influential: the wealthy and those with high incomes benefit from lower taxes but will not much suffer from higher implicit taxation in the future. Their preference is pretty clear, too: tax cuts are more beneficial than budget cuts, especially if they can expect budget cuts in the future vis-a-vis tax increases.

So I don't think we need a moralizing story here. Rather, we have lots of people who benefit immensely from racking up deficits under a low tax regime and so they demand such a regime. Even if they are ideologically committed to budget cuts, ideology is a poor bulwark against incentives and the result is that they will "buy" a political system which favors low taxes and high spending.

This hasn't been the case in Europe, but Europe didn't really have self-denominated bonds until the end of Bretton Woods and, after that, only for the 30 years before the euro. It may also be that "starve the beast" is actually innovative and simply didn't spread to Europe before the euro.

Himanshu Sanguri writes:

Also starve the beast theory does not imply a check on spending or austerity. Today, almost all the politicians remain grasshoppers at the cost of debt from public and foreign aids. In a democracy, be an ant is impossible, in communist nation you can.

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