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Gorging the Beast

Tax cuts didn’t starve big government.

Nov 26, 2012, Vol. 18, No. 11 • By ANDREW FERGUSON
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A dedicated libertarian, William Niskanen was also a dedicated pot-stirrer. For him the two vocations—pressing the case for small government and, at least intellectually, making trouble—were inseparable. He was best known as an original member of Ronald Reagan’s Council of Economic Advisers, one of a principled band of Reaganites who followed their man into the White House and then drifted away as Reagan succumbed to political compromise and ideological deviationism. For the rest of his professional life (he died last year) he worked as chairman of the Cato Institute, the country’s sanest libertarian institution. 

William Niskanen

William Niskanen

Terry Ashe/Time Life Pictures

Beginning in 2002, Niskanen published a series of papers and op-eds about tax cuts and spending increases that turned conventional conservative wisdom on its head. Since both taxes and spending are much in the news, his critique is worth another visit.

If we wanted a smaller government, he said, we would have to raise taxes.

Most people who work in politics and government in Washington have heard the phrase “starve the beast”; many normal people are familiar with it too. According to the historian Bruce Bartlett, a former Republican aide and now a bestselling author, the phrase was first publicly applied to tax and spending matters in 1985.

Lamenting the failure of the Rea- gan administration to cut the fed- eral budget, an unnamed official told a Wall Street Journal reporter: “We didn’t starve the beast.” He meant the administration had been unable or unwilling to shrink the size of the federal government by depriving it of revenue through tax cuts. The revenue-deprivation part worked fine; the Reagan tax cuts of 1981 were mostly still in effect in 1985. But there had been no shrinkage. The beast was fatter than ever.

The concept of starving the beast was older than the phrase. An earlier metaphor involved unruly children. In a 1980 presidential debate, Reagan scoffed at the idea that Congress would have to cut federal spending before it cut taxes.

“If you’ve got a kid that’s extravagant, you can lecture him all you want about his extravagance,” said Reagan. “Or you can cut his allowance and achieve the same result much quicker.”

Milton Friedman liked the metaphor too.

“How can we ever cut government down to size?” he wrote. “I believe there is one and only one way: the way parents control spendthrift children, by cutting their allowance. For government this means cutting taxes. Resulting deficits will be . . . the only effective restraint on the spending propensities of the executive branch and the legislature.”

With such bona fides—Alan Greenspan, passing through one of his conservative phases, had advocated starving the beast too—Republicans seldom questioned the theory of STB, using it over the last three decades as an ironclad argument for low taxes.

And then Niskanen, looking over 25 years of budget data, noticed something about STB: It didn’t work. In fact, attempts to starve the beast by tax cuts seemed to lead to increased federal spending.

Niskanen looked at both spending and taxes as a percentage of GDP. On average, he found, if federal revenues declined by 1 percent, federal spending increased by 0.15 percent. When revenues rose, on the other hand, relative spending decreased. A further study in 2009 by another Cato economist, Michael New, came to the same conclusion after the gluttonous administration of George W. Bush. Under Bush and his mostly Republican Congress, new benefits like subsidized Medicare drugs and increased federal education spending followed on the heels of large tax cuts.

Niskanen’s explanation for the failure of STB was straightforward, a conjecture based on standard economics: When you cut the price of something, demand for it will increase. Lowering taxes without lowering benefits meant that tax- payers were getting the benefits at a discount. The government made up the true cost with borrowed dollars that future taxpayers would have to repay. There was a big difference, Niskanen said, between a kid on an allowance and the federal government: The government has a credit card with no debt limit.

A study by a pair of liberal economists in 2004 showed how thoroughly the desire to cut taxes had been made compatible with the desire to spend money and expand the government’s power. Among congressmen who had signed a pledge never to raise taxes, presumably on starve-the-beast grounds, more than 80 percent nevertheless voted for the mostly unfunded Medicare prescription drug benefit in 2003. More than 70 percent of them voted for the lard-packed farm and transportation bills in Bush’s first term. 

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