On “Starve the Beast” Regressions and Feckless Politicians

Mark Thoma provides a working link to and comments on a 2004 paper by William A. Niskanen and Peter Van Doren:

The first conclusion from these tests is that there was no significant effect on the relative level of federal spending … The more important conclusion, consistent with my prior estimate of this equation, is that there was a very strong negative relation between the relative level of federal spending and the relative level of federal revenues in the sample 1981-2000 … What happened in federal fiscal politics that might explain the substantial difference in the estimates from these two samples? We do not know, but we suspect that the growing influence of the “supply siders,” who have a strong case that high marginal tax rates significantly reduce economic growth, undermined the influence of the traditional fiscal conservatives’ commitment to a balanced budget…

Mark cautions us not to put too much faith in these regressions. While I agree with Mark, maybe we can provide an answer to this question about fiscal politics by reviewing the ratios of revenues (Rev) and expenditures (Exp) to GDP over the 1949 to 2005 period. My view is that we have had four fiscal regimes since World War II ended. The regime that extended from President Truman to President Carter – which included Democratic and Republican Administrations – was one of general fiscal responsibility. Over such a regime, it would not be surprising that revenues and expenditures would tend to be correlated. Despite the general upward trend in the size of the Federal government, however, there was little variation in these ratios.

As Niskanen and Van Doren note – we had a change in fiscal regimes after 1980 with a pack of free lunch supply-siders telling President Reagan that we could have more defense spending and lower tax rates at the same time. The third fiscal regime combined two virtuous features. One was the good fortune of having political leaders with what Brad DeLong called “feck” (as Brad was drinking his morning can of diet Pepsi). The other was the peace dividend. So we should not be surprised the revenue/GDP and expenditure/GDP ratios moved in opposite directions.

Unfortunately, the last five years have been dominated by feckless politicians as well as a reversal of the peace dividend. One would think President George W. Bush would have paid for the Global War on Terror with either a tax increase or reductions in Federal spending. Yet, we see him today passing out free money to seniors in the form of that prescription drug benefit as he advocated more tax cuts. We don’t need regression equations to tell us that we will one day have to enter into a fifth fiscal regime that hopefully resembles what we saw during the 1990’s.