A while back – Bruce Bartlett was so kind to email a link to his “Starve the Beast” Origins and Development of a Budgetary Metaphor. Within this history behind this phrase and how it has been (ab)used by certain politicians, I’ve been meaning to argue that Starve the Beast is not he correct metaphor for the modern Republican Party. As Brad DeLong objected to the latest from Greg Mankiw (for somewhat different reasons than my objection, he points to a wonderful piece from a true small government conservative – Alex Tabarrok:
I favor a much smaller government but I do not favor the Bush tax cut. Or, to be more precise, I would support a tax cut if one had been proposed. But so far President Bush has neither proposed nor implemented a tax cut – only a tax shift. To grasp the difference between a tax cut and a tax shift, we must first understand that what ultimately drives taxes is spending. If spending increases, as it has under the current administration, then sooner or later taxes must increase (or inflation, a type of tax, will go up). Milton Friedman, the libertarian-leaning Nobel prize-winning economist, has long reminded us to be suspicious of any tax cut not matched by a spending cut. If spending isn’t cut, then less taxes today means more taxes tomorrow. Thus, the Bush tax cut plan is really a plan for future tax increases … although Bush’s tax proposal does shift taxes away from capital (which, other things equal, would promote long-run economic growth), the mismatch between the tax cuts and spending increases means a rise in government borrowing to make up the difference. Some of this borrowing will come out of capital markets, thereby draining the source of private investment. Thus, on net, I don’t expect significant gains in long-run economic growth from these tax cuts.
The Bush Administration not only gave us a bloated prescription drug benefit program but has also increased defense spending. Outside of Ron Paul (who will not get the GOP nomination for 2008) those GOP hopefuls to replace George W. Bush all seem to be calling for even more defense spending. This includes especially Mitt Romney who has Greg Mankiw as one of his economic advisors. While Bruce Bartlett and Alex Tabarrok may be advocating less government spending, the political leaders of the GOP are not really listening. Credit goes to both Bruce Bartlett and Alex Tabarrok for understanding the implication of “big government conservatism” – to use the oxymoron once used by Fred Barnes – that this means taxes must go up for someone at sometime. OK, Fred Barnes isn’t smart enough to get this but I would trust Greg Mankiw is.
But let’s go back to what Bruce wrote to suggest the size of the government really is not what is at issue here. Rather, it’s who should pay for this government. Some key excerpts follow:
The budgetary experience of recent years, in which Congress has enacted large tax cuts and large spending increases at the same time, has caused some former supporters of the starve-the-beast idea to reconsider their view. However, the metaphor remains a powerful one. In this article, I trace the origins and development of the idea and the reasons why it rose to prominence not just among policymakers, but among professional economists as well … The earliest recent use I have seen of the precise term starve the beast as it relates to the budget appeared in a Wall Street Journal news story in 1985. Reporter Paul Blustein quoted an unnamed White House official as lamenting that not enough had been done to cut spending during the Reagan administration. “We didn’t starve the beast,” the official said. “It’s still eating quite well – by feeding off future generations” … when the next Republican president, Dwight D. Eisenhower, took office in 1953, he strenuously resisted efforts by Republicans in Congress to cut taxes. He insisted that balancing the budget had to take precedence, even though tax rates were extraordinarily high owing to the Korean War. As Eisenhower explained at a press conference on February 17, 1953, “Whether we are ready to face the job this minute or any other time, the fact is there must be balanced budgets before we are again on a safe and sound system in our economy. That means, to my mind, that we cannot afford to reduce taxes, reduce income, until we have in sight a program of expenditures that shows that the factors of income and of outgo will be balanced. Now that is just to my mind sheer necessity” … Richard Nixon, Eisenhower’s vice president, continued this policy of resisting tax cuts and supporting tax increases after his election as president in 1968. One of his earliest actions in 1969 was to ask Congress for extension of the 1968 surtax, despite having promised during the campaign to allow it to expire on schedule … Gerald Ford, after succeeding Nixon in 1974, similarly resisted political pressure to cut taxes permanently, supporting only a temporary tax rebate in 1975, while asking for higher taxes on individuals and corporations and allowing inflation to raise taxes automatically as taxpayers were pushed into higher tax brackets and business depreciation allowances were eroded
It is true that the Republican Party from the Eisenhower Administration to the Ford Administration did adhere to long-run fiscal restraint but something changed when Ronald Reagan began campaigning for the White House:
In an influential article in early 1976, Wall Street Journal editorial writer Jude Wanniski blasted Ford for timidity in cutting taxes. He argued that the nation needed each political party to be a different type of Santa Claus – the Democrats being the spending Santa Claus and the Republicans being the tax-cutting Santa Claus. By refusing to play its proper role and instead being the party of the balanced budget, Republicans had hurt not only themselves, but the nation as a whole. Declared Wanniski: “The political tension in the marketplace of ideas must be between tax reduction and spending increases, and as long as Republicans have insisted upon balanced budgets, their influence as a party has shriveled, and budgets have been unbalanced.” … Writing on the Wall Street Journal’s editorial page, which often sets the Republican agenda on economic policy, columnist Irving Kristol made clear the political connection between tax cuts and government spending. Tax cuts, he explained, are essential to shrinking the size of government. Republicans and conservatives, he said, “have learned the lesson of Proposition 13, which is that tax cuts are a prerequisite for cuts in government spending. The politics of the budgetary process is such that a cut in any particular program will provoke intense opposition from a minority, and only indifference from the majority. In such a case, it is unreasonable to expect politicians to pay the high political costs involved. They can only cut when they are seen to have no alternative”. At this point, the circle had been largely squared. Instead of being viewed as the height of fiscal irresponsibility, cutting taxes without any corresponding effort to cut spending was now seen as the epitome of conservative fiscal policy. Trying to cut spending in isolation was both doomed to failure and counterproductive because
focusing attention on the deficit was more likely to lead to increasing taxes and thus expanding the size of government. The only way off the treadmill of higher spending leading to higher taxes leading to still more spending was to refuse to play the game. Just cut taxes, the conservative intelligentsia now argued, and concern about deficits will be channeled into lower spending … During the 1980 campaign, Ronald Reagan endorsed the Kemp-Roth tax cut, but he also insisted that he would sharply cut government spending. Upon taking office in 1981, he followed through on this promise and asked Congress for spending cuts as well as tax cuts … However, Reagan was unwilling to hold his tax cuts hostage to congressional inaction on spending. In explaining why tax cuts should precede spending cuts, he said that the former would pave the way for the latter, as the starve-the-beast theory posited.
We should stop right here and simply note that Federal spending did not decline during the Reagan Administration. But let’s return to what Bruce has to say about that 1993 debate over whether to raise taxes:
On Capitol Hill as well, the modified starve-the-beast theory made inroads even among moderates who had previously supported tax increases to reduce budget deficits. After taking so much political heat, many members of Congress were apparently dismayed to see that so little progress was accomplished toward permanent resolution of the deficit problem. One of these legislators was Senator Bob Packwood (R-Ore.), who during floor debate on Bill Clinton’s proposed tax increase in 1993 said: “The history of the U.S. Government is that when we increased taxes, we spent them; we did not apply it to the deficit. It does not matter that the President has stated, ‘Let us have a deficit reduction trust fund.’ We have never followed that; we instead spent it. I predict that if we raise these new taxes, we will spend them, also. We will not cut spending. We will spend it on new programs or expansion of existing programs”
OK – but Federal spending as a share of GDP actually fell during the Clinton Administration. Fast forward to the 2000 Presidential debate:
During the 2000 presidential campaign, one of George W. Bush’s major themes was the need for a tax cut to reduce the budget surplus that had been accumulated during the Clinton administration. Again echoing the starve-the-beast theory, Bush argued against the virtues of a surplus, saying that it would only fuel additional spending … Despite the lack of evidence during the George W. Bush administration that tax cuts restrain spending increases, let alone cause spending to be cut, a number of leading conservative economists continue to insist on the basic correctness of the starve-the-beast theory, including Edward Lazear, who became chairman of the CEA under President Bush in May 2006 … many on the political left have long charged that the ultimate goal of starve-the-beast advocates has been to create a deficit so massive that entitlements … will have to be cut when a fiscal crisis finally emerges. In the words of Peter Beinart, editor of The New Republic: “It’s middle-class entitlements, however, such as Medicare and Social Security, which make the federal government so big (and so popular). And the GOP’s only hope of undermining them is to create a fiscal crisis so huge that now-unpopular Republican solutions, such as privatizing Social Security and turning Medicare into a voucher program, become politically feasible. In roughly a decade,
when multiple Bush tax cuts and an enormous defense buildup run smack into the baby-boom retirement, they might just get their wish” … This argument would have much more plausibility, however, if George W. Bush and a Republican Congress had not massively expanded Medicare spending in 2003 by adding a new prescription drug benefit to the program. Moreover, most Republican concern about federal spending these days tends to be channeled into demands that “pork-barrel” spending on public-works projects be curtailed, even though – perhaps because – it is a trivial component of overall spending.
There you have a very good summary of the fiscal debate today. While the GOP political leadership wants you to believe we can have this prescription drug benefit, larger defense budgets, and low tax rates simply by curbing pork-barrel spending – the numbers do not add up. Even with fuzzy math – you can’t come close to justifying this kind of Bushian nonsense. So what is the real agenda? While big spending necessitates big taxes, this realism does not tell us who will ultimately pay all of these taxes. Some conservatives who favor lower taxes on capital income are honest enough to propose other forms of taxation – such as Bruce’s idea to have a national Value-Added Tax.
But most of the GOP political leadership is not as honest as Bruce. They may prefer what I’ve called a Back Door Employment Tax Increase – that is, a cut in future Social Security benefits that exceeds any proposed reduction in payroll “contributions” and the alleged long-run Social Security shortfall. While George W. Bush claims his privatization plan will make young workers better off, but simple finance tells us that this claim is nothing more than a big fat lie. So the GOP leadership has decided to simply package this as “entitlement reform”. And sadly, some economists including Greg Mankiw parrot these dishonest labels. But let’s speak plain English – a plan to abuse the Social Security Trust Fund reserves to pay for cuts in taxes on capital income is a massive shift in taxation from capital income to employment income. To do so by deception strikes me as Grand Larceny. Of course, to tell young workers they’ll have to continue to pay high employment taxes as they get less in Social Security benefits could cost the GOP future elections. Then again – robbers rarely call the bank president just before they decide to rob the bank.
(title corrected – thanks to the AB reader)