Ramesh Ponnuru’s Starve-the-Beast Thought Experiment

by Reihan Salam

Ramesh Ponnuru offers a thought experiment:

Let’s say we still had the Clinton-era tax rates and a (smaller but still quite large) long-term debt problem. Wouldn’t we be debating an increase in tax rates to a higher level than we are now? That seems to me pretty likely. The baseline from which we’re negotiating would be higher, perceptions of what’s tolerable would be higher, expectations of tax rates would be higher. On the Niskanen theory there would be a countervailing effect: In the interim the tax cuts caused spending to be higher and thus moved the spending baseline higher. But Niskanen didn’t find that a dollar of tax cuts were associated with a dollar of spending increases; he found that a 1 percent reduction in revenue over GDP was associated with a 0.15 percent increase in spending over GDP. So the countervailing effect would be smaller.

If these suppositions are right, then the Bush tax cuts would turn out to have lowered federal spending in the long run. They would end up having been moves in a long-term process of bargaining.

That is, Ramesh is tentatively suggesting that on a sufficiently long time-scale, “starve-the-beast” might be roughly right. Many on the left believe — and I think that they are right to believe — that the Clinton administration made a critical mistake when it failed to make the case for a sharp increase in, say, infrastructure spending in the late 1990s. Charles Blahous has helpfully illustrated how the projected surpluses of the early 2000s evaporated for Economics 21. Roughly 49% of the fiscal deterioration relative to the expectations of the CBO circa its 2001 projections can be attributed to increased spending, 27% to the failure to predict the less-than-smooth business cycle perturbations of the decade, and 24% to tax cuts. It isn’t too difficult to imagine that had we restored the 24% in tax cuts, the increase in spending would have made up much of or all of the difference, e.g., one can imagine a Gore administration pursuing a more ambitious coverage expansion than the S-CHIP and Medicaid expansions pursued during the Bush years. Bush-era fiscal deficits were relatively small, certainly in comparison to what we’ve seen in the post-crisis era, and more fiscal running room would have made the case for welfare state expansion far more plausible. 

None of this is to suggest that the Bush-era tax cuts are thus vindicated. Conservatives could have argued against welfare state expansion even if revenue levels had been higher. But Ramesh has given us something to think about.