Andy Ferguson writes in the newest issue of The Weekly Standard:
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 Reagan administration to cut the federal 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. . . .
And then [William] Niskanen, looking over 25 years of budget data, noticed something about STB [starve the beast]: 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. . . .
As compelling as Niskanen’s critique is, he was less persuasive in explaining the flip side of his findings. Why do tax increases lead to decreased spending? “Demand by current voters for federal spending,” he explained, “declines with the amount of this spending that is financed by current taxes.” When you make them pay for government benefits out of their own pockets, in other words, voters will want fewer of them. The journalist Jonathan Rauch put Niskanen’s point more pithily: “Voters will not shrink Big Government until they feel the pinch of its true cost.”
For that reason, the great libertarian pot-stirrer said that spending would never decrease—that government would never get smaller—until federal revenues increased from 15.8 percent of GDP, where they are today, to higher than 19 percent of GDP: an amount totaling in the hundreds of billions of dollars.
Ferguson rejects Niskanen’s explanation, though:
The only system that would sustain Niskanen’s logic—raise taxes to reduce demand for government benefits—is one in which everyone pays the same percentage of their income in taxes. When taxes were increased to pay for government, everyone would feel the pinch. Such a system is called the flat tax. Good luck with that.
So we’re right back where we started.
Reagan never showed a sign that his “starve the beast” strategy was failing, had failed. “Raising taxes won’t balance the budget,” he said in his 1982 State of the Union address, as revenues fell and spending rose. “It will encourage more government spending. . . .”
We know now Reagan was wrong. But that doesn’t mean Niskanen was right. There may be reasons to raise taxes—if you give me a couple years I might come up with some—but the failure of “starve the beast” isn’t one of them.
Furgeson is correct to reject Niskanen’s argument. Taxes and government spending are, of course, correlated, but that does not equal causation. There is at least one other possible explanation for why government spending has historically decreased (relative to GDP) as tax revenue has increased (relative to GDP): the business cycle. As the economy grows, people earn more so they pay more in taxes; conversely, when the economy enters a recession, government revenue plummets. During recessions, however, the public relies on increased government spending, in the form of Medicaid, food stamps, and other transfer payments. (This can go the other way, too: Some state and local governments have used economic growth to justify increasing promises to government employees’ pension plans, but those costs typically come much further down the line.)