Categories:
Fiscal Policy
Public Choice Theory
Two public choice theories of fiscal policy:
Under Starve the Beast, the spenders tell the tax-cutters, “If you get what you want, that means I can’t get what I want.” It’s a story of limits to budgets, limits to borrowing, limits limits limits.
Under the alternative view, which I call the Ant and the Grasshopper, the spenders tell the tax cutters, “If you get what you want, then I’m definitely going to get what I want.” It’s a story of childish pettiness, childish tantrums gone awry, childishness childishness childishness.
Both channels are surely at work. But in modern American politics, I think all sides are quite good at ignoring limits.
READER COMMENTS
Hana
Apr 15 2013 at 10:52am
You must be prescient. A ‘No New Budget Cuts’ pledge has arisen. The spenders are now matching the tax cutters in approach.
http://dailycaller.com/2013/04/14/the-democrats-norquist-style-budget-pledge/
Brian
Apr 15 2013 at 11:55am
It may in fact be that STB doesn’t work to restrain spending. This wouldn’t be terribly surprising, given that most of spending is not discretionary, so significant cuts are hard to achieve. But I’m still at a loss as to why you and the Forbes article you link suggest that it make spending worse.
In your last post on this, the comment I left already showed that increases in spending per revenue fit STB better than they fit the ant and grasshopper scenario. Now the Forbes article draws conclusions that don’t seem to fit the evidence provided. Over the course of Reagan’s term, Federal spending went from 21.7% to 21.3% of GDP. The brief rise to 23.5% in 1983 may have been a result of the recession. Recessions will do that. Bush Sr. increased taxes and the percent went to 22.1% at the end of his administration. Clinton increased taxes a bit and the rate fell to 18.2% by the end, but most of that was likely due to strong economic growth. Bush Jr. cut taxes again and saw the percentage rise to 20.7% over his 8 years. Even with recessions, Bush’s average percentage was probably close to that of Clinton’s.
There’s really no evidence here of STB making things worse. Rather, spending seems to be pretty impervious political intentions. Only recessions seem to move the needle, as we’ve seen with Obama. His percentage jumped to over 25% of GDP in 2009 and has remained at or above 24% since. He’s a tax raiser, by the way. 😉
Kenneth Stanley
Apr 15 2013 at 12:02pm
The ant and grasshopper story seems to be true and is supported by empiric work by Christina Romer. She wrote a paper a few years back that showed how tax cuts (Starve the Beast) are met with subsequent tax increases and (seemingly) retaliatory spending increases.
Her conclusion – as I recall -is that Starve the Beast – doesn’t work. It just makes the beast get fatter
Brian
Apr 15 2013 at 12:19pm
Kenneth,
Do you have a link for that paper? I don’t see any evidence for this in the Federal data since Reagan. Besides, if tax cuts are met with later tax increases, the net effect depends on how big the later increases are. And which one, cuts or increases, are responsible for the spending increases?
Kenneth Stanley
Apr 15 2013 at 12:25pm
I don’t have a link but it is from
“Brookings Papers on Economic Activity”
Spring 2009
Coauthor David Romer
Paper title:
:Do Tax cuts Starve the Beast
The Effect of Tax cuts on Government Spending
MG
Apr 15 2013 at 12:54pm
Similar conclusions from one — William A. Niskanen — who I suspect favors lower taxes more than Cristina Romer. (I recal reading an article that claimed that he had been warning “starvers” about this as far back as the 80’s.)
http://www.cato.org/sites/cato.org/files/serials/files/cato-journal/2006/11/cj26n3-8.pdf
Himanshu Sanguri
Apr 15 2013 at 2:34pm
In India, politicians have always sung the Ant and Grasshopper rhymes. It would be more interesting to study the effects of continuous “Starve the Beast” to gain the ignorant electorates in a democracy. I also doubt if the politicians who run the government had ever studied economics?
Politics Debunked
Apr 15 2013 at 5:06pm
re: the comment above about a “no new budget cuts” pledge, it is shocking that they get away with posturing as if there have been major budget cuts and that small government types are extremists. In reality as this page points out:
http://www.politicsdebunked.com/article-list/federal-spending
graphs show the growth trend mostly independent of what party was in power.
MingoV
Apr 15 2013 at 5:36pm
I’m not seeing any true sides in the federal budget disputes. I’m seeing one side wearing different colors.
Democrats say spend spend spend on bribes for constituents, pork for themselves, and boondoggles for defense contractors.
Republicans say spend spend spend on slightly smaller bribes for constituents, pork for themselves, and bigger boondoggles for defense contractors.
Both parties are unconcerned about borrowing or printing a trillion dollars a year. Neither side will raise taxes enough to meet the enormous spending of the federal government. The budget outcome will be nearly identical regardless of which “side” wins.
Aaron Zierman
Apr 15 2013 at 7:42pm
I feel that the Ant/Grasshopper model is far too simple to be able to tell the overall economic story of the past 30+ years. I have trouble categorizing the different administrations as you have. Perhaps I am not fully understanding it or am trying to make it fit more perfectly than is intended.
I can understand why the Republicans in the late 70’s, Milton Friedman, et al. would have proposed the STB idea. However, we can in hindsight see the flaw that they had overlooked.
The expectation of STB was that spending would necessarily shrink to align somewhat closely with revenue. Running large deficits and accumulating debt would obviously be intolerable to the common man. However, we have found out that it is far more politically palatable to continue spending (even deficit spending) than it is to cut any programs. So long as everyone is getting their piece of the pie, no one has seemed to care how they got their slice.
So, unfortunately it has had an unintended adverse effect on debt and perhaps shown how remarkably easy (and politically advantageous) it is to spend.
The real issue we are beginning to see now is this debt. How do we deal with it? I think to begin we must understand that SPENDING is the real TAX. To continue to borrow is just to delay an ever increasing payment.
Brian
Apr 18 2013 at 12:31am
After looking over the Romer and Niskanen articles, a number of things are very clear.
1) There’s no evidence that STB reduces spending. STB as a theory should be thrown out.
2) (Regardless of what Romer claims) There’s no evidence that STB increases spending. (See Fig. 3j of Romer–spending per GDP is flat over time). This means that the ant and grasshopper theory should be thrown out.
3) Tax cuts and tax increases have no discernable effect on government revenues as a percentage of GDP.
4) Romer’s observation that tax cuts are often followed by mitigating tax increases is interesting and relevant. This also implies that the Bush tax cuts are all the more remarkable, having largely resisted efforts to repeal them or otherwise raise taxes.
5) The bottom line is that government appears to keep chugging along independent of who’s in power. Revenues per GDP show very little variation and spending per GDP only responds to economic downturns.
6) Obama has taken spending per GDP to unprecedented levels, putting his own distinct twist on the realities of #5.
Comments are closed.