- The Washington Times - Tuesday, July 26, 2005

Last week, columnist Robert Novak reported Rep. Bill Thomas, California Republican and chairman of the powerful House Ways and Means Committee, had signed onto legislation to create private accounts from the Social Security “surplus.”

Supporters of Social Security reform feel this is doable legislatively and would be a down payment on fundamental reform, which has stalled in Congress.

But there isn’t a pot of money out there to finance these new accounts. The unified federal budget deficit will simply rise by the amount of the Social Security cash surplus — current Social Security tax revenue in excess of that needed to pay current benefits. This would be about $80 billion per year to start. But as the Social Security surplus falls to zero in 2017, the money available to finance personal accounts will also fall to zero.

Supporters of this proposal blithely assume federal spending will be cut by enough to avoid a massive deficit increase. But there is not a scintilla of evidence to suggest even the remotest possibility this will happen.

It is revealing no specific budget cuts are detailed in the legislation, nor is there even any mechanism by which this might be accomplished. It is simply assumed.

According to Mr. Novak, this is not a concern because the deficit rise will pressure Congress to cut spending. As he put it, the deficit rise “is no real problem for conservatives, who correctly view a big deficit as a deterrent on runaway spending.”

Once upon a time, I believed this idea, which is often called the “starve the beast” theory. The premise is there is some level of deficit that is “too big,” beyond which irresistible political pressure will force Congress to cut spending. Therefore, the “conservative” strategy is to cut taxes any way possible so long as federal revenues go down. The increase in the deficit will force down spending, thus leading to smaller government.

This is really the opposite of supply-side economics, which sees many tax rates as being too high to maximize revenue. For example, it is now generally accepted a capital-gains rate much above 15 percent will reduce revenue. If the rate is higher than that, a rate cut probably will raise revenue. The idea was to analyze the tax system and find these “free lunches” where tax rates could be cut with little, if any, revenue loss.

But many people were skeptical about this. They also believed the size of government is measured by what it spends, not what it taxes. Therefore, it was necessary to convince them tax cuts would aid this goal. From this was born the starve-the-beast theory. In that way, those who favored reduced spending could support tax cuts as a means to that end.

In the 1970s and 1980s, I think this theory worked to some extent. Big deficits did put downward pressure on spending—but not very much, because it also exerted pressure to raise taxes. Virtually all the deficit reduction from the dozen 1982-93 budget deals came from higher revenues. To the extent spending was cut, it was simply reprogrammed into higher spending elsewhere.

Today, I see zero evidence deficits exert downward pressure on spending. This fact is documented in research by economist William Niskanen, chairman of the libertarian Cato Institute. In his words, “Acceptance of the ‘starve the beast’ position has led too many conservatives and libertarians to be casual about the sustained political discipline necessary to control federal spending directly and to succumb to the fantasy that tax cuts will solve the problem.”

Today, Congress cuts taxes and raises spending, too, with complete indifference to the effect on the deficit. And President Bush refuses to veto anything, preferring rhetoric to action on the deficit. Shockingly, he is the first president since John Quincy Adams to serve a full term without a single veto.

The starve-the-beast theory now has effectively been turned on its head. Instead of tax cuts starting up forces that will lead to spending cuts, the cuts have become a substitute for spending cuts. Tax cuts are spending cuts in the minds of many Republicans these days.

I support fundamental Social Security reform and private accounts. But this latest plan is nothing but a tease — the appearance of reform without any real substance. If we insist Social Security cash surpluses justify tax cuts, we have in effect conceded Social Security deficits, such as we will have after 2017, justify tax increases. I can’t support that.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

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