- The Washington Times - Monday, May 31, 2004

Milton Friedman, one of the world’s most accomplished economists, has stated that lower taxes are the best way to limit the size of government: “I believe there is one and only one way: the way parents control spendthrift children, cutting their allowance. For government, that means cutting taxes.” This “Starve the Beast” theory received considerable attention in the 1980s. Many believed that Ronald Reagan’s tax cuts helped impose spending discipline and thus arrest the growth of government.

The events of recent years, however, have put proponents of this theory on the defensive. President Bush has cut taxes, but he has also presided over record spending increases — including a $500 billion increase in government spending and an additional unfunded $12 trillion prescription drug benefit to Medicare. Does this mean the “Starve the Beast” theory is discredited?

It certainly is an indication that tax cuts alone do not guarantee fiscal responsibility, but the real question is whether government spending today would be even higher in the absence of tax relief. Economic theory suggests that government spending eventually adjusts to available tax revenues because politicians are unwilling to let deficits rise above some unspecified level. Deficits are an effective weapon against the political temptation to engage in spending binges because the public’s unhappiness with deficits forces spending restraint. Thus, as Nobel Prize winner Gary Becker notes, “If you want lower spending, tax cuts make sense.”

To illustrate this point, Mr. Becker uses the example of Mr. Reagan’s tax cuts of the 1980s. These cuts helped promote growth but they also — at least in the short run — increased the deficit. But this deficit made it harder for politicians to spend money. Moreover, the perceived need to reduce the deficit and to meet subsequent interest payments on the debt had long-term effects, perhaps even indirectly leading Congress and the Clinton administration to enact welfare reform and slow the overall growth of spending.

American Enterprise Institute Economists Kevin Hassett and Charles Calomoris present further evidence that starving the beast works. They measured the government’s marginal propensity to spend in response to positive and negative revenue surprises, which by nature are not influenced by previous commitments. Using CBO data, they concluded that from 1983 to 2001 “spending responds positively to news that there is more money to spend.” They noted that these results provide some support for the view that “tax cuts may reduce the growth of government.”

But other economists are not so sanguine. The Bush administration’s performance has led some conservatives to challenge the idea that cutting taxes reduces government spending. The Cato Institute’s chairman, Bill Niskanen, flatly states, “Starve the beast does not work.” And AEI’s Daniel Shaviro claims that those who support the Bush tax cuts because they are a first step toward smaller government “are under the influence of spending illusion and confuse the amount of the nominal dollar flows between individuals and government with the actual size of government.” He concludes that tax cuts don’t lower government spending and make things worse if they are not followed by significant spending cuts.

To be sure, today’s spend-aholic Republicans have done their best to discredit the “Starve the Beast” hypothesis. Yet it is wrong to conclude that tax cuts should be avoided if not matched by spending cuts. First, tax cuts help the economy. The 2003 growth rate of 4.9 percent was the fastest since 1984, and the economy is now on the path of robust self-sustaining expansion. Hopefully, Republicans will fight to make these keys tax cuts permanent.

Also, requiring spending cuts before implementing any tax cuts is the best guarantee to never get tax cuts again. Moreover, if Mr. Becker is correct, the moment of truth will come in few years when public opinion will put enough pressure on politicians to curtail spending. Rushing to implement quick budget mechanisms now might have dramatic consequences on economic growth.

One valid criticism of “Starve the Beast” is that some conservatives believe that tax cuts have a very large positive impact on the economy, and that this “supply-side” effect generates enough new revenue to eliminate any need to control spending. Proponents of this approach in the 1980s claimed that spending cuts were “the root canal approach to good tax policy.” They believed that cutting tax rates would take care of everything.

Fortunately, it did not stop President Reagan at the time to completely lose sight of his true objective: Reduce the size of the government. He used his tax cuts to force reductions in spending. And despite a Democrat-dominated House, Mr. Reagan managed to cut real nondefense spending by 10 percent during his first term. President Bush, on the other hand, has aggressively sought to expand the burden of government.

This spending explosion is the real problem. Today’s fiscal mess has nothing to do with the “Starve the Beast” theory or the tax cuts. But it has everything to do with Republicans giving up the hard work of promoting limited government.

Veronique de Rugy is a visiting scholar at the American Enterprise Institute.

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