Feeding the Beast

FEEDING THE BEAST….What happens if you lower the cost of something? People buy more of it. What if you raise the cost? People buy less of it.

So: what happens if the federal government reduces taxes and runs a deficit ? thus lowering the “cost” of government? People will “buy” more government.

This actually makes a strange kind of sense ? if there are no additional taxes to cause you pain, why shouldn’t you support big government? ? and William Niskanen, the chairman of the Cato Institute, says he now has research to back this up:

Niskanen recently analyzed data from 1981 to 2005 and found….?no sign that deficits have ever acted as a constraint on spending.? To the contrary: judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount.

….?I would like to be proven wrong,? says Niskanen. No wonder: for the modern conservative coalition, the implications of his findings are discomfiting, and in a sense tragic.

In other words, “starve the beast” doesn’t work. If you cut taxes, all you do is encourage additional spending.

This makes sense to me because of the reductio case: what if you eliminated taxes altogether and funded the entire government by deficit? Then people would spend like crazy. Why not, after all? It’s all free! (For a while, anyway….)

Of course, I’m not an economist and it might turn out that Niskanen’s analysis is too crude. (His regressions don’t sound especially sophisticated even to me.) So I’ll be curious to hear what other economists have to say about this. Should we add “starve the beast” to the already large mountain of things Grover Norquist is wrong about?