Proving modern conservative fiscal policy wrong

Stoking the Beast

This is fascinating, simple yet elegant.

Even during the Reagan years, Niskanen was suspicious of Starve the Beast. He thought it more likely that tax cuts, when unmatched with spending cuts, would reduce the apparent cost of government, thus stimulating rather than stunting Washington’s growth. “You make government look cheaper than it would otherwise be,” he said recently.
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Niskanen recently analyzed data from 1981 to 2005 and found his hunch strongly confirmed. When he performed a statistical regression that controlled for unemployment (which independently influences spending and taxes), he found, he says, “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.

Again looking at 1981 to 2005, Niskanen then asked at what level taxes neither increase nor decrease spending. The answer: about 19 percent of the GDP. In other words, taxation above that level shrinks government, and taxation below it makes government grow. Thanks to the Bush tax cuts, revenues have been well below 19 percent since 2002 (17.8 percent last year). Perhaps not surprisingly, government spending has risen under Bush.

“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.

What irony. Then again, the funny thing is that this is what the WSJ argued when they had that editorial on "lucky duckies". You have to tax those who don't make anything so that they 'hate government'.

... the root-canal economics of pre-Reagan conservatism was right all along: the way to limit the growth of government is to force politicians, and therefore voters, to pay for all the government they use—not to give them a discount.

Second, conservatives who are serious about halting or reversing the dizzying Bush-era expansion of government—if there are any such conservatives, something of an open question these days—should stop defending Bush’s tax cuts. Instead, they should be talking about raising taxes to at least 19 percent of the GDP. Voters will not shrink Big Government until they feel the pinch of its true cost.

And the most ironic news of all, Clinton (and the first president Bush) policies of raising taxes and cutting spendings are the best way to constrain government spending. unfortunately, this probably won't make any difference.

The conservative movement is in no position to accept or even acknowledge those implications, now that tax cutting has become the long pole in the Republican tent. Therein lies the element of tragedy. By turning a limited-government movement into an anti-tax movement, conservatism has effectively gone into business with the Big Government that it claims to oppose. It is not starving the beast. It is fueling the beast’s appetite. And the beast has a credit card.