Strengthening Constitutional Self-Government

No Left Turns

The Beast Didn’t Starve

I always enjoy reading Jonathan Rauch, because even though he often departs from the right’s policy prescriptions, his fundamental worldview remains that of the conservative/libertarian. He is at his best when he points out that certain things we support can produce consequences that we most likely do not.

In this month’s Atlantic Rauch takes on that most sacred of conservatism’s cattle, tax cuts. Ronald Reagan, of course, popularized the idea that by cutting taxes it was possible to reduce the size of government by "starving the beast." If revenues fell, the argument went, legislators would have no choice but to exercise fiscal discipline.

The problem, of course, is that this is precisely what didn’t happen. Government spending has soared in the past five years, just as it soared in the 1980s--in the wake of significant reductions in income tax rates. The missing tax revenue, Rauch argues, was quickly made up through borrowing, and as a result the whole episode sent the mistaken and dangerous message to taxpayers that it was possible to keep all of their favorite programs fully funded, but with less money. On the contrary, he claims, in the 1990s Bill Clinton raised taxes, and the ensuing years saw actual decline in the size of the federal government. This was not surprising, because now taxpayers recognized the pocketbook effect of big government.

I think Rauch tends to give the lawmakers of the 1990s too much credit--the cuts of that decade stemmed less from taxpayer outrage than the impression (mistaken, as it turned out) that the end of the Soviet Union meant that the United States could gut its armed forces. Nevertheless, in a period of runaway spending under the administration of an allegedly conservative president, we would be foolish to dismiss Rauch’s central point--it’s hard to starve a beast when it has so many credit cards.

Discussions - 19 Comments

". . . the right’s policy prescriptions."

The "right" is hardly monolithic or unitary.

Years ago in grad school, some of us met a guy who introduced himself as a "radical anthropologist." A friend of mine gave the deserved response: "So, what is it you do? Measure the skulls of Weathermen?"

A couple of things about a large deficit concerns me, hoping someone with some economic knowledge might be able to tell me if my fears are well founded.

It seems that a lot of US bonds are being sold to the Chinese. I wonder what this might do to our foreign policy? Is it possible that China could order their citizens to stop buying our bonds unless the US obeys that regime’s wishes? It seems the US needs China to buy the bonds or we cannot operate, at least we cannot without massive tax increases, so why wouldn’t a US President just obey the Chinese instead of raising taxes?

Also, and this is the part I am somewhat unsure on, it seems that the more bonds the government issues, the higher the interest rate has to be on those bonds. At some point investors will demand a higher rate for their money either because they can get it (the government needs the money) or because it looks like the US won’t be able to pay the bonds back (much like GM and its bonds right now). Once bond interest rates go up it seems all other interest has to go up, since bonds are considered the safest investment. Why would banks lend mortgage money (a fairy safe loan too) at a lower percent than bond interest? I do not think they would, so as the US government borrows more it slowly raises interest and slowly destroys the economy.

A couple of thoughts about conservatives and taxes:

1. Assuming the Laffer curve is right, and assuming we were on the wrong side of the curve in the 1980s (which I assume was the argument), then decreasing taxes ought to have increase revenue to the government, but I thought this is exactly what conservatives did not want? It seems a plausible argument could be made that once one is on the wrong side of the curve, then if one wants to "starve" government, one should not decrease tax rates but increase them.

2. In order to get the lower marginal rates included in the 1986 tax reform act for the wealthy, tax shelters were pretty much outlawed (thanks to sections 163 and 469). One wonders whether conservatives might not have been better off keeping pretend high rates around so the public was satisfied and Democrats could play the charade that they were taxing the rich at high rates, while keeping tax shelters around so that the rich would pay very little. It is true that in this system the AMT would still get people, but its rate is 26% to 28%, which is about the rate for couples making over $60,000; singles $30,000; so pretend rates of taxation would look ghastly, 70%, while real taxation would be 26% if shelters were employed.

clinton benefited by a huge drop in interest rates. after arter, about a third of hte budget was interst on the national debt. that declined to under one quarter as bonds were paid off with new bonds

Rauch is spot-on. Tax cuts without spending cuts are only half the game. While they may well be good for the economy, they don’t shrink government. The political class simply borrows.

Moser notes: "Government spending has soared in the past five years, just as it soared in the 1980s--in the wake of significant reductions in income tax rates. The missing tax revenue, Rauch argues, was quickly made up through borrowing."

I think it’s pretty funny that Rauch, apparently with your approval (which is not funny), makes this zero-sum tax game argument on the very day when we find out that tax revenues are setting new records. The idea set forth by the Regean supply-siders is working exactly as intended.

Simply put, tax cutting works on a PRO-GROWTH formula based upon a free-market economy. The more money left in The People’s pocket doesn’t translate to less money for Uncle Sam. It’s just the opposite. As The People spend and invest the economy grows, ergo tax coffers enlarge as well.

In a very real sense this is Keyesnian doctrine in reverse. And it works rather well, thanks. :)

everyone remembers Clinton’s tax hike of 1993, but everyone seems to forget that Clinton also had taxes CUT on his watch (the congress cut the capital gains tax rate, helping primarily those with high incomes), and the congress (for a couple of years anyway) held the line on discretionary spending. Thye result was a boom in the stock market, an increase in tax receipts, and a budget surplus.
Since the Bush administrtion has displayed about as much interest in controlling spending as it has in enforcing our immigration laws, it is not suprising that we are running a deficit. After all, get a 1K raise, and spend 2K more, and you end up worse off financially.

In a very real sense this is Keyesnian doctrine in reverse. And it works rather well, thanks. :)

So Nixon’s right--we’re all Keynesians now?

Keynes himself saw problems with repeated tax cuts and spending increases; he knew that it was an unsustainable strategy. His recommendation was that during periods of economic growth that the government focus on balancing the budget through a combination of tax increases and spending cuts. Of course, as Hayek pointed out, tax cuts and spending increases are always popular, but the reverse never is. So, when a democratic society engages in Keynesianism, the trend will always be in the direction of greater and greater deficits.

This, incidentally, was the critique that Keynes was responding to when he said, "In the long run, we’re all dead." It wasn’t a satisfactory answer then, and it still isn’t today.

Keyesnian doctrine discounted the unique ability of individuals working in free markets to create wealth, while stressing too much favor upon governments to regulate wealth and spread it around Marx-like (from each according... to each according...) to the hungering mob.

Reagan, on the other hand, stressed the individual’s "right" over the mob’s "right" in a constitutionally governed society. In otherwords, Keynes, while not seeking to kill the "golden goose," merely to wound it for the good of the whole flock, he saw cynically thought would happily kill the golden goose. Reagan, optimistically saw the flock as better than that, and the rule of law capable of saving the golden goose from the threatening mob.

For this distinction, of course, Reagan was deemed a cold and unfeeling "fascist," while Keynes holds the title of a man of "compassion." Me? I see it just the opposite. Reagan is my hero. Keynes is a cynic, stopping a bit short of a populist jerk. :)

Sure, Reagan’s tactic was to reward the supply side versus the demand side, but the fundamental principle was the same as that of Keynes--in times of recession increase the money supply, by cutting taxes, raising spending, and lowering interest rates. And, to be sure, it brought the country out of recession. But supply-side economics ultimately suffers from the same problem as demand-side Keynesianism, in that fiscal discipline is forgotten.

But supply-side economics ultimately suffers from the same problem as demand-side Keynesianism, in that fiscal discipline is forgotten.

Keynesian doctrine does, of course, because government confiscation of private wealth (and spending it on non-wealth creating enterprise) is the antidote to what ails society. But government spending, in the form of tax cuts, creates more wealth and thus increasing tax revenues. What that government, then, does with those increased revenues has nothing whatsoever to do with how they got it, save by higher confiscatory taxes (which will in turn discourage the golden goose).

Do you wish to make the argument that fiscal spending discipline in government can only be achieved via higher taxes and more government muscle flexed upon free markets? It’s not the fault of business that Congress (The People’s representatives) can’t control itself with an unearned bonanza!

Do you wish to make the argument that fiscal spending discipline in government can only be achieved via higher taxes and more government muscle flexed upon free markets? It’s not the fault of business that Congress (The People’s representatives) can’t control itself with an unearned bonanza!

Actually, this was a pretty standard argument among conservatives pre-Reagan. Let taxpayers feel the real cost of big government--rather than pushing it off onto their grandchildren--and they’ll demand that the size of government (and hence the taxes to support it) be reduced. This was why conservatives fought FDR’s desire to impose income tax withholding--they wanted taxpayers to get hit with a big bill on April 15.

That was a pretty cycnical way to try and win elections, dude. They weren’t called the "stupid party" for nothin’ ya know? :)

The way withholding presently works, taxpayers feel as if they are getting a big gift from the government every April 15. Most do not realize that their refund was actually an interest free loan to the federal government. Multiple all of the refunded money by the interest rate for back taxes and taxpayer improper payments (right now it is 7%) and one can see that the government is deriving significant benefit from withholding while taxpayers suffer denied interest/investment opportunities and/or the cost of delayed gratification.

That was a pretty cycnical way to try and win elections, dude.

I’m not sure what your definition of "cynical" is. As Steve Sparks indicates, the withholding system masks the true costs of big government. So does borrowing. According to the common understanding of the term, that’s a lot more cynical than maintaining a balanced budget.

I’m not sure what your definition of "cynical" is.

Sigh. My apologies. Once the "Add" button is pushed, a spelling or grammatical error cannot be corrected. I’ll try to be my thorough with my posting in the future, so as to not distract willing minds from the debate issues that matter.

Having lost the U.S. House to the Democrats, in the 1954 midterms, Eisenhower famously wrote to his brother:

"Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history."

That the authors of these programs, the Democrats, managed to control the "Ways and Means" by which they were funded for forty striaght years, tells me something about how the American people like the way their government is run, wether it makes any common sense or not.

Nice change of subject, though. Wanna talk about the common sense of sending two billion bucks of U.S. taxpayer’s money to Egypt every year? Did I get my spelling rite this time? Know of any good spell checkers out there I can borrow online, dud? ;)

Read what I wrote. It should be clear that I wasn’t commenting on your typo; I was disputing your use of the term. It’s not cynical to ask that taxpayers feel the pain of big government; it’s cynical to try to hide it from them by passing that pain onto their children.

Please consider that by justifying tax cuts on the grounds that they spur economic growth you are accepting another basic Keynesian premise--that it is the proper function of government to ensure economic growth. Our Constitution says nothing about this; on the other hand, it does mandate that the government do certain things, and permits the use of taxation (including the income tax) to pay for them.

I know well the Eisenhower comment, and it’s unfortunate that conservatives now have to play by the same dirty rules that the progressives wrote long ago. But I’m not a politician, nor do I have any intention of becoming one, so I have no reason to try to pander to any special interest group.

I know well the Eisenhower comment, and it’s unfortunate that conservatives now have to play by the same dirty rules that the progressives wrote long ago.

This is not at all necessary. Reagan et al could’ve just accepted Goldwater’s 1964 trouncing, remained safely in their ivory towers and let progressives continue to write the rules till we look just like Europe.

Now that’s what I call "cycnical"!

Rauch is correct but his opinion isn’t original...a similar argument is or was posted on the Mises web site a while back...Also the Federal Reserve steps in and buys Government Bonds...so it is highly unlikely that that the rate demanded on treasury notes will increase dramatically in the short run without the Federal Reserve stepping in...(As Sparks fears)

What Plubius seems to fail to realize is that this ammounts to the creation of money at will...in effect a silent form of taxation because money is created which depresses the purchasing power of money as the government goes on the market and purchases goods. This silent taxation masks the true cost of government programs/wars... Of course it is rather difficult to rationally discuss what the cost of not having those government programs or wars would or might be... Economics is trully a strange science in that it tries to understand what is seen as well as what is not seen...(kind of like a lot of speculation on if we would have been better off without Iraq...Hard to answer..and even getting close to answering it one way or another means accepting certain premises/scenarios...

On the other hand...Plubius is correct and Dr. Mosier is off base because in effect even our republican president GWB puts out an economic report accepting the premise (the Keynesian premise?)--that it is the proper function of government to ensure economic growth...albeit in his case with an emphasis on markets/free trade... I will call it the Macro-economic premise (because some approaches are decidely un-Keynesian..albeit perhaps the whole endeavor is extra constitutional)... no one does Macro without believing/accepting what you call a Keynesian premise, and no president will ever dispute the premise...

Also I find it rather ridiculous the extent to which people go to always bash Keynes...one should simply state where one disagrees with him instead of imputing on him nefarious views of human nature.

If you want to bash Keynes be prepared to do a whole lot of mathmatics...

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