Starve The Beast - Economic Analysis

Economic Analysis

James M. Buchanan, a Nobel Prize-winning economist, helped develop the Fiscal Illusion hypothesis. It's obvious, he said, "borrowing allows spending to be made that will yield immediate political payoffs without the incurring of any immediate political cost." In their book Democracy in Deficit (1977), Buchanan and Richard E. Wagner suggest that the complicated nature of the U.S. tax system causes fiscal illusion and results in greater public expenditure than would be the case in an idealized system in which everyone is aware in detail of what their share of the costs of government is.

Empirical evidence shows that Starve the Beast may be counterproductive, with lower taxes actually corresponding to higher spending. An October 2007 study by Christina D. Romer and David H. Romer of the National Bureau of Economic Research found: " no support for the hypothesis that tax cuts restrain government spending; indeed, suggest that tax cuts may actually increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases."

William Niskanen, chairman emeritus of the libertarian Cato Institute, criticized “starve the beast.” If deficits finance 20% of government spending, then citizens perceive government services as discounted. Services that are popular at 20% off the listed price would be less popular at full price. He hypothesized that higher revenues could constrain spending, and found strong statistical support for that conjecture based on data from 1981 to 2005. Another Cato researcher, Michael New, tested Niskanen’s model in different time periods and using a more restrictive definition of spending (non-defense discretionary spending) and arrived at a similar conclusion.

Professor Leonard E. Berman of Syracuse University testified to a U.S. Senate committee in July 2010 that: "My guess is that if President Bush had announced a new war surtax to pay for Iraq or an increase in the Medicare payroll tax rate to pay for the prescription drug benefit, both initiatives would have been less popular. Given that the prescription drug benefit only passed Congress by one vote after an extraordinary amount of arm-twisting, it seems unlikely that it would have passed at all if accompanied by a tax increase. Starve the beast doesn’t work."

Economist Paul Krugman summarized as: "Rather than proposing unpopular spending cuts, Republicans would push through popular tax cuts, with the deliberate intention of worsening the government’s fiscal position. Spending cuts could then be sold as a necessity rather than a choice, the only way to eliminate an unsustainable budget deficit." He wrote that the "...beast is starving, as planned..." and that "Republicans insist that the deficit must be eliminated, but they’re not willing either to raise taxes or to support cuts in any major government programs. And they’re not willing to participate in serious bipartisan discussions, either, because that might force them to explain their plan—and there isn’t any plan, except to regain power."

Historian Bruce Bartlett, former domestic policy adviser to President Ronald Reagan, has called Starve the Beast "the most pernicious fiscal doctrine in history", and blames it for the increase in US government debt since the 1980s.