Battlepanda: Feed the beast to stop its growth


Always trying to figure things out with the minimum of bullshit and the maximum of belligerence.

Saturday, November 11, 2006

Feed the beast to stop its growth

Mike Moffatt examines the "starve the beast" hypothesis about government spending, and concludes that it has been refuted.
I decided to examine the literature and see what evidence there was for the starve the beast phenomenon. I found three recent articles on the subject:


All three articles find the same thing - that there is absolutely no statistical evidence for the "starve the beast theory". What recent evidence we have actually supports the opposing theory, that is increases in taxes lead to lower government spending, and vice versa.
But what's the mechanism behind this trend of lower taxes leading to greater spending? Moffatt quotes from Jeffrey Frankel:
What is the mechanism through which the Starve the Beast approach is in theory supposed to restrain spending? The mechanism is that if you create huge deficits, citizens will worry so much about the national debt that they will come complaining to their Congressman: "I'm worried about raising taxes on my grandchildren." The Congressman will then be less likely to vote higher spending. Maybe people worry about the national debt, about taxes on their grandchildren. But surely they don't worry about such uncertain prospective future taxes... more than they worry about certain taxes today... Unpopular taxes today must put more pressure on Congressmen. Thus as a political economy argument, Starve the Beast just doesn't make sense, if the alternative is the regime of the 1990s.
In short, taxpayers aren't so concerned about running up a big tab on the government credit card when there's the possibility that someone else will get stuck with the bill.