The Failure of “Starve the Beast”

The Republican talking point that lowering taxes lowers spending and raising taxes increases spending is denied by reality.

Bruce Bartlett points out that the “Starve the Beast” theory is empirically false.

When Bush took office in January 2001, we were already well into fiscal year 2001, which began on Oct. 1, 2000. He immediately pushed for a huge tax cut, which Congress enacted. In 2002 and 2003, Bush demanded still more tax cuts, even as the economy showed no signs of having been stimulated by his previous tax cuts. The tax cuts and the slow economy caused revenues to evaporate. By 2004, they were down to 16.1 percent of GDP. The postwar average is about 18.5 percent of GDP.

Spending did not fall in response to the STB decimation of federal revenues; in fact, spending rose from 18.2 percent of GDP in 2001 to 19.6 percent in 2004, and would continue to rise to 20.7 percent of GDP in 2008. Insofar as the Bush administration was a test of STB, the evidence clearly shows not only that the theory doesn’t work at all, but is in fact perverse.

Moreover, as Bartlett rightly points out – historically speaking tax hikes lead to a decrease in spending, as well.

By this logic, the tax increase enacted in 1993, which raised the top federal income tax rate to 39.6 percent from 31 percent, should have caused a massive increase in the federal budget deficit. In fact, it did not. Spending was 22.1 percent of GDP in 1992 and it fell every year of the Clinton administration, to 21.4 percent of GDP in 1993, 21 percent in 1994, 20.6 percent in 1995, 20.2 percent in 1996, 19.5 percent in 1997, 19.1 percent in 1998, 18.5 percent in 1999, and 18.2 percent in 2000.

And contrary to another commonly-held Republican idea — that all tax increases reduce revenue via the Laffer Curve — revenues rose from 17.5 percent of GDP in 1992 to 20.6 percent in 2000.

According to Republican mythology, repeated by Moore and Vedder, the budget was balanced only because Republicans got control of Congress in the 1994 elections. But the deficit had already shrunk from 4.7 percent of GDP in 1992 to 2.9 percent in 1994. Budget experts who don’t shill for the Republican Party generally agree that the budget reforms and tax increases of 1990 and 1993 — which were both enacted against strenuous opposition from almost every Republican in Congress — deserve the bulk of the credit for bringing down spending and the deficit with tough budget enforcement rules and higher taxes.

Read the whole thing, along with the associated published research. The Republican idea that we can cut taxes and somehow spending will magically decrease is obviously false. But equally important is the idea that tax hikes can go hand in hand with spending cuts to reduce the budget deficit and produce a surplus. A combination of tax hikes and spending cuts is what is required to bring the budget into balance. Any one who promotes tax decreases and deficit reduction is simply at odds with empirical reality.

UPDATE (James Joyner): Kevin Drum adds,

[W]hat makes it even more crackpotty is that basic economic principles, of the kind that Republicans are endlessly lecturing the rest of us about, predict the same thing. If you raise taxes to pay for government programs, you’re essentially making them expensive. Conversely, if you cut taxes, you’re making government spending cheaper. So what does Econ 101 say happens when you reduce the price of something? Answer: demand for it goes up.

Cutting taxes makes government spending less expensive for taxpayers, which makes them want more of it. And politicians, obliging creatures that they are, are eager to give the people what they want. Result: lots of spending and lots of deficits.

If you want to reduce spending, the best way to do it is to raise taxes so that registered voters actually have to pay for the services they get. I don’t have a cute name for this theory, but it’s true nonetheless.

I’m reminded of Cap Weinberger’s observation on arms control agreements with the Soviets:  “We build, they build. We cut, they build.”    We’re essentially dealing with a variable here that doesn’t vary:  The demand for increased spending.

Bill Clinton had the luxury of presiding over the early post-Cold War years and being able to cut the Defense budget by a third.  He also benefited mightily from the dot.com boom and the massive influx of tax revenue it brought in.  The latter bubble burst just before George W. Bush came to office and he burst the former himself, starting two incredibly expensive wars.  He also created a massive new entitlement program, though, in the Medicare drug benefit.

I agree with Alex (and Bruce Bartlett) that we’re not going to get the deficit under control without both cutting spending and increasing revenues.  But we’re probably not going to be able to do either in sufficient amounts to solve the problem.   We could weather very large cuts in Defense spending but that’s not happening politically.  And the real nightmare is health care costs. There’s no politically viable solution to that in sight.

And I’m not quite sure Kevin’s right here.  Yes, tax hikes would make government more expensive.  But the politics are such that we’ll raise taxes only on those earning high incomes — meaning 99 percent of the population will feel zero pain.

The bottom line is that, so long as someone else — whether it’s “the rich” or future generations — is paying for our lavish government spending, the incentives for substantial reform are minimal.

FILED UNDER: Economics and Business, US Politics
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. Ron says:

    An empirical corollary exists that any increased tax revenue provided to government will not be used to cut deficits but will be spent.
     
    Spending cuts must come first.

  2. Andy says:

    I don’t think there is empiricism in politics, but YMMV.  Anyway, this story isn’t over yet.

  3. michael reynolds says:

    Alex:
     
    You realize that this will change not a single Republican mind, right?  They have their religion and they’re sticking to it.  If they accepted reality what would be left?
     
    Empirically wrong.  No impact.  Isn’t that the definition of delusional?

  4. ponce says:

    The smart Republicans figured all this out long ago and left the party.

  5. andrew says:

    Bill Clinton inherited victory in the Cold War, the internet reaching the masses and a Republican Congress to shut down his agenda. It was a unique situation. Take away those things and he would have been Carter or Obama. Victory in the Cold War is the most important factor, anyone who doesn’t mention that is fundamentally dishonest.

  6. ponce says:

    “Victory in the Cold War is the most important factor, anyone who doesn’t mention that is fundamentally dishonest.”
     
    *Yawn*  The Soviets were never coming and having to prop up the economies of all the failed former Soviet countries was certainly no gift to Clinton.

  7. michael reynolds says:

    Andrew:
    What a load.  Bill Clinton inherited a giant mountain of debt.  When he left office most of it was gone.  The Republicans took over and promptly re-created the mountain of debt. That mountain of debt wasn’t the Cold War, it was Reagan refusing to pay for the Cold War.
     
    It’s getting to be a pattern.  Hoover then FDR.  Reagan/Bush then Clinton.  And now Obama has another giant pile of Republican sewage to clean up.

  8. anjin-san says:

    > Victory in the Cold War is the most important factor, anyone who doesn’t mention that is fundamentally dishonest
     
    GHW  Bush was unable to capitalize on victory in the cold war, or the gulf war for that matter. He simply did not have the political skills.
     
    Clinton, on the other hand, did have ample political skills, and as a result was able to be a successful President. As for the internet, Al Gore was the one who saw its true potential, and put the power of the federal government behind making it grow. “Conservatives” seem to think there is humor in that somehow. Most of them probably could not write a blink tag without coaching, but they attack Gore, who helped to create the very medium they use to share their love of ignorance with the world.

  9. mannning says:

    Who hasn’t figured out that more money coming in results in more money going out–spending, in other words?  Tax and spend is not an illusory phrase for Democrats, but is rooted in fact for many years.  Surpluses are like a bag of popcorn to Democrats, to be eaten quickly with relish while staring at the big screen absently. Unfortunately, today’s Democrats are Progressives and they have a wish list of expenditures exceeding both the (non-existant)budget and the ability to raise revenue by way of taxes. That fact alone condemns Progressives as spendthrifts.
    The ambitious spending programs of this Democratic Administration are impovrishing the nation—unnecessarily at that. They have it exactly backwards: price out the wish list, borrow and spend the money for it, and then worry about how and when to pay it back in 2100 or later. There is no way out of this fiscal trap that our children will have to pay for without getting rid of the spenders up front, all of them–most of whom are Progressives.
    Then the inevitable problem will begin to arise again as Republicans taste the joys of spending other people’s money too. Hopefully, there will be a decent time lag before this joy takes hold, during which substantial repair of our financial affairs can be accomplished by those few who truly understand money and how to manage it, none of whom are Progressives.

  10. mannning says:

    Anyone that thinks Algore invented the internet is full of sh*t.

  11. sam says:

    “Who hasn’t figured out that more money coming in results in more money going out–spending, in other words? ”
    Actually, if Kevin Drum’s argument is sound, just the reverse is true:
     
    After agreeing with Bruce that starve-the-beast is a crackpot idea, Kevin writes:
     

    But what makes it even more crackpotty is that basic economic principles, of the kind that Republicans are endlessly lecturing the rest of us about, predict the same thing. If you raise taxes to pay for government programs, you’re essentially making them expensive. Conversely, if you cut taxes, you’re making government spending cheaper. So what does Econ 101 say happens when you reduce the price of something? Answer: demand for it goes up.Cutting taxes makes government spending less expensive for taxpayers, which makes them want more of it. And politicians, obliging creatures that they are, are eager to give the people what they want. Result: lots of spending and lots of deficits.

  12. mannning says:

    “And politicians, obliging creatures that they are, are eager to give the people what they want. Result: lots of spending and lots of deficits.”
    Actually this article supports my thesis quite nicely. Spending OPM follows from having OPM. Excess spending follows from excess revenue, however you try to excuse it. 

  13. superdestroyer says:

    Have we already forgotten the ratchet effect.  The boom in the late 1990’s was a tax windfall for the states along with the federal government.  Since the states did not have a defense budget to cut, the  states decided to spend all of the income on new entitlements and by expanding their payrolls.  In 2001, most states were running deficits but were then bailed out by the real estate bubble.  Once again, states spent the new tax income instead of cutting spending and saving for the future.
    Look at how badly the states have handled increased income.   Does anyone believe that Nancy Pelosi would be better?

  14. steve says:

    “Actually this article supports my thesis quite nicely”
     
    Go back and look at the actual numbers. In the 90s, taxes went up and spending actually went down, as a percentage of GDP.  At any rate, we have sustainability issues here. Tax and spend is economically sustainable, but not politically sustainable. Cut taxes and spend is not economically sustainable, but is politically sustainable. Conservatives have chosen the latter. To date, that has been a winning strategy. There has been no political cost to them for increasing our debt. However, it has been awful for our country.
     
    Steve

  15. superdestroyer says:

    The states defy the idea that higher taxes leads to balanced budgets.  New York and California both have very high taxes and have massive budget issues.  High taxes to support high spending means that the deficits are bigger during recessions.
    Cut spending significantly, then talk about tax cuts.  Raising taxes with no plan to cut spending is just a plan to turn the U.S. into California.

  16. john personna says:

    The problem, as people use one path through US history, to prove this or that as “empirically false” is that there are many possible futures.
     
    The future is not deterministic, and certainly not predicted by a shallow or slant read of the past.
     
    The overarching truth here isn’t where we’ve been, it’s where we’ve got to go.  And for that, I think we can trust Stein’s Law. “If something cannot go on forever, it will stop.”
     
     

  17. steve says:

    “The states defy the idea that higher taxes leads to balanced budgets.  New York and California both have very high taxes and have massive budget issues.”
     
    Texas has very low taxes and is also facing large deficits. IIRC, on par with California on a per capita basis. The issue is not taxes or spending but both.
     
    Steve

  18. john personna says:

    “Cut spending significantly, then talk about tax cuts.  Raising taxes with no plan to cut spending is just a plan to turn the U.S. into California.”
     
    That is certainly not what is going on in California.  We lead in the deadlock “solution.”  If you want to see what a do-nothing government can achieve, look here first.
     
    We neither cut enough spending nor raise enough tax.  We have the “permanent” budget gap.
     
    (Maybe Oregon is friendlier to tax-as-solution, but I think even they have resistance.)

  19. andrew says:

    What a load.  Bill Clinton inherited a giant mountain of debt.  When he left office most of it was gone.  The Republicans took over and promptly re-created the mountain of debt. That mountain of debt wasn’t the Cold War, it was Reagan refusing to pay for the Cold War. It’s getting to be a pattern.  Hoover then FDR.  Reagan/Bush then Clinton.  And now Obama has another giant pile of Republican sewage to clean up.

  20. andrew says:

    Is there anyway to eliminate a post? The previous one was from me, I have no idea why it posted, I was copying and pasting someone else’s and then something happened. Please get rid of it.

  21. anjin-san says:

    > Anyone that thinks Algore invented the internet is full of sh*t.
    And anyone who perpetuates they myth that he said he did is a complete and total idiot.  Pull Rush’s hand out of your ass and stop being a sock puppet. Here is a transcript of the actual interview with Wolf Blitzer:
     
    http://www.cnn.com/ALLPOLITICS/stories/1999/03/09/president.2000/transcript.gore/index.html
    More here: http://www.snopes.com/quotes/internet.asp
     
    > s it true that Gore “took the initiative in creating the Internet?” Bob Kahn and Vint Cerf, who invented the TCP/IP protocol that is at the core of all Internet communication, certainly think so:

    “As the two people who designed the basic architecture and the core protocols that make the Internet work, we would like to acknowledge VP Gore’s contributions as a Congressman, Senator and as Vice President . No other elected official, to our knowledge, has made a greater contribution over a longer period of time.”

    Among other things, Kahn and Cerf were referring to the High Performance Computing and Communication Act of 1991, originated by then-Senator Gore, which provided funding and resources for the growth of the Internet.
     
    If you want to sound like an ignorant twit Manning, just keep typing. Gore has also recieved a lifetime Webby Award for his contributions to the internet.
     
     

  22. john personna says:

    Anyone who goes off on Gore about the Internet is stubbornly ignorant at this point.  I will say this though, to balance the issue – Al Gore was sold the Internet.  His daddy had driven the interstate highway system.  The guys with the Internet took it to Gore, packaged as “the Information Superhighway” (remember those days?)  To Gore’s credit, he bought it.
     
    I think right wingnuts have trouble with it because they can’t accept that the Information Superhighway build-out was necessary.  They have a free market fantasy about it.

  23. superdestroyer says:

    John,
     
    When California received a tax windfall during the run up of housing values, did California responsibly use the money to pay off debt and put money away for the inevitable downturn?   No, California made long term payroll and pension commitments based upon the short term revenues.   California, Florida, New York, etc demonstrate that if you give the money more money, that the politicians will find a way to spend it.   Of course, the federal government has shown that if you let politicaisns borrow money, they will spend without control.
    The only solution is cutting spending.  Claiming that everything can bedone with tax increases is idiotic.  The government should not get one more additional dollar of tax dollar until it shows a true commitment to cutting spending. The government should not get one more dollar of borrowed money until it cuts spending.
    Without spending cuts, everything else is pointless.

  24. john personna says:

    Super, did  you say “windfall” before, or did you say “raising taxes?”
     
    Yes, California and every other civic entity in the capitalist and democratic world received windfalls from the world-wide housing boom.  Yes, California spent it, as did many.
     
    But that is a different story than what is going on since to fix the problem.

  25. steve says:

    Details on the Texas deficits. Low taxes do not guarantee anything, nor does low spending.
     
    http://www.dallasnews.com/sharedcontent/dws/dn/latestnews/stories/1024dntexbudgetmess.274b11d.html
     
    Steve
     
     

  26. mannning says:

    So Tim Berners-Lee wasn’t the inventor of the web logic while at CERN. OK, you write your history and I will follow truth.  Wikipedia has a solid history of development of the web. I subggest you read it.

  27. sam says:

    “Wikipedia has a solid history of development of the web. I subggest you read it.”
     
    The internet preceded the web by a number of years.

  28. john personna says:

    I said “stubbornly ignorant” and mannning proves he is.
     
    He’s arguing “invented” when that claim was never made.  He’s even arguing “web” when “web” isn’t the Internet.

  29. john personna says:

    Really manning, take a year or two to process this:
     
    http://www.snopes.com/quotes/internet.asp
     
    I know you can come around, if you work on it.

  30. mannning says:

    Having been an early user of ARPANET, and NSFNET (especially MILNET) while at IBM, I am quite familiar with them, but never actually called these early nets “The Internet” until TBL introduced Hypertext and a browser into the mix to create the WWW. They were called by their respective names, ARPANET, NSFNET, and MILNET, not Internet, until quite a bit later, say the mid 80’s, when their use grew exponentially with a decent browser becoming available. 
    The only contribution I can see that Algore made was his funding bill, and <i>absolutely no technical invention at all on his part.</i> Whether he claimed he made a technical contribution or not is not my concern—the facts show that he was not a part of its invention.
    A second source for the history is http://www.computerhistory.org/
     

  31. anjin-san says:

    > the facts show that he was not a part of its invention.
    And no one ever said he was. So exactly what are you carrying on about?
     
    > The only contribution I can see that Algore made was his funding bill
     
    Than you are not really informed. I am shocked. Shocked, I tell you.
     
    http://en.wikipedia.org/wiki/Al_Gore_and_information_technology

  32. mannning says:

    Ok, so he was a great promoter of other people’s ideas–big whoop! He always has a horse to ride, doesn’t he, and his latest has made him very wealthy.

  33. matt says:

    Manning : It’s like you exist in an alternate reality with an alternate history that never happened…

  34. sam says:

    ” I am quite familiar with them, but never actually called these early nets “The Internet” until TBL introduced Hypertext and a browser into the mix to create the WWW. They were called by their respective names, ARPANET, NSFNET, and MILNET, not Internet,”
     
    Maybe you didn’t. but I and everybody else was calling it the Internet, or more commonly, the Net, a few years before Mosaic (which morphed into Netscape), the first widely used browser,  made its appearance. I certainly wasn’t using ARPANET, NSFNET, or MILNET is send email, ftp, or access Usenet — I was using the Internet.  See, History of the World Wide Web.
    Really, Manning, what are you on about with all this?

  35. john personna says:

    Here’s what mannning is going to do:
     
    1) he’s going to move his goalposts today to Gore “promoting” the internet, “big whoop.”
    2) he’s going to forget that “invented” was a rightist slur that never had to be proven
    3) he’ll forget about this until he pops up next year to say “Gore never invented the Internet!”
     
    Dishonesty, but probably internal dishonesty, unreachable by us.

  36. mannning says:

    Well, personna, that Gore promoted the internet is fact. That he had nothing to do with the technical side of it is also fact. That he is in my book a charletan is a fact too. So, no change in goalposts, but your defense of him puts you in the same category as he is in my book. You have no idea what I know about the Gores, and most of it I will not write about, but since I am from Nashville originally, and both of my uncles were newspaper editors there, perhaps you can imagine that some things aren’t published even when quite newsworthy. For the younger Gore I have nothing but contempt, That goalpost will never change!

  37. john personna says:

    So Mannning you’ve disproved your own starting point, but you are still convinced.
     
    There are numerous studies that confirm this is the human condition.  When an ideological mind is presented with contrary facts, that mind becomes more convinced of its starting position.  This, democracy is the worst form of government, except for all the others.
     
    For the record though, you started with this:
     
    “Anyone that thinks Algore invented the internet is full of sh*t.”
     
    The problem is that he never claimed to have invented it.  Now, your goalposts is that he promoted it, and you are mad at him for that.  Sad, so sad, but human.
     

  38. mannning says:

    @ sam
    We seem to be having a (forgettable) semantic history argument on the subject of when the term Internet became widespread when referring to what we today know as “The Internet,” perhaps as opposed to an internet protocol term–of which there are many. Some people refused to label any old net “The Internet” until ARPANET was released by DARPA for civil use and adopted TCP/IP as the standard protocol throughout.
    Then, too, some nasty person got the idea that I didn’t know much about the subject, when I kinda lived with it for years as a user and system designer/developer, and adopted some of the techniues for use in the miltary systems I was concerned with at the time that interfaced MILNET (among others) using a militarized version of an IMP.
    Obviously, UUnet, Usenet, telnet and dozens of other lesser nets could have been called an internet, especially with a number of bridges to other nets available, but the real thing came in the late 80’s and early 90s. So it is sort of a moot issue, highly subjective, and certainly not worth any more words here. The history screeds are in fact rather moot on this point, and sort of slide into the usage post hoc. Enough said, by me anyway.

  39. john personna says:

    Mannning, you only want the semantic argument because it distracts from your real problem: that no one claimed Gore invented anything.

  40. mannning says:

    He said to Blitzer in a CNN transcript:  “During my service in the United States Congress, I took the initiative in creating the Internet. ” That was a very unfortunate choice of words, since to create= to invent, which he did not do. What he meant was quite different, but much of the world tagged him with claiming to have invented the internet. But, it is exactly this slithering way with words he has that condemns him as a liar and a self-promoter and exaggerator, as is well proven in his Truth film. As I said before, I couldn’t care less whether he was rightly or falsely accused of  saying that, I have him dead to rights on so many other matters. You seem bent on defending this charlitan to the death. It rubs off on you then. End of story.