There’s an interesting post by Tyler Cowen of The Volokh Conspiracy as to whether “depriving the government of tax revenue actually limits government spending.” The links in Cowen’s post lead to other VC posts on the same subject (here, here, and here)
and to a paper by Bill Niskanen and Peter Van Doren of the Cato Institute (where I once roosted for a spell).
Here’s the “starve the beast” hypothesis, according to Niskanen and Van Doren:
For nearly three decades, many conservatives and libertarians have argued that reducing federal tax rates, in addition to increasing long-term economic growth, would reduce the growth of federal spending by “starving the beast.” This position has recently been endorsed, for example, by Nobel laureates Milton Friedman and Gary Becker in separate Wall Street Journal columns in 2003.
It seems to me that the notion of starving the beast is really an outgrowth of an older, simpler notion that might well have been called “strangle the beast.”
The notion was (and still is, in some quarters) that the intrusive civilian agencies of the federal government, which have grown rampantly since the 1930s, ought to be slashed, if not abolished. There’s no need for fancy tricks like cutting taxes first, just grab the beast by the budget and choke it.
There’s more than money at stake, of course — there’s liberty and economic growth. The deregulation movement, which finally gained some traction during Carter’s administration, reflects the long-held view that many (most?) civilian agencies have a powerfully debilitating influence by virtue of their regulatory powers and ingrained anti-business attitudes. But I’ll focus on the money that feeds the beast.
Niskanen and Van Doren’s figure of merit is spending as a share of GDP. But it’s the absolute, real size of the beast’s budget that matters. Bigger is bigger — and bigger agencies can cause more mischief than smaller ones. So, my figure of merit is real growth in nondefense spending.
What about defense spending, which Niskanen and Van Doren lump with nondefense spending in their analysis? Real nondefense spending has risen almost without interruption since 1932, with the only significant exception coming in 1940-5, when World War II cured the Depression and drastically changed our spending priorities. Real defense spending, on the other hand, has risen and fallen several times since 1932, in response to exogenous factors, namely, the need to fight hot wars and win a cold one. Niskanen and Van Doren glibly dismiss the essentially exogenous nature of defense spending by saying
that the prospect for a major war has been substantially higher under a unified government. American participation in every war in which the ground combat lasted more than a few days — from the war of 1812 to the current war in Iraq — was initiated by a unified government. One general reason is that each party in a divided government has the opportunity to block the most divisive measures proposed by the other party.
First, defense outlays increased markedly through most of Reagan’s presidency, even though a major war was never imminent. The buildup served a strategy that led to the eventual downfall of the USSR. Reagan, by the way, lived with divided government throughout his presidency. Second, wars are usually (not always, but usually) broadly popular when they begin. Can you imagine a Republican Congress trying to block a declaration of war after the Japanese had bombed Pearl Harbor? Can you imagine a Democrat Congress trying to block Bush II’s foray into Afghanistan after 9/11? For that matter, can you imagine a Democrat-controlled Congress blocking Bush I’s Gulf War Resolution? Well, Congress was then in the hands of Democrats and Congress nevertheless authorized the Gulf War. Niskanen and Van Doren seem to dismiss this counter-example because the ground war lasted only 100 hours. But we fielded a massive force for the Gulf War (it was no Grenada), and we certainly didn’t expect the ground war to end so quickly.
As I was saying, domestic spending is the beast to be strangled. (I’m putting aside here the “sacred beasts” that are financed by transfer payments: Social Security, Medicare, etc.) How has the domestic beast fared over past 30-odd years? Quite well, thank you.
There is a very strong — almost perfect — relationship between real nondefense spending and the unemployment rate for the years 1969 through 2001, that is, from the Nixon-Ford administration through the years of Carter, Reagan, Bush I, and Clinton. Using a linear regression with five pairs of observations, one pair for each administration, I find that the percentage change in real nondefense spending is a linear function of the change in the unemployment rate. Specifically:
S = 1.0315 + 0.11286U
where S = real nondefense spending at end of a presidency/real nondefense spending at beginning of a presidency
U = unemployment rate at end of a presidency/unemployment rate at beginning of a presidency.
The adjusted R-squared for the regression is .997. The t-stats are 228.98 for the constant term and 39.75 for U.
In words, the work of the New Deal and Fair Deal had been capped by the enactment of the Great Society in the Kennedy-Johnson era. The war over domestic spending was finished, and the big spenders had won. Real nondefense spending continued to grow, but more systematically than it had from 1933 to 1969. From 1969 through 2001, each administration (abetted or led by Congress, of course) increased real nondefense spending according to an implicit formula that reflects the outcome of political-bureaucratic bargaining. It enabled the beast to grow, but at a rate that wouldn’t invoke images of a new New Deal or Great Society.
Divided government certainly hampered the ability of Republican administrations (Nixon-Ford, Reagan, Bush I) to strangle the beast, had they wanted to. But it’s not clear that they wanted to very badly. Nixon was, above all, a pragmatist. Moreover, he was preoccupied by foreign affairs (including the extrication of the U.S. from Vietnam), and then by Watergate. Ford was only a caretaker president, and too “nice” into the bargain. Reagan talked a good game, but he had to swallow increases in nondefense spending as the price of his defense buildup. Bush I simply lacked the will and the power to strangle the beast.
Bureaucratic politics also enters the picture. It’s hard to strangle a domestic agency once it has been established. Most domestic agencies have vocal and influential constituencies, in Congress and amongst the populace. Then there are the presidential appointees who run the bureaucracies. Even Republican appointees usually come to feel “ownership” of the bureaucracies they’re tapped to lead.
What happened before 1969?
The beast — a creature of the New Deal — grew prodigiously through 1940, when preparations for war, and war itself, brought an end to the Great Depression. Real nondefense spending grew by a factor of 3.6 during 1933-40. If the relationship for 1969-2001 had been in effect then, real nondefense spending would have increased by only 10 percent.
Truman and the Democrats in control of Congress were still under the spell of their Depression-inspired belief in the efficacy of big government and counter-cyclical fiscal policy. The post-war recession helped their cause, because most Americans feared a return of the Great Depression, which was still a vivid memory. Real nondefense spending increased 2.8 times during the Truman years. If the relationship for 1969-2001 had been in effect, real nondefense spending would have increased by only 20 percent.
The excesses of the Truman years caused a backlash against “big government” that the popular Eisenhower was able to exploit, to a degree, in spite of divided government. Even though the unemployment rate more than doubled during Ike’s presidency, real domestic spending went up by only 9 percent. That increase would have been 28 percent if the relationship for 1969-2001 had been in effect. But even Ike couldn’t resist temptation. After four years of real cuts in nondefense spending, he gave us the interstate highway program: another bureaucracy — and one with a nationwide constituency.
The last burst of the New Deal came in the emotional aftermath of Kennedy’s assassination and Lyndon Johnson’s subsequent landslide victory. Real nondefense spending in the Kennedy-Nixon years rose by 56 percent, even though the unemployment rate dropped by 48 percent during those years. The 56 percent increase in real spending would have been only 8 percent if the 1969-2001 relationship had applied.
As for Bush II, through the end of 2003 he was doing a bit better than average, by the standards of 1969-2001 — but not significantly better. He now seems to have become part of the problem instead of being the solution. In any event, the presence of the federal government has become so pervasive, and so important to so many constituencies, that any real effort to strangle the beast would invoke loud cries of “meanie, meanie” — cries that a self-styled “compassionate conservative” couldn’t endure.
Events since 1969 merely illustrate the fact that the nation and its politicians have moved a long way toward symbiosis with big government. The beast that frightened conservatives in the 1930s, 1940s, and 1950s has become a household pet, albeit one with sharp teeth. Hell, we’ve even been trained to increase his rations every year.
Tax cuts won’t starve the beast — Friedman, Becker, and other eminent economists to the contrary. But tax increases, on the other hand, would only stimulate the beast’s appetite.
The lesson of history, in this case, is that only a major war — on the scale of World War II — might cause us to cut the beast’s rations. And who wants that?
UPDATE: If Bush II wins a second term, might he become the Ike (or even Coolidge) of this decade? As Mike Rappaport of The Right Coast says,
I’ll believe it when I see it, but this is at least a good sign:
The White House put government agencies on notice this month that if President Bush is reelected, his budget for 2006 may include spending cuts for virtually all agencies in charge of domestic programs, including education, homeland security and others that the president backed in this campaign year.
If Bush II wins — and if Republicans retain control of Congress — it’s possible. But don’t count on it.
The timing of this announcement may be intended to whip up enthusiasm for Bush’s re-election among conservative Republicans, who have been wondering what sets Bush apart from a free-spending Democrat, aside from the war in Iraq. And some of those same conservative Republicans, apparently suffering from an overload of media scandal-mongering and defeatism, have begun to wonder about the war, as well.
Politics and Prosperity 