A Beast of an Idea

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How can you justify cutting taxes when you're already running a huge deficit and you're adding new spending like an extra $400 billion on Medicare? For a quarter-century, tax-cut junkies have had two answers to that. One is supply-side economics: There is no need to cut spending. Tax cuts can be so liberating they will actually pay for themselves, and then some, by inspiring new economic activity.

The second answer is that if you want smaller government, you have to "starve the beast." Larger deficits increase the pressure for spending cuts. President Bush has actually said that deficits are a good thing because they put Congress in a spending "straitjacket." An essay by three conservative economists, including Nobel prizewinner Gary Becker, published in the Wall Street Journal in October, ranked starving the beast ahead of the Laffer Curve as a reason to cut taxes. But there is even less evidence that starving the beast works in real life than there is for supply-side theories. Two rounds of tax cuts and a fast-rising deficit under George W. Bush have not led to serious spending cuts. The federal budget is bigger than ever.

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But put reality aside (as the President and Congress seem to have done). Does starving the beast make sense even in theory? Supply-side economics comes with a lot of intellectual paraphernalia, such as that famous Laffer Curve, drawn on a cocktail napkin. It may be nonsense, but at least it's clever nonsense (as Tom Stoppard once put it — though not about supply-side economics). Starve the beast, by contrast, is not a theory or even an assertion. It is barely more than a wish.

There's a reason that starve the beast has no curves, formulas or doctoral dissertations to clothe its nakedness. Cutting taxes with the expectation that spending cuts will follow is a huge and implausible leap not just in terms of human psychology but also in terms of simple mathematics.

How is starving the beast supposed to work? Let's create a simple model, in which every dollar of a tax cut leads to some fraction of a dollar in spending cuts. The trouble is that when you starve the beast by cutting taxes, you also increase the national debt and the bill for interest on that debt. So the first thing that happens is that you increase government spending. From then on, it's a battle between the lingering effects of the tax cut and the ever growing impact of compound interest on the added borrowing.

Let's go to the spreadsheet. Start with a government budget of 100, no debt and an annual deficit of zero. Call interest rates 4%. And say that in year one we get a 10%, across-the-board tax cut. Let's assume further that there is a starve-the-beast effect of 90%. This means that 90 of any dollar in tax cuts is covered by spending cuts that emerge spontaneously from the national subconscious. Assume finally that all the other things that affect government revenue and spending don't exist. What happens?

Well, spending does go down. It plunges to 91 in year three and then drifts upward, but even 20 years down the road it is only 93--a 7% cut in the size of government. Meanwhile, the deficit has gone from 0 to 2.8--which is the equivalent of about $56 billion — and the accumulated new national debt is about $1 trillion in real money. All in all, not disastrous. But it's a big cost for a small tax cut and an even smaller cut in spending.

And the idea that a tax cut will immediately return 90 on the dollar is wildly optimistic. Starve the beast, as a philosophy, has nothing to say about what exactly gets cut from the government budget. And there is an implication that this cutting happens painlessly, like the supply-siders' free lunch. But it does not happen painlessly or without a fight. At a somewhat more realistic STB rate of 50 worth of budget cuts for every tax-cut dollar, the deficit climbs from 0 to 11 (equivalent to $220 billion). Spending drops to 97 around year eight but is back to 100 and heading uptown by year 20. Accumulated new debt over two decades is around 160 ($3.2 trillion).

And if spending goes down only 10 for every dollar of tax cuts (hardly pessimistic, given that there is no actual evidence that tax cuts drive down spending at all), we're in deep, deep doo-doo. Government spending is almost 10% higher (yes, higher) after 20 years, and the equivalent of more than $5 trillion has been added to the national debt.

But don't despair. Imagine an STB rate of 1 to 1. You end up with an annual surplus equivalent to $400 billion, government spending down by almost 30% and more than $5 trillion knocked off the national debt. All you have to believe is that every time President Bush gives the country a dollar in new tax cuts, the country shows its appreciation by spontaneously knocking a dollar off its demands for government spending. And if you buy that, I've got an old cocktail napkin I'd like to sell you.