Tuesday, May 11, 2010

Time For Stabbing Not Starving

There's a growing realization in conservative circles that when it comes to controlling government budgets, cutting taxes is not the answer. The theory that the "beast" can be slimmed down by depriving it of sustenance has been disproved by what's actually happened over the last thirty years. Kevin D. Williamson had an excellent piece in a recent edition of National Review that squarely addressed the problem (sub req):

Properly understood, there were no Reagan tax cuts. In 1980 federal spending was $590 billion and in 1989 it was $1.14 trillion; you don't get Reagan tax cuts without Tip O'Neill spending cuts. Looked at from the proper perspective, we haven't really had any tax cuts to speak of--we've had tax deferrals. Reagan and his congressional allies had an excuse in the considerable person of Speaker O'Neill. But George W. Bush and the concurrent Republican majorities in both houses of Congress didn't manage to cut spending, either. Part of that was circumstances--9/11, Afghanistan, Iraq, the subprime meltdown--but part of it was the fact that a poorly applied supply-side analysis has infantilized Republicans when it comes to the budget. They love to cut taxes but cannot bring themselves to cut spending: It's eat dessert first and leave the spinach on the table.

This isn't to say that there aren't perfectly valid reasons for cutting taxes such as to spur economic growth. But the history is quite clear that cutting taxes in the hope that such cuts would automatically lead to less spending is wishful thinking at best, a delusional fantasy at worst. As is the notion that tax cuts always "pay for themselves" through increased revenue. While it's true that a dollar in tax cuts usually does not equate to a dollar in lost revenue, it's also true that they aren't usually budget neutral. As Williamson notes in his piece, those who continue to claim they are should check with Mr. Supply Side himself:

Some people are more sensible about that Laffer Curve talk. Laffer, for instance. Arthur Laffer, whose famous (and possibly apocryphal) back-of-the-napkin diagram launched supply-side tax policy, readily concedes that the growth effects of tax cuts are oversold in the political debate. "Does every tax cut pay for itself? No. I think Irving Kristol wrote that, once--and then did a pretty good job of arguing for it. But if some guy running for Congress in Clayton County, Texas, says all tax cuts pay for themselves, what do we want to do? Go after him with a shotgun? Sure, they're going to cite me, and there's very little I can do about it. But there's the same amount of ignorance on the other side, ignoring the economic feedback effects of tax cuts."

The fact that a good part of arguments of the Left are economically ignorant does not excuse such ignorance among conservatives. If we believe that tax cuts are needed, then we should support them for the right reasons. But we should not pretend that such cuts will help improve budgetary matters.

Williamson has additional advice:

This we know: Tax cuts don't get us out of the spending pickle, and growth isn't going to make the debt irrelevant. Legislative mandates and gimmicks like spending caps and the like will not constrain the spendthrift habits of appropriators--because, if they do, they will be repealed, just like Gramm-Rudman was. You can't starve the beast if the Chinese and the bond markets keep lending him bon-bons by the ton. And the prospect of enacting a balanced-budget amendment to the Constitution is a castle in the sky.

So, what should conservatives do? One, abjure magical thinking about tax cuts. Two, develop a rhetoric in which "spending" and "taxes" are synonyms, so a federal budget with $1 trillion in new spending means $1 trillion in new taxes--levies on Americans today or on our children tomorrow, with interest. Three, get a load of those tea-party yokels, with their funny hats and dysgraphic signage, and keep this in mind: They are opposed to the Democrats, but what they are really looking for is an alternative to the establishment Republicans, whom they distrust, with good reason, when it comes to the bottom-line question of balancing the budget and getting our fiscal affairs in good order. And then, finally, decide which angry mob you want to face: today's voters or tomorrow's bondholders.

Similar thoughts were voiced by Steve Chapman in a piece at the Washington Examiner called How starving government gets fat (via Joe Carter at First Thoughts):

This really shouldn't be surprising. In the first place, cutting taxes doesn't deprive the government of funds as long as it can tap the credit markets on a vast scale. Locking up the ice cream does no good if there's an endless supply of burgers and fries.

In the second place, cutting taxes instead of spending is seductively pleasant. It lets citizens enjoy more government services at no extra cost on April 15.

Forced to pay for everything they get, right away, Americans would undoubtedly choose to make do with less. But given the opportunity to party now and pay later -- or never, if the tab can be billed to the next generation -- they find no compelling reason to do without.

Think of it this way. If you want people to consume more of something, you reduce the price. If you want them to consume less, you raise the price. For most of the last 30 years, federal programs have been on sale, and they've found lots of buyers.

That's how the low-tax strategy has worked in practice. So if we are going to reduce the size of the federal government, we can't rely on starving the beast. We will have to tackle it and wrestle it to the mat.

In some ways, cutting taxes had the same impact on government spending that cutting interest rates had on consumer spending. Easy money allowed people to defer the day of reckoning for having to pay for the homes, cars, boats, and other toys they loaded up on before the latest bubble burst. Lower taxes have allowed Americans to defer having to pay for all the government goodies we've loaded up in over the last thirty years. The credit bubble has already burst, it's time to puncture the government bubble.

This is not going to be an easy message for conservative leaders to deliver. Taking on the beast head on means cutting spending. A lot. At levels that will have some impact on almost all Americans. But if there ever was a time for that message to be understood and accepted by a majority of the country, it's right now.