“Starving the Beast” Worked

Conservatives first used the term “Starve the Beast” in the Reagan Administration. The strategy was to cut taxes, and then use the resulting deficits as leverage for spending cuts. After George W. Bush signed massive tax cuts into law in 2001 and 2003, the deficits materialized, but not the spending cuts. William Niskanen of the Libertarian CATO Institute looked at the evidence from 1981 to 2005 and found that “most of the changes in the relative level of federal spending were coincident with changes in the relative federal tax burden in the opposite direction.” He declared “Starve the Beast” a failure.

Federal receipts and spending as a percent of GDP. (Niskanen 2006)

Federal receipts and spending as a percent of GDP. (Niskanen 2006)

But now it seems that conservatives just needed to be more patient. The deficits created by the Bush Administration were just Step One of starving the beast. Step Two was to use those deficits as leverage to cut spending. Republicans started using that leverage after the election of a Democratic president, whereupon deficits suddenly mattered. Round after round of political brinksmanship followed, with threats of shutting down the government and defaulting on government debt obligations. The result has been an estimated $2.5 trillion in deficit reduction over the next ten years, three-quarters of which comes from spending cuts.

The Bush Tax Cuts continue to be among the largest drivers of our nation’s debt. The chart below from the Center on Budget and Policy Priorities shows a steadily shrinking debt in grey, but for a few policies and events layered above that grey area that drive our debt upward. Not only are the Bush Tax Cuts the most expensive of those policies and events, they are the only one that is permanent.

10-10-12bud_rev2-28-13-f2

How did we get here? Well, a consensus emerged during the 2000 election that taxes were too high. Both George W. Bush and Al Gore called for tax cuts, and both agreed that the poor and middle class should get tax relief. Bush’s tax cut plan was more expensive than Gore’s, and more beneficial to the wealthy.

Fast forward ten years, and that consensus remained in place during the debate over whether to extend the Bush Tax Cuts. Democrats and Republicans both agreed that the bulk of the tax cuts – for incomes up to $250,000 – should be extended. President Obama promised that people making less than $250,000 would not see a tax increase. Democrats eventually prevailed in repealing the Bush Tax Cuts for incomes over $450,000 – a small portion of the Bush Tax Cuts – while permanently extending the rest.

How can Democrats resist further starving the beast? First, by recognizing that the federal budget is in far better shape than it was a few years ago. Deficit reduction is still important, but mindless spending cuts such as the sequester do more to harm the economy than anything else.

The second point starts with Niskanen’s conclusion to his 2006 paper on the failure of “Starve the Beast” (at that time):

If our political system then leads to decisions that roughly reflect voter preferences, the longer-term challenge for those of us who favor limited constitutional government is to try to convince voters to reduce their demand for the services financed by federal spending. Until that time, some increase in federal taxes appears to be a necessary part of a fiscal policy to balance the budget.

If Democrats are to convince voters that government is worthwhile, at some point they have to convince voters to pay for it. If the consensus against taxing anyone except the wealthiest 1% continues, the beast will continue to starve.

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