Deficits: Uncertainty and the beast

BRUCE BARTLETT'S latest piece in the Fiscal Times reminds us that today's deficit problems are to a great extent the legacy of the Reagan and second Bush administration's "starve the beast" philosophy: the belief that if you cut taxes, spending will automatically come down. In fact, both administrations revved up spending at the same time they were cutting taxes, in the political equivalent of an overweight person who rewards himself with an extra helping of ice cream because he has just purchased a membership in a gym. And Kevin Drum adds the well-recognised point (on the left, at least) that this is precisely what we should expect:

[B]asic 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.

I think this is true, and both the current moment and the previous moment of deficit-cutting frenzy, in the early Clinton administration, suggest the public tends to develop an openness to tax hikes and spending cuts at the same time. (The hard right, of course, is different: it's never open to tax hikes, but that's another story.) But Mr Drum's way of looking at this (and my own) does contain a hidden assumption. The assumption is that when you raise taxes, people view it as making government spending "expensive", but that when you cut taxes, people don't look at the extra debt you've created, raise their expectations of future taxes needed to repay that debt plus interest, and consider government spending even more expensive. A lot of hard-money conservatives, however, believe that people act in the latter fashion. And this is the same reason why they've been arguing for the past year or two that government fiscal stimulus doesn't work.

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Deficits: Uncertainty and the beast