Suppose you think the federal government is a bloated monstrosity in need of a stomach-stapling, extreme makeover. What should be done? Small-government types - free-market conservatives and libertarians - are increasingly at odds on this question.
Tax hawks like Grover Norquist, of Americans for Tax Reform, maintain that we should "starve the beast": create pressure on Congress to reduce spending by cutting the government's intake of taxes and running up deficits. This is the approach prescribed last year by Milton Friedman and Gary Becker, both Nobel Prize-winning free-market economists, in separate Wall Street Journal op-eds. Friedman predicts that "deficits will be an effective... restraint on the spending propensities of the executive branch and the legislature. The public reaction will make that restraint effective."
However, economist William Niskanen, chairman of the Cato Institute (also my employer), has presented econometric evidence that federal spending tends to increase when tax revenues decline, flatly contradicting the starve-the-beast theory. Furthermore, according to William Gale and Brennan Kelly of the Brookings Institution, members of Congress who signed the President's "No New Taxes" pledge were more, not less, likely to vote for spending increases, which is hard to square with the starve-the-beast theory.
"Starve the beast" is really a conjecture about the psychology of voters and legislators. The idea embodied in Friedman's statement is that mounting deficits will spur voters to choose representatives who will impose fiscal discipline. But why would voters react that way? Will they be worried about deficits causing rising interest rates, or about the prospect that their children will be stuck with a huge bill?
It seems just as likely that current voters would prefer to have their kids and grandkids foot the bill. In the long run, we're all dead, and the dead don't pay taxes. If the doctor gives you a month to live, why not run up the Visa?
Niskanen's analysis suggests that when current spending is financed by current taxes, voters see it as their money being spent, and so are more motivated to be frugal. But when current spending is financed by debt, voters see it as future voters' money being spent. If voters prefer to benefit now and have some one else pay later, there is no good reason to think legislators will see deficits as a reason to restrain themselves.
Starve-the-beast advocates might retort that the theory has yet to be tried. Sure, we're running record deficits. Sure, we've had tax cuts. Sure, most Republicans in Congress nevertheless voted for plush increases in education, defense, Medicare and more. And sure, President Bush has never seen a spending bill he wouldn't sign. The reason "starve the beast" has yet to kick in, they say, is that things aren't bad enough yet.
But if the deficit reaches crisis proportions - and it will, quickly, if it continues to grow at the current rate - we should not imagine that the government will rush to contain the crisis by rapidly cutting the fat from government. As George Mason University economist Alex Tabarrok recently argued, "The combination of changing demographics and current tax cuts is seeding our economy for a fiscal 'perfect storm.' When the storm hits, there will be a crisis, and... small government rarely does well in a crisis."
So, given our monumentally huge deficits, and the unsustainability of current policy, should small-government folks give up on further tax cuts, at least for now? That's a harder question than you might think.
For many libertarians and conservatives, cutting taxes is about more than efficiency; it's about morality. We have a moral claim to the fruits of our labor. Every cent the government takes from us beyond what is strictly necessary to secure our basic rights is a token of injustice. Cutting excess taxes is rectification, a way of making abused taxpayers whole. Therefore, for many proponents of smaller government, passing up a chance at a tax cut, or, worse, defending a tax increase, is a willing perpetuation of injustice.
However, if further tax cuts would accelerate deficit spending, justice would be threatened. Under present conditions, further tax cuts would largely be tax shifts, moving the burden of government spending to future generations. And there is nothing notably moral about raising taxes on the future to subsidize the present.
By promulgating the idea that given a tax cut, spending will take care of itself, advocates of the "starve the beast" theory have helped produce a political climate in which principled vigilance about spending seems unnecessary.
But we need principled political discipline now more than ever. It is not enough to cut out the pork. According to economists Jagadeesh Gokhale of the Cato Institute and Kent Smetters, cutting the entire discretionary budget forever would still not be enough. The real fiscal beasts are Social Security and Medicare. Unless they are tamed by serious reform, they will grow out of control and devour almost all future federal revenues.
A sustainable and just America requires the principled will to eliminate the unconstitutional, the inessential and the ineffective, and the courage to reform Social Security and Medicare today so that future generations will inherit a world at least as well-off as our own.