Friday, December 23, 2005

Starve the beast, part 1

In today’s New York Times, Paul Krugman addresses the “starve the beast” rationale for never-ending tax cuts, advocated by Republicans no matter what they do to the deficit or the fiscal gap:

“At this point starve-the-beast theory looks as silly as supply-side economics. Although a disciplined conservative movement has controlled Congress and the White House for five years - and presided over record deficits - public opposition has prevented any significant cuts in the big social-insurance programs that dominate domestic spending…

"In other words, the starve-the-beast theory - like missile defense - has been tested under the most favorable possible circumstances, and failed. So there is no longer any coherent justification for further tax cuts.

"Republicans have turned into tax-cut zombies. They can't remember why they originally wanted to cut taxes, they can't explain how they plan to make up for the lost revenue, and they don't care. Instead, they just keep shambling forward, always hungry for more."

Cute, but in my view Krugman under-estimates the unfalsifiability of starve-the-beast thinking. Counter-factual hypotheticals mean never having to say you’re sorry. No matter how fast spending keeps rising as tax revenues fall, one can always say: “Yes, but if not for the tax cuts, there would have been EVEN MORE spending!”

Because this argument rests on a counterfactual, it cannot directly be falsified. True, it can be tested empirically in the sense of testing past correlations between revenue levels and spending levels. Unfortunately, the research that has been done suggests that tax cuts are associated with spending increases, and tax increases with tighter spending, apparently because both respond to whether fiscal discipline is prevalent at any given time.

For a nice example of blithe unfalsifiability, however, when economists would ask Glenn Hubbard, during his White House years, about the rationale for cutting taxes in the face of a huge fiscal gap, he would respond that the long-term impact on the fiscal gap was zero because otherwise there would have been spending increases instead. Or rather, exta spending increases with the same present value as the revenue loss from the tax cuts.

Whatever. But anyway, starve-the-beasters have a further fallback, likewise unfalsifiable This is what I call the “manana theory.” True, we haven’t done anything yet to cut spending, it goes. But wait until manana – then we’ll take care of everything.

The great thing about the manana theory is that there are always more mananas to wait for.

Since this post is already pretty long, I will post a second, separate one explaining why “starve the beast” theory is mistaken even to the extent that the fiscal gap does indeed prompt large spending cuts manana.

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