My recent contributions to public choice

Southern Economic Journal, July, 2008 by William Niskanen

The Facts

Next, and more important, the starve-the-beast hypothesis is not consistent with the facts, at least since the beginning of the Reagan administration. During this period, most of the changes in the relative level of federal spending coincided with changes in the relative federal tax burden in the opposite direction.

What is going on? One condition that contributes to this pattern is the variation in the unemployment rate, since an increase in the unemployment rate increases federal spending and reduces federal tax revenues. So any estimate of the relation between changes in federal spending and the level of current revenues should control for changes in the unemployment rate. Second, one should also control for the change in net interest payments as a percent of gross domestic product (GDP) because interest payments are independent of the conditions that affect other spending.

Most important, a regression of the effects of these conditions indicates that the level of current federal receipts as a percent of GDP has a significant negative effect on the change in current federal spending as a percent of GDP. A one percentage point increase in the current federal receipts share apparently reduces the change in the federal spending share by about one-seventh of 1% a year indefinitely. As expected, the change in the unemployment rate has a strong positive effect on the change in current federal spending, and the change in net interest payments also has a significant positive effect. Another value of this regression is that it provides a basis for estimating the current federal receipts share at which there would be no change in the current federal spending share. Assuming no change in the unemployment rate and the interest payment share of GDP, federal receipts of about 19% of GDP (about the current share) would stabilize federal spending as a share of GDP but would still be insufficient to balance the budget.

The Problem of Fiscal Discipline

The third problem, of course, is that the starve-the-beast perspective has led too many conservatives and libertarians to be casual about the sustained political discipline necessary to control federal spending directly, succumbing to the fantasy that tax cuts would solve this problem. President George W. Bush, for example, proposed and won the approval of most congressional Republicans for large increases in federal spending for agriculture, defense, education, energy, homeland security, medical care, and transportation, and he only recently used his first veto on a spending bill. As a consequence, real per capita federal spending during the Bush administration has increased at the highest rate since the Johnson administration. If our political system leads to decisions that roughly reflect current 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 deficits. Until that time, some increase in federal taxes appears to be a necessary part of a fiscal policy to balance the budget.