'Starve the Beast' Theory Not the Answer

 Last week, columnist Robert Novak reported that Rep. Bill Thomas, R-Calif., chairman of the powerful House Ways and Means Committee, had signed onto legislation that would create private accounts out of the Social Security "surplus." Supporters of Social Security reform feel that this is doable legislatively and would be a down payment on fundamental reform, which has stalled in Congress.
The problem is there isn’t some pot of money out there to finance the cost of creating these new accounts. The unified federal budget deficit will simply rise by the amount of the cash surplus in Social Security — the amount of current Social Security tax revenue in excess of that needed to pay current benefits. This would be about $80 billion per year to start. But as the Social Security surplus falls to zero in 2017, the amount of money available to finance personal accounts will also fall to zero. 

Supporters of this proposal blithely assume that federal spending will be cut by enough to avoid a massive increase in the deficit. But there is not a scintilla of evidence to suggest even the remotest possibility that this will happen. It is revealing that no specific budget cuts are detailed in the legislation, nor is there even any mechanism by which this might be accomplished. It is simply assumed.
According to Novak, this is not a concern because the rise in the deficit will bring pressure on Congress to cut spending. As he put it, the rise in the deficit "is no real problem for conservatives, who correctly view a big deficit as a deterrent on runaway spending."
Once upon a time, I believed this idea, which is often called the "starve the beast" theory. The premise is that there is some level of the deficit that is "too big," beyond which irresistible political pressure will be brought to bear on Congress to cut spending. Therefore, the "conservative" strategy is to cut taxes any way possible so long as federal revenues go down. The increase in the deficit will force down spending, thus leading to smaller government.
This is really the opposite of supply-side economics, which sees many tax rates as being too high to maximize revenue. For example, it is now generally accepted that a capital gains rate much above 15 percent will actually reduce revenue. If the rate is higher than that, then a cut in the rate will probably raise revenue. The idea was to analyze the tax system and find these "free lunches," where tax rates could be cut at little, if any, loss in revenue.
But many people were skeptical that this was possible. They also believed that the size of government is measured by what it spends, not what it taxes. Therefore, it was necessary to convince them that tax cuts would aid this goal. From this was born the starve-the-beast theory. In that way, those who favored reduced spending could support tax cuts as a means to that end.
In the 1970s and 1980s, I think this theory worked to some extent. Big deficits did put downward pressure on spending — but not very much, because it also put on pressure to raise taxes. Virtually all of the deficit reduction from the dozen budget deals between 1982 and 1993 came from higher revenues. To the extent that spending was cut, it was simply reprogrammed into higher spending elsewhere.
Today, I see zero evidence that deficits are putting any downward pressure on spending. This fact is documented in research by economist William Niskanen, chairman of the libertarian Cato Institute. In his words, "Acceptance of the ‘starve the beast’ position has led too many conservatives and libertarians to be casual about the sustained political discipline necessary to control federal spending directly and to succumb to the fantasy that tax cuts will solve the problem."
Today, Congress cuts taxes and raises spending, too, with complete indifference to the impact on the deficit. And President Bush refuses to veto anything, preferring rhetoric to action on the deficit. Shockingly, he is the first president since John Quincy Adams to serve a full term without a single veto.
The starve-the-beast theory now has effectively been turned on its head. Instead of tax cuts setting in motion forces that will lead to spending cuts, the tax cuts have become a substitute for spending cuts. Tax cuts are spending cuts in the minds of many Republicans these days.
I support fundamental Social Security reform and the establishment of private accounts. But this latest plan is nothing but a tease — the appearance of reform without any real substance. If we insist that Social Security cash surpluses justify tax cuts, then we have in effect conceded that Social Security deficits, such as we will have after 2017, justify tax increases. I can’t support that.


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