What To Do About the Beast?

The June issue of the Atlantic arrived a few days ago and I just today got around to reading it. It contains the usual mix of insightful pieces and Fallowsesque hoohah. But as usual it makes you think, if only to refute some of the authors’ more absurd conclusions.

One of the most interesting, if terribly wrongheaded, articles is by Jonathan Rauch based on an interview with William A. Niskanen, chairman of the Cato Institute.

Rauch’s purpose is to de-legitimize modern conservatism and to do so he constructs a straw man. By his account, the Reagan revolution was made possible by two innovative concepts – the “Laffer Curve”, and “starving the beast.” Prior to Reagan, he argues, conservatism was split into opposing and irreconcilable camps – businessmen who abhorred deficits and therefore opposed tax cuts unless they were accompanied by spending cuts, and Goldwaterite libertarians who simply wanted to shrink the role of government and saw spending cuts as a means toward that end. Since spending cuts never happened, the movement was “gridlocked.”

But Reagan placated the business interests with the Laffer Curve, which promised that revenues lost to tax cuts would be more than compensated by those generated by increased economic activity; and for the Goldwaterites he offered taxcuts and the resulting deficits as a way of forcing a shrinkage in government. Tax cutting satisfied the demands of both wings of the Reagan coalition and therefore became “the lodestar of conservatism.”

This, of course, is a grotesquely simplistic picture of Reaganism, but it suits Rauch’s purposes, because he hopes to dismantle the twin pillars on which, in his view, Republican dominance has been erected and in doing so to bring the entire edifice toppling down. Regarding the “Laffer Curve” he has nothing to say, simply dismissing it as “mostly wrong.”

Enter William Niskanen, who Rauch describes as a “nonpartisan… honest man… [who] seems to glide above political Washington.” He has performed a “statistical regression” analysis of the past twenty-five years [since Reagan assumed office] that yields “no sign that deficits have ever acted as a constraint on spending.” Quite the contrary, Niskanen seems to show that tax cuts, by reducing the cost of government to the taxpayers, actually makes the public more tolerant of increased spending. When government is cheap, people are willing to buy more of it. [Actually, this sounds a lot more like simple correlation than regression analysis.] Moreover, Niskanen claims to have identified a magic number, 19 percent of GDP, above which taxes will decrease spending. He therefore urges repeal of the Bush tax cuts, which have reduced taxes below the 19 percent magic figure as a way of curbing government spending.

Aha! Rauch is triumphant. The tax-cutting “long pole” of the Republican big tent has been pulled down by a libertarian conservative, no less. The entire Reagan revolution has been discredited, based as it was on false assumptions.

Well, not so fast there sonny. It’s not that easy. I have a few problems with this stuff.

First of all, it isn’t legitimate to simply dismiss half of the equation, the idea that tax cuts will generate revenues, by saying that it is “mostly wrong.” What seems to matter in this regard is time scale. Certainly, in the short run, government revenues will drop, but in the long run they tend to rise, if not always at the same rate as government expenditures. Recent figures, for instance, show that the government, operating in the wake of the Bush tax cuts, will post a surplus for this coming fiscal year – something that the deficit hawks declared impossible just a few months ago. The much-derided “Laffer curve,” it would seem, cannot be completely dismissed.

Secondly, I have a problem with the time-frame of the analysis. By choosing his cut-off date at 1981 Niskanen has ignored the previous quarter of a century during which government grew rapidly despite a high tax burden. A longer time-frame analysis would seem to invalidate his “magic number” thesis and must be explained.

And then there is the question of tax burden. Is Niskanen dealing with total taxation, local state and federal, or just federal figures? Often, when federal taxes are cut, states and localities increase theirs in order to offset revenue losses. How does this complicate the picture?

And for that matter, the tax burden is not equally distributed. In our graduated system the wealthy pay a disproportionate amount of the taxes. This means that most of the voting public does not feel the burden of tax increases or the benefits of tax reduction as much as do the economic elites. The “cost of government” is therefore not equally shared. Does resistance to increased spending reflect general voter dissatisfaction or an elite response? The link between spending and political action is not as simple as the article suggests.

And in the end, aren’t we really talking about political action and political will? Niskanen and Rauch have presented a set of statistics that seem to show that the federal tax burden as measured by the percentage of GDP, might be in some ways related to the tax policies of the first Bush and the Clinton administrations and that, despite all sorts of brave rhetoric neither Congress nor four successive Presidents have been able to stem the growth of the federal government. That’s all.