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Two Evil(?) Santas

December 23rd, 2009 . by economistmom

two-santas-futurama

Len Burman (who is now at the Maxwell School at Syracuse, contrary to what the Washington Times printed) has a “festive” and “spirited” take on fiscal policy for the holiday season: he argues that Republicans and Democrats and their fiscally irresponsible ways are like two “evil Santas”–”evil” because these are:

two Santa Clauses who borrow from children to give gifts to their parents.

The two Santas came to Washington in 2000 and threaten to never leave. If we don’t send them packing, Christmas Future could be very bleak indeed…

[I]t’s past time to run the evil Santas out of Washington. Tax cuts don’t pay for themselves. And cutting federal revenues does not restrain the growth of spending (another baseless theory used to justify tax cuts). Instead, tax cuts create the illusion that government services can be purchased at a discount. As Cato Institute President Bill Niskanen has pointed out, that has led to more government, not less.

Democrats have figured this out. It’s a lot easier to expand government if nobody seems to have to pay the price. To his credit, Mr. Obama has insisted that his major domestic initiative — health reform — be offset by spending cuts and tax increases, but he did not impose the same standard on his new tax cuts. And Democratic activists deride those who lobby for fiscal sanity as “budget scolds” (or worse) because they fear that honest arithmetic will undermine their agenda.

I have more to say about the “derision” of “budget scolds” Len speaks of–some recent examples come from Paul Krugman and even friend-and-former?-budget-scold himself, Stan Collender.  But at Concord we’re now scrambling to get out our take on health care reform today before the Senate votes tomorrow morning–and before Santa visits.

10 Responses to “Two Evil(?) Santas”

  1. comment number 1 by: BillSmith

    “And cutting federal revenues does not restrain the growth of spending (another baseless theory used to justify tax cuts). ”

    How can this be known?

  2. comment number 2 by: Brooks

    Re: Stan’s post, I still don’t know with whom he thinks he’s breaking. It seems that he’s “breaking” with a figment of his imagination (to be precise, a straw man of his imagination), as I explain at http://capitalgainsandgames.com/blog/stan-collender/1332/breaking-deficit-hawks-very-personal-story#comment-4990

    (By the way, does anyone ever use the word “figment” in any other phrase?)

  3. comment number 3 by: Brooks

    Bill,

    From time to time this “starve the beast” question comes up on blogs and in my conversations via email and elsewhere, so I did a little write-up to use on such occasions. I’ll paste below. NOTE: I think the spam filter is blocking due to multiple links, so I’m going to footnote them and add in subsequent comment(s).
    ————————————————-

    On the “starve the beast” theory, there is debate among economists and the jury is out among them on whether or not lower taxes induce lower spending.

    Please note that I’m speaking of lower spending, ceteris paribus, NOT so much lower spending that the lost revenue is fully offset or more by lower spending, making the tax cuts deficit-neutral or better. What is discussed below is thus only the “soft” version of “starve the beast”, not the “strong” version implying deficit-neutrality or better. I think economists generally reject the latter hypothesis and believe tax cuts generally increase deficits even net of any reduction in spending.

    It may seem intuitive that lower revenues would induce lower spending, but an intuitive argument is made the other way as well — that borrowing to spend rather than taxing to spend shields taxpayers from the pain of spending and reduces the incentive to curb spending. In addition to this intuitive aspect, the empirical evidence is debated.

    A debate emerged among some economists after this (2004) piece by William A. Niskanen, Chairman of the Cato Institute and former member and acting chairman of President Reagan’s Council of Economic Advisers [1]. He holds a Ph.D. in economics from the (famously free-market) University of Chicago, which has honored him with a lifetime professional service award. Thus, it would seem that any ideologically bias would lead him to conclusions favorable to tax cuts. Yet Niskanen concluded that tax cuts led to HIGHER, not lower spending, and his behavioral explanation is per the preceding paragraph (shielding taxpayers from the pain of spending).

    Conservative economist Gregory Mankiw, who was Chairman of W Bush’s Council of Economic Advisors and is an economics professor at Harvard, noted (in 2006) that another prominent economist reached the opposite conclusion, with some differences in methodology (with perhaps some advantages), albeit with less recent data vs. Niskanen’s analysis. Mankiw also notes that (activist “progressive” economist and blogger) Mark Thoma was very critical of Niskanen’s methodology [2]. Mankiw concluded that “Until someone sorts out these apparently conflicting results, it is (as Thoma suggests) premature for anyone…to conclude that Niskanen has the last, or even the most persuasive, word on the topic.” [3]. (Note that Thoma’s ideology and related agenda would, if anything, bias him in the opposite direction from the view he expressed, since his rejection of Niskanen’s conclusion meant one less argument against tax cuts, which Thoma generally opposes. As Thoma writes as he begins his critique, “I hate to do this because the result that “starving the beast” does not work is useful in political battles”)

    In 2007, Berkeley economics professors Christina and David Romer analyzed the question and found that (quoting the abstract of their paper) “The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, they suggest that tax cuts may actually increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases.” http://www.nber.org/papers/w13548 The Romers were economic advisors to Obama during his campaign, and Christina is now Chair of President Obama’s Council of Economic Advisors, although conclusions they have reached in their studies have been cited by conservatives advocating tax cuts (on the basis of GDP growth), and The Economist magazine described them (5/10/07) as having “impeccable neoclassical [economist] credentials” (meaning strongly favoring free markets as a means of efficient allocation of resources). [4].

    Discussion of the Romer study at [5] and [6].

  4. comment number 4 by: Brooks

    [1] http://www.cato.org/pubs/policy_report/v26n2/cpr-26n2-2.pdf
    [2] http://economistsview.typepad.com/economistsview/2006/05/a_closer_look_a.html

  5. comment number 5 by: Brooks

    [3] http://gregmankiw.blogspot.com/2006/06/starving-beast.html
    [4] http://www.economist.com/world/na/displaystory.cfm?story_id=9163589

  6. comment number 6 by: Brooks

    [5] http://www.econbrowser.com/archives/2007/04/new_estimates_o.html
    [6] http://streetlightblog.blogspot.com/2007/04/macroeconomic-effects-of-tax-changes.html

  7. comment number 7 by: Brooks

    Diane,
    Speaking of Santa, Happy Holidays and thanks for a great year of EconomistMom!

  8. comment number 8 by: SteveinCH

    Personally, I have a slightly different take on starving the beast. Starting from any place, I don’t think you can starve the beast but I do think you can feed it. Said differently, raising revenue will tend to increase spending more than what would have otherwise have been the case but lowering revnue will not necessarily lower spending simply because government doesn’t lower spending ever. The only hope is slowing the rate of increase.

  9. comment number 9 by: Brooks

    Steve,

    Happy Holidays to you. I look forward to more fun, interesting conversations with you here in 2010.

    You’ve touched on a close cousin of the “starve the beast” hypothesis, the “feed the beast” hypothesis, which I have found is called in academic papers either the “revenue-expenditure nexus” or the “tax-spend hypothesis”. Several months ago I did a bit of research on it, reviewing some papers* including individual analyses and meta-analyses, and engaging in email exchanges with several economists and budget experts with insight into this question, including some conservatives who generally advocate for tax cuts or oppose tax increases. Views/conclusions generally ranged from at least skepticism to rejection of what I would call the “strong” version of the hypothesis — that incremental revenue causes an equal or greater amount of incremental spending. I’m reading your comment as implying the “soft” version — that incremental revenue will generate some incremental spending, but less than the amount of incremental revenue. I think most of the experts assumed/concluded this “soft” version. For example:

    I emailed economics professor Andrew Young who had written “”Tax-Spend or Fiscal Illusion? Allowing for Asymmetric Revenue Effects in Expenditure Error-Correction Models” (with that title I don’t think he’ll get offers for the movie rights). I asked the following, with emphasis in the original:

    (1) When you speak of “evidence in favor of causation”, and of “Friedman-type tax-spend hypythesis”, are you speaking of evidence/hypothesis of incremental revenues causing some incremental spending, or of incremental revenues causing incremental spending of an equal or greater amount as the incremental revenues?

    (2) Have a substantial portion of economists who have analyzed this question reached the latter conclusion , or just the former (as well as others who have concluded no relationship or an inverse relationship

    His response began:
    The evidence for the Friedman-type hypothesis generally suggests that revenue increases (decreases) case SOME incremental spending increases (decreases).

    * I’m neither an economist nor a professional statistician, but I reviewed the academic papers to the extent a layperson can. For a more layperson-friendly paper than most I reviewed, see Bruce Bartlett’s http://www.independent.org/pdf/tir/tir_12_01_01_bartlett.pdf

  10. comment number 10 by: economistmom

    Brooks: Sorry about that spam blocker and for not having checked here earlier. I tried to catch up but don’t know if I cleaned things up properly, but hopefully if anything we have some duplication and not anything missing. Thanks for the holiday wishes and your continued dedication to my site! I hope to bring some new and exciting creative twists as well as duller but much-needed practical improvements to EconomistMom in the coming year; let’s see if I can make some New Year’s resolutions that I can stick to this year!