Free Markets, Free People


Deficits: Are Spending Increases The Same As Tax Cuts?

This weekend on on Fox News Sunday, Jon Kyl (rather inartfully) set up a classic struggle between political views of how government economics work:

Ezra Klein (and others) pounced on Kyl’s poorly expressed assertion (my emphasis):

What’s remarkable about Kyl’s position here is that it appears to be philosophical. “You should never have to offset cost of a deliberate decision to reduce tax rates on Americans,” he said. Never! This is much crazier than anything you hear from Democrats. Imagine if some Democrat — and a member of the Senate Democratic leadership, no less — said that as a matter of principle, spending should never be offset. He’d be laughed out of the room.

Back in the real world, tax cuts and spending increases have the exact same affect on the budget deficit. This sort of comment is how you tell people who care about the deficit apart from people who are interested in exploiting fears of the deficit to shrink the size of government.

While Kyl’s phrasing lends to this sort of demagogic mockery, it’s hard to blame Klein, et al., after the spending binge that followed the Bush tax cuts of 2001. Kyl’s immediate point — that paying for some tax cuts by raising other taxes — is spot on. Shuffling around the types of taxes that one pays makes no sense if the idea is to let Americans hold onto more of their money. Indeed, he made exactly that point after his Fox News Sunday appearance (via Daniel Foster):

“Who does the money belong to?” Kyl asked rhetorically. “The money belongs to the taxpayer, to the people. The money does not belong to the government, and yet that’s what this kind of a rigid paygo rule would assume: that the money belongs to the government, and therefore if you’re going to deny the government some of that revenue through a tax cut, you have to make the government whole, because the government can never lose any money. That would mean that you could never reduce the size of government. Each year, when it gets bigger, it stays at that level or it gets bigger yet, but you can never reduce it.”

As Foster notes, “Kyl is openly advocating some ‘starve the beast’ unfunded tax cuts.” Klein counters this with a reasonable budgetary point: deficits are deficits, whether from reduced income or increased spending. Yet, this misses the real issue:

He who has the money expands; he who does not shrinks.

According to the “starve the beast” strategy, if government takes in less revenue than it spends, eventually it will have to cut spending in order to match revenues, and thus the government will shrink. At the same time, if the private sector has more money in its pocket, the economy will expand. While the efficacy of this strategy leaves much to be desired in practice, at least one part of the equation can’t be denied, i.e. the more money that the government takes in, the more it expands.

The same holds true for the private sector. The fewer taxes it is forced to pay (that is, the more money it is allowed to keep), the greater it expands.

So, the real question is, which do we want to expand: the private sector or the government?

Kyl is dead-on in his describing the pervasive attitude of statists of all stripes. They really think the money belongs to the government and should be dispersed as it sees fit (provided, of course, that government is run by officials suitably attuned to the “common good”). That is where the struggle lies. Statists believe that government is the best source of economic expansion while history individualists commend the opposite.

If the statists are correct, then we should want the government to expand, and deficits should be run up without commensurate spending cuts or, alternatively, with tax increases. If, instead, the private sector holds the key to economic expansion, then deficits (if any) should be met by spending cuts. Period.

To be sure, in order to live under a rule of law, some minimal level of government spending is required. Ideally, taxes, user fees, etc. pay for that minimal level, but there will always come a time when unfortunate events necessitate dipping into the red. It is in those times when raising taxes may be the best solution on a temporary basis (which hasn’t always worked out very well). Once those events subside, however, continuing to expand government spending can only be done to the detriment of the private sector, which will then shrink.

In the end, whether the electorate chooses an expansion of the state or the private sector will be the real deciding factor in whether the economy expands or not. All deficit spending may be equal in budgetary terms, but only one course will actually serve to expand the economy. On that score, Kyl has the better of the argument.

~MJW

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22 Responses to Deficits: Are Spending Increases The Same As Tax Cuts?

  • America is not a closed system.¬† Private capital has no interest in facilitating growth of specifically the American economy.¬† If for instance the cost of doing business in America were higher – due to crumbling infrastructure or constrictive regulatory rules or a higher than normal cost borrowing related to a loss liquidity on the local market – then private capital would move to a better place.
    If none of the underlying problems are fixed then it doesn’t matter if there is a big tax cut or a big spending splurge – they both fail.
    ¬
    ¬
    BTW – how is “starving the beast” supposed to work when a government can simply print more money?

    • Well, printing the money hasn’t been the problem so far–the problem has been the big run the government has had on its Chinese credit card.

      Printing money as a solution would be very short term. If the government goes that route, it will be a self correcting problem in the short term. Running up the credit card takes awhile before it becomes self correcting. Hence the preference for the credit card.

    • Starving the beast is an absolute dead-bang strategy, depending on how we mean that term to be employed.
      Gandhi observed that the moment we withdraw support for government, it ceases to function.
      If supported by even a modest (but critical) fraction of the productive population, a program of civil disobedience would be effective in very short order.

  • I’m a believer in the efficacy of the extended order. It works. But we have a socialist government. Democrats are aggressive malignant socialists and Republicans are janitorial socialists. And where there is socialism the extended order is continuously bled, until it has no blood left to give. The goose has no more golden eggs.

    Ronald Reagan was needed in 1960, with a privatizing solution to Ponzi I (Social Security) and a pre-emptive move to get the last self-reliant generation to buy into private retirement health care to avoid Ponzi II (Medicare). Reagan arrived 20 years too late.

    The rest are mice nibbling around the edges of a malignant cheese.

    Lacking an economy with room to move and grow, the U.S. labor market cannot compete with a billion Chinese and a billion Indians. We can’t afford to make T-shirts here, or bathing suits, or cars, really.

    Americans will have to scramble hard, because we’ve gone from the Great Society¬†through the Opportunity Society into the Cannibal Society.

    Radical solutions: End Ponzi I and II for everyone under a certain age. Buy everyone out via a sinking fund created by selling vast federal¬†land holdings. Rip out Obamacare before it sinks its cancerous claws into the U.S. and create a 50-state free market for insurance like there should have been all along. Cut taxes on business. Get rid of the minimum wage (it kills unskilled labor, and that’s all it does).

    But I’m just pissing into the wind, and I know it. The cannibals will have their way for a long time. Don’t get eaten, is the only advice worth giving.

    • I have been advocating this approach for some time now; STARVE THE BEAST–REFUSE TO BE EATEN.
      It is simple…but by no means easy or without risk…and would be wonderfully…even terribly…effective.

    • Yeah, it’s weird to hear this talk of philosophical differences between the two parties.¬† Whatever their differences, in practice both parties have a history of spending more money than they take in and of making government larger over the long term.¬† Or to paraphrase Clinton’s campaign motto, “it’s the spending, stupid!”

      • The Dems gave us SS, Medicare, Medicaid, and Obamacare.

        Bush gave us Medicare Part D, but he also tried to reform SS.

        I spy a difference. The Dems are 100% wrong. The Repubs are only 50% wrong. It may not be the difference you want, but it is the difference we have. And I’ll take it, for now.

        • I made the distinction that the Democrats are the aggressive malignant socialists and the Republicans are the janitorial socialists.

          Bring on the janitors. But this time the toilets are backed up and the main sewer line has burst. And everybody is eating s**t.

    • Actually, our cars are not that bad. But when the biggest markets like China require you to have domestic joint-venture factories, you don’ t get an export business going. Hell, Chinese automakers wanted to buy made in USA parts, but then their government said the parts had to be taxed like cars, killing that business.
      I think the US could still manufacture a lot, but there are other factors than just labor cost that affect the manufacturing environment in the US

  • The biggest lie of the left in recent years, and it has been echoed, unfortunately by some economists who should know better, Is that tax cuts and spending increases have the seam effect on the deficit.

    But, as we have seen with the massive spending of the Obama administration, the effect of spending on economic growth is minimal. But the effects of tax cuts on economic growth is always substantial. As we have seen with several tax cuts in this and other nations in the post war period.

    You do not have to buy into the Supply side dogma completely to see that one is very much preferable over the other, as it leads to higher growth and thus eventually ratchets up the income that even the government receives.

    Unfortunately economic illiteracy among the public is surpassed only by economic illiteracy among politicians and journalists.

    • Tax cuts are not an attempt to defy the knowledge problem, whereas spending as stimulus is.

      Tax cuts should be across the board, but must also focus on allowing investors to form and use capital for investment that they can expect profit on if their risk is successful. The “tax the rich” strategy is always a¬†“tax on the middle class” because¬†it taxes¬†investment and investment is what causes the economy to grow. It’s also a tax on the poor because it creates zero opportunity, and in the zero opportunity cloud the poor are thrown crap like Obamacare and “benefits.” They are left on the plantation.

      Government spending does nothing. The idea that it stimulates the economy, beyond a few trips to the store, is baloney.

      Leave the rich alone and they will form up capital for new ventures and¬†the economy will grow. Don’t encourage bad financial practices via government latahs like Fannie and Freddie. And don’t encourage rentseeking by the big banks and industrials. Pull your gun when you hear phrases like “public-private partnership.”¬†That’s essentially fascism and is anticompetitive and destructive of market signals.

      But we are so far down the socialist-fascist road that all we needed was a Marxist president in tandem with a Marxist Congress to push us over the edge. We were already close to the edge. These people have pushed us over it.

    • In the Rohmer and Rohmer paper, they showed tax cuts had more of a stimulus effect than government spending.¬† Too bad Christina Rohmer couldn’t get that through to the administration she works with.

  • The tragedy is that the economic condition the last thirty years have brought us too requires a solution neither party is willing to embrace.¬†¬† There must be significant spending cuts, including massive entitlement reform, and there must be a restructuring of the tax code, perhaps a progressive fair tax, which increases revenues by essentially removing most tax deductions (which usually benefit the wealthy).¬†¬† We have to bring the budget into balance.¬† Neither political party will EVER have the power to do it through just spending increases, or just tax increases.¬† The two sides will have to put aside their ideological jihad and pragmatically bite the bullet and make real compromises and sacrifices, each giving up things dear to their core¬† constituency, for the good of the nation.¬†¬† Once the budget has been brought into balance and made sustainable, ONLY THEN can we talk about whether or not more spending cuts should exist, causing tax cuts, or if spending should increase, but paid for by tax increases.¬†¬† The great debate about government can continue.¬† But for now the very capacity of the US to avoid not only relative decline but possible collapse is through both parties recognizing that only by working together can these problems be solved.¬†¬† Not because working together is some value in and of itself, only because the political reality is such that neither can win on their own.¬†¬† The political pendulum will shift back and forth because whoever doesn’t have power will promise something for nothing (that’s what the GOP is doing now, and what Obama did in 2008), and the public will turn to them.

    • I understand. When you’re not lying, you’re confused.

    • So, Ryan’s road map is “promising something for nothing”?
      Collectivists will never act responsibly.  Any assertion they will simply ignores history, reality, and is an essential lie.
      What you suggest is that people who live for power will give it up willingly.  We all know better.

    • … but you promised us that Obama would have truly meaningful spending cuts.
      To me that means more that defense cuts, which you seem to believe above … so what is Obama waiting for ?
      Frankly, this is the same as the immigration reform debate … every body knows that we need to take control of our borders .. they even told us that they would during the 1986 reform but it hasn’t happened.¬† Why do Republicans or Democrats have to concede anything to get what was already promised 24 years ago ?¬† This resembles negotiating with a drunkered¬† .. I’ll go to AA if you give me

      • … or more like negotiating with a junkie … just one more hit and I’ll stop
        The Obama Administration has made a half-hearted claim in the DOJ suit vs Arizona that there are larger considerations ..
        Somebody give me a good reason not to control the border … I’m waiting …

    • Let me know when the Democrats agree to this and not demagog.

      • Both parties share blame.¬† But the practical truth is that none of these problems can be solved by either party following its partisan ideology or platform.¬† Only by finding a way to work together will they have the votes and the power to make needed changes.¬† The future of America depends on whether or not they can do it.¬† Those who fan the flames of partisan hatred of the other side as somehow evil or anti-American (be they from the left or right) are working against the capacity of this Republic to endure.

        • There is absolutely nothing, NOTHING, that the Democratic Party, with this President, and the leadership it has in Congress, and its intellectual base, and its philosophy can do for America, other than go away, and it will not do that.

          The Republicans haven’t much to offer, but they are not riddled with Marxist ideology throughout their ranks. So, as little as they have, they thankfully have little of that.

          As for you and your insincere, plaintive little whine, get yourself a priest, and a conscience. And do yourself a favor and do the impossible: Shut your mouth for a few years.