Monday, May 08, 2006

Economics 101

Another example of just how intellectually bankrupt the rabid right is came to light recently in an Atlantic Monthly article titled “Stoking the Beast.” In this article the author, Jonathan Rauch, makes a convincing case that the linchpin of the conservatives economic philosophy is just plain wrong. That philosophy has two components to it: The first is that cutting taxes will boost the economy and will pay for itself. The second and from the conservatives point of view most important is the Starve the Beast hypothesis that tax cuts reduce the funds the federal government can spend resulting in smaller government. Tax cuts need not await spending cuts because they would cause spending cuts.

Now conservative Republicans could offer both lower taxes and smaller government without any need for fiscal dentistry. Tax cutting had become the foundation of conservative economics and a political problem for Democrats. However, there had always been dissenters who did not believe that this easy fix had any intellectual rigor and some were even in the conservative camp. Chief among those conservative voices is William A. Niskanen, chairman of the libertarian Cato Institute.

Niskanen argues that far from reducing government spending, tax cuts by themselves encourage such spending. He argues that cutting taxes without spending cuts would reduce the apparent cost of government thus stimulating rather than stunting government growth. “You make government look cheaper than it otherwise would be,” he said recently.

His argument is buttressed by real data from past administrations. When Regan cut taxes, federal spending as a share of gross domestic product went up. Under both Clinton and Bush 1 who raised taxes it went down, and back up again it went up under the shrub.

Niskanen has analyzed data over the last twenty five years and has concluded that a tax cut of 1 percent of the GDP increases the rate of spending growth by about .15 percent of the GDP a year. A tax increase reduces spending by roughly the same amount. At about 19 percent of the GDP taxes neither increase nor decrease spending. Above that level it increases spending and below that level it decreases it. Thanks to Bush tax cuts, it is currently at 17.8 percent and government spending has risen.

Democrats have rightly decried the unfairness of Bush’s tax cuts because they are skewed to favor the rich. Now, it seems to me they have another argument which would resonate with moderate voters that not only are these tax cuts not fair they increase not decrease government spending while simultaneously raising the debt future generations will have the burden to pay off.

No likes to pay more taxes than necessary, but when you have a morally and fiscally bankrupt economic philosophy, it is incumbent upon the opposition party to hammer home the message to the American people that this administration is so incompetent it can’t even do basic economics right.

David M Goldberg