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No Deficit Trap, Just Two-Party Politics

Nobel Prize-winning economist Joseph Stiglitz (via Praktike from American Footprint, temporarily on hiatus), mentions the trap:

Some say that Bush created the huge deficits to squeeze government, to force cuts in public investments and social programs. Democrats who focus excessively on deficit reduction are falling precisely into the trap, especially when political timidity impedes reversing the tax cuts.

This is the whole “starving the beast” scenario. I typically hear this argument from conservative supply-side proponents (which Praktike and Stiglitz are most definitely not) after I’ve explained the Laffer curve to them (it’s amazing how many supply-side proponents don’t even know why it’s called “supply-side” and not “demand-side”). They typically retreat to say that at least the tax cut will constrain government spending.

Well, if that were true, why didn’t “starving the beast” work in the Reagan era, where tax cuts were accompanied by huge spending increases?

I think I know why…

Politicians are not incentivized towards balancing budgets because 1) they don’t have to face any of the consequences — their successors do, and 2) they can always blame the deficit on the other party. Therefore, deficits give them zero motivation towards cutting spending. And when the deficit got too big, Bush and Clinton merely raised taxes again (or rolled back Reagan’s tax cuts, depending on how you want to look at it). In fact, I give Bush a lot of credit for doing what needed to be done even though it may have cost him a second term.

Note that most Democrats are not calling for spending cuts but instead are opposing making Dubya’s tax cut permanent (i.e. tax increases). And some conservatives also believe that the deficits will lead to tax increases, not spending cuts. Economics professor Tyler Cowen says:

I would say that taxes, real taxes, already have been raised, the Bush Administration just hasn’t admitted it yet. Milton Friedman has long insisted that the level of government spending is the best measure of what government is taking from the economy.

So, I don’t buy the whole “trap” theory. Starving the beast didn’t work for conservatives in Reagan’s time, and I don’t see why any of them seriously believe it will work now. If you want to decrease the size of the government, then just decrease the size of the government!

So I don’t think the deficits are intentional conservative strategy. What I think happened is simpler. Political parties have one real purpose: obtain as much power as possible. Ideology actually has little to do with it; it is merely a means to an end. Republicans parrot conservative arguments to win conservative votes, and Democrats parrot liberal arguments to win liberal votes. So many Republicans probably don’t actually believe in shrinking the power and influence of government, because that would actually decrease the power they could wield in government. So neither party supports decreasing spending (which is why you hardly ever see spending cuts, you instead see huge pork projects from both parties). They just want to move spending from the other party’s priorities to their own party’s priorities.

Seems rather cynical, I know, but I think the whole flip-flop on the deficit is evidence of this. It makes no ideological sense for Democrats to be deficit hawks at all. They are only taking it up in order to try and win votes by filling the market void created by the Republicans (and as a plus, it allows them to remind people of Clinton’s budgets). Similarly, it makes no ideological sense for Dubya to support steel tariffs, a huge increase in Medicare spending, or an expanded space program. The reasons behind these decisions are clearly political in nature.

Note that it wouldn’t have done Dubya much good to be a deficit hawk. He didn’t inherit a deficit from Clinton; he inherited a surplus. There wouldn’t have been very much for him to claim credit for if he had just kept the budget balanced. However, he could win political points in policies targeted towards benefiting his allies and constituents and in stealing thunder from Democrats through Medicare reform.

Indeed, if you read Stiglitz’s entire article, it actually doesn’t really talk much about “the trap” and focuses more on how the Republicans and Democrats seem to be swapping places on the deficit issue. Praktike himself has another post (currently not available while he’s on hiatus) remarking on how the two parties seem to be creating strange bedfellows and flip-flopping on issues like free trade:

Following in the wake of the most pro-trade administration in American history, a Republican President supports steel tariffs, immigration reform, massive farm subsidies, and the largest entitlement increase in three decades.

What’s going on here? I believe these are side-effects of a two-party political system. When one party sees a political opportunity, it will seize it, regardless of ideology. If you can violate your party’s ideology in one issue to gain some voters, it’s generally worth it because the danger of losing your base is pretty small — they only have one alternative, and they still agree with you on most of the other issues. And indeed, conservatives upset at Dubya’s expanding of the government can merely voice their displeasure, but it doesn’t mean anything because Dubya knows he still has their vote no matter what.

The lack of better alternatives is exactly why you see strange bedfellows in a two-party system. Libertarians are interested in shrinking both the size and influence of the government, and thus are more welcome in the Republican Party despite the presence of the Christian Right (who want to increase the role of government in our private lives). The only other alternative for them is the Libertarian Party, but hardly anybody votes for third parties because they correctly know that, in a plurality electoral system, it is tantamount to throwing away your vote or, as Nader voters learned, hurting your second choice candidate.

How do we address all of this? Well, it’s going to take a serious amount of electoral reform.

Update 5/20/04

Stuart Benjamin at the Volokh Conspiracy cites an interesting Cato Institute paper pointing out that the evidence not only contradicts the “starve the beast” hypothesis, but that tax cuts have the exact opposite effect, leading to an increase in federal spending, hypothesizing that:

…the demand for federal spending by current voters declines with the amount of this spending financed by current taxes. Future voters will bear the burden of any resulting deficit but are apparently not effectively represented by those making the current fiscal choices.