This episode should have advocates of limited government asking themselves an important question: are tax cuts without spending cuts good for the cause of limited government? Decades ago, Milton Friedman answered this question with a resounding yes. Cut taxes, he counseled, and starve the beast. With less revenue, spending will fall too. Tax cutters from Ronald Reagan to George W. Bush have been convinced of “starve the beast” ever since.
But there is another Nobel laureate with free market bona fides who begs to differ. James Buchanan, a founding father of public choice economics—which uses the tools of economics to shed light on the incentives of policy makers—has long questioned “starve the beast.” When politicians are legally and politically permitted to run deficits, he warned, they will simply fund government by borrowing. In this case, tax cuts give voters the illusion that government spending is cheap. And with government seeming less-costly, voters will be happy to have more of it.
That’s me, writing on the Bush Tax Cuts in the latest issue of Reason. It was part of broader piece, edited by Peter Suderman on the fiscal cliff and it includes great essays by Charles Blahous, James Pethokoukis, Veronique de Rugy, Tad DeHaven, Susan Dudley, Maya MacGuineas, and Marc Goldwein. The whole piece can be found here.
Finally, Lars Christensen has some insightful comments on our paper here.
On behalf of all of us at Mercatus and Neighborhood Effects, Happy Holidays to all.