Limiting government: the failure of "Starve the Beast".

• Author: Niskanen, William A.
• Position: Government spending reduction

For nearly 30 years, many Republicans have argued that the most effective way to control federal government spending is to "starve the beast" by reducing federal tax revenues. Moreover, two Nobel laureate economists, Milton Friedman and Gary Becker, have endorsed this argument. Friedman (2003) summarized this perspective as follows:

How can we ever cut government down to size? I believe there is one and only one way: the way parents control spendthrift children, cutting their 'allowance. For governments, this means cutting taxes. Resulting deficits will be an effective--I would go so far as to say, the only effective--restraint on the spending propensities of the executive branch and the legislature. The public reaction will make that restraint effective. Becker and his colleagues Ed Lazear and Kevin Murphy (2003) described this effect as "the double benefit of tax cuts." (Lazear is the recently appointed chairman of the Council of Economic Advisers.) This argument has been effective in unifying the Republican Party in favor of reducing federal taxes, but at the cost of undermining the more traditional Republican concern about fiscal responsibility.

Problems with Starve the Beast

There are three major problems with the starve-the-beast argument: (1) it is not a plausible economic theory; (2) it is inconsistent with the facts; and (3) it has diverted attention away from the political reforms needed to limit government growth.

The Implausibility Issue

It is most implausible that reducing the current tax burden of federal spending would reduce the amount of federal services that voters demand. Orthodox price theory, of which Friedman and Becker are among the leading exponents, is unambiguous in concluding that reducing the price of a good or service increases the amount demanded. Reducing the current tax burden of federal spending has much the same effect as a price control, increasing the amount demanded relative to that supplied from current revenues, an effect that Friedman and Becker have consistently and correctly opposed in private markets.

The Facts

Second and more important, the starve-the-beast hypothesis is not consistent with the facts, at least since the beginning of the Reagan administration. Figure 1 shows current federal spending and receipts as a percent of gross domestic product by calendar year from 1981 through 2005. As this figure illustrates, most of the changes in the relative level of federal spending were coincident...