Monday, December 03, 2012

Why You Can't Starve the Beast

The theory behind "Starving the Beast" is that, by restricting government revenue, you can restrict the government's growth.  Though that makes sense mathematically, it just doesn't work in reality.

First, a government with monetary authority (a central bank) cannot be starved of nominal revenue--the Treasury is legally able to mint a handful of trillion-dollar platinum coins.  There's no way to starve the beast out of that.  All it would do is create inflation, which in this case is a stealth tax paid by those with cash assets.  To starve the beast you need to control monetary policy.

Second, like anything that is starving, "the beast" will not cut the fat.  It will cut the muscle.  A government threatened with revenue cuts will put the most important thing that it does on the chopping block to discourage further cuts.  If you try to starve the beast, it will cut popular programs, and the budget will be restored by popular vote.  To starve the beat you need to control the budget.

Third, if the government in question is a sovereign borrower, it can continue to borrow to economy-destroying levels before the market will act.  This borrowing makes government benefits seem comparatively cheap.  The benefits received from the government exceed the costs of supporting that government, so people will naturally demand more government even though it's just delaying the inevitable.  To starve the beast you need to control borrowing.

Fourth, a government can stay within whatever limits are imposed on it by simply moving spending off the books.  For example, rather than subsidizing housing directly, we provide a tax break.  Rather than subsidizing charities directly, we provide a tax break.  Rather than paying for a great many things on the books--which would require raising and spending taxes--the government neglects to collect the taxes it would otherwise be owed.  To starve the beast, you would need to control tax policy and accounting.

Fifth, a government can move many of its expenses off the books, simply by mandating that someone else do something.  The government could, for example, mandate that all tax forms be submitted electronically, thereby moving the cost of data entry from the government to the individual tax payer.  To starve the beast, you would need to control regulatory authorities.

So in short, to starve the beast you need to control monetary policy, the budget, borrowing, tax policy and accounting, and the regulatory authorities.  Once you have controlled all of that, you don't need to starve the beast, you are the beast.

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