Starve The Beast is a GOP Myth

As the GOP pushes ahead with their tax plan, clearing both Houses in Congress, we seem to be going down a familiar, yet dangerous path. There are two economic ideas that have come to dominate Republican economic policy. They are that tax cuts pay for themselves and that the theory of “starve the beast” actually works. The “starve the beast” theory states that by lowering taxes, this forcefully reduces spending, as there is less revenue coming in. If anyone follows Bruce Bartlett, former economic advisor to Presidents Ronald Reagan and George H.W. Bush, it is easy to see how starving the beast does not work and leads to higher spending.

The truth of the matter is that neither one of these ideas have worked. In fact, a recent study done by the Congressional Research Service (CRS), has found that lowering tax rates on the top 2 percent does not spur any kind of economic growth. To add to that point, just looking back on history will also demonstrate that tax cuts do not pay for themselves.

If we look back at the Roaring 20’s, which preceded The Great Depression, tax rates were pretty low and we saw a spike in income inequality. I've always been doubtful of JK Galbraith's claim that the tax cuts of the 1920s were the cause of the Great Depression.  However, we are about to do an exact replay and will find out once and for all if it did.

By taking a look at the 1980’s, we begin to see the gap widening in income growth. When Ronald Reagan was elected in 1980, he would sign legislation that shifted our economic policy to a Supply-Side model, which would become Reaganomics. He also believed in the “starve the beast” theory. As Mr. Bartlett points out, President Reagan totally bought into this theory when he addressed the nation on the economy in 1981. In historical context, President Reagan may have been right for the times, but there were long term dangers to the economic policies he embraced.

Unfortunately, throughout the 1980’s, we saw tax cuts aimed at the top 2% and drastic spending increased on defense. By the time the late 1980’s and early 1990’s came about, the national debt had tripled from what it was in 1980, the housing market had collapsed, the savings and loans crisis hit, and the economy was in a recession with unemployment topping 7%. It is clear to see that the “starve the beast” theory did not work. With this data, one can also make a great argument against deregulation.

By examining his fiscal policies and approaches, President George W. Bush also embraced low taxes and “starve the beast”. In 2001 and 2003 he signed two bills that would essentially become known as the Bush Tax Cuts. Unfortunately, this did not curb spending as the “starve the beast” theory suggests. There was a surge in federal spending, especially with Medicare Part D, which was favored by Republicans, passed in Congress and signed into law by President Bush.

According to Mr. Bartlett, these tax cuts did not stimulate the economy and Republicans continued pushing for further tax cuts. On the spending side, Mr. Bartlett notes “spending rose to 20.7 percent of G.D.P. in 2008 from 18.2 percent in 2001”. Once again, we see the “starve the beast” theory proven false.

According to a January 2001 report, the Congressional Budget Office (CBO) projected that the US will run a budget surplus of $5.6 trillion through 2008. This was not taking into account the Bush Tax Cuts that came after. In conjunction with these tax cuts, there was very slow economic growth and revenue was reduced by more than $6 trillion dollars. At the same time, spending would increase by more than $5 trillion.

There is a clear history, as well as hard data, to show that tax cuts do not pay for themselves and “starving the beast” does not bring down federal spending. With two presidential administrations to look back on, these theories have been proven false. Republicans are once again putting forth the same plan, but need to understand their economic philosophy is flawed and must change. If not, the Republican Party could be losing ground at a dramatic rate in the 2018 and 2020 elections if history repeats itself on tax cuts and starving the beast, while dangerously adding to the budget deficits and national debt of the United States.