When I was in college during the Reagan years the accepted wisdom on the limited government side of the aisle was that the only way to limit government spending was to first reduce government revenues. The logic was that the dynamics of interest-group politics were such that spending would rise indefinitely until it hit some ceiling but that raising taxes above some level would be politically unacceptable (see, e.g., Mondale for President). That ceiling, it seemed, was the amount of revenue taken in plus some limited amount of government debt. The assumption was that there was some limit that reality imposed on government debt, either politically or economically. Eventually, so went the reasoning, something would have to give–either Washington would have to cut spending or raise taxes. And at that point, spending would have to yield. Milton Friedman was particularly associated with this position.
A few years ago I heard Bill Niskanen speak when his book, Reflections of a Political Economist came out. Niskanen argued that “starve the beast” doesn’t work–that tax cuts bring about more, rather than less, spending. The logic is that people demand more of something if the cost is subsidized. If the cost of government is subsidized by pushing off the costs to later generations, then people will demand more government. Niskanen provides empirical evidence to support the hypothesis.
Over time, the empirical evidence has largely turned me from the Friedman position to the Niskanen position. Steve Chapman has an excellent summary of the theory and empirical findings in The Examiner today. the column is here. Michael New’s article from the Cato Journal that Chapman cites is here.