Sunday, May 9, 2010

Starve the Beast: Let's Take a Look at the Data

Mark Thoma links to a very interesting article from Bruce Bartlett. The conclusion: "Starve the Beast" actually does very little to reduce government spending. My favorite quote:
On Aug. 7, 1978, economist Milton Friedman added his powerful voice to the discussion. Writing in Newsweek magazine, he said, "the only effective way to restrain government spending is by limiting government's explicit tax revenue--just as a limited income is the only effective restraint on any individual's or family's spending."

It's pretty obvious where Friedman's metaphor breaks down: a family has no source of spending other than its income. It can get a loan for a house, for example, but if a family isn't credibly repaying its loans it will not be able to get any further loans. Government can fail to repay a whole bunch of loans and continue to get more. This needs to get more attention... it's going to be very relevant for domestic American politics for the next few decades as we try to get our fiscal house in order.

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Compared with the totality of knowledge which is continually utilized in the evolution of a dynamic civilization, the difference between the knowledge that the wisest and that which the most ignorant individual can deliberately employ is comparatively insignificant. ~Fredrich Hayek in The Constitution of Liberty