We’re not broke, we’re starving, says Brown School economist

A government shutdown is looming and many politicians who are claiming “we’re broke” are proposing short-term or long-term federal budget plans with steep budget cuts as the only option to reduce the deficit.

“But it looks like budget deficits are being driven in part by a deliberate strategy to sustain them, so policymakers are forced to cut spending,” says Timothy McBride, PhD, economist and associate dean for public health at the Brown School at Washington University in St. Louis.

“The evidence certainly supports the theory that the Republicans are using a strategy of ‘starving the beast,’” he says.

Under this strategy, the first step is to constrain the rate of growth in taxes and revenues as much as possible. Then, when this results inevitably in annual budget deficits, demands for spending cuts follow.

“We certainly see that this is the track of our current fiscal policy,” he says.

McBride notes that taxes as a share of the gross domestic product (GDP) are projected to be lower in 2011 (14.4 percent of GDP) than at any time in 60 years (14.4 percent in 1950).

For most of the last 60 years, revenues as a share of GDP hovered between 17 percent and 19 percent of GDP, but dropped from 20.6 percent in 2000 to 14.4 percent in 2011, largely resulting from the Bush tax cuts, and since 2007, the great recession.

“What is also ironic and hypocritical about the hyperbolic claims that ‘we have a spending problem’ is that in fact the first thing this Congress did when it got into office was enact a huge tax cut, adding over $800 billion to the federal debt over 10 years,” McBride says.

“After this tax cut passed, it became clear that passing any increases in revenue were off the table as options to reduce the budget deficit.

“In other words, ‘starve the beast’ became the strategy to reduce the budget deficit. In fact, if revenues were being collected today at levels at their post-war average levels, the deficit would be over $500 billion less than it is today.”

McBride says that it is true federal spending also was at a very high rate of 25.3 percent of GDP in 2011, the highest rate since World War II, but this is also largely due to the recession and stimulus spending.

“Ironically, spending also rose during the Bush presidency, largely because of spending on defense and increases in domestic spending,” he says.

“Even before the recession hit, federal spending as a share of GDP had risen from 18.2 percent in 2001 (the lowest level since 1966) to 20.7 percent of GDP in 2008, the highest level in 12 years.”

At the state level

This picture is also being played out in the states, where one of the first acts of the Wisconsin governor and the legislature was to pass a tax cut of over $100 million, adding to a real long-term budget deficit problem facing the state.

“After starving the beast, he turned around and argued that the state was broke and it was essential that state and local government workers take cuts in benefits,” McBride says.

“There is no doubt that the budget deficits facing our country are serious, and they cannot be sustained. However, the size of the deficits at the federal and state levels will drop considerably as the country pulls out of the recession and revenues rise as incomes rise, and spending by government falls as demands for spending from the safety net decline.”

McBride says that even after the recession ends, our country will still be left with huge fiscal challenges looming on the horizon, mostly due to the retirement of the baby boom generation, leading to rapidly spending on Medicare, Medicaid and Social Security.

“This serious challenge requires a serious policy response, not the irresponsible policy of ‘starving the beast,’” McBride says.