Conservative Orthodoxy Makes Spending Higher

If the super committee doesn’t reach agreement on a plan to reduce the deficit by at least $1.2 trillion, then a quasi-automatic budget sequester will cause $1.2 trillion in spending cuts. Democrats on the panel are proposing a package that would contain about $1 trillion in additional spending cuts on top of the existing mandate. But Speaker John Boehner and his allies don’t like that idea. They prefer the smaller package of spending cuts to the larger one Democrats are proposing. Why? Well because in addition to cutting spending by $2 trillion, the Democratic plan would also raise taxes by $1 trillion.

We’re so accustomed to this that we tend to take it for granted. But it’s really crazy. Suppose Democrats agreed to just do the $2 trillion in cuts without the $1 trillion in tax increases. Well it’s not as if not raising the taxes creates some magical way to pay for the spending that wasn’t eliminated. The money is just borrowed. It needs to be paid back, over time, with interest. Paid back out of tax revenues. Conservatives, strangely, are hyper-attentive to this point when liberals are proposing economic stimulus packages. Just because the money’s borrowed, they say, doesn’t mean it won’t need to be repaid with higher taxes. Which is true. The Keynesian case is simply that shifting the timing of taxes and spending around can help stimulate a depressed economy. But over the long-run, the only difference between debt-financed spending and tax-financed spending is that debt-financed spending needs to be paid back with interest. So by preferring $1.2 trillion in cuts to $2 trillion in cuts and $1 trillion in spending hikes, the GOP position is pushing both long-run spending and long-run taxes much higher than it would be under the Democratic plan.

One can only wish that William Niskansen was still around to comment on this.