The Return of ‘Starve-the-Beast’: The Law of Demand and the Future of Smaller Government

Abstract

William A. Niskanen’s 2006 paper, “Limiting Government: The Failure of ‘Starve the Beast,’” dealt a severe blow to the notion that tax cuts lead to smaller government. Niskanen argued that (1) government’s ability to borrow loosens the fiscal constraints of reduced revenue, and (2) as a result, the apparently lower “price” of government for taxpayers is a “fiscal illusion” that results in demand for more government. Empirical work by Niskanen and others supports those ideas. We accept Niskanen’s argument—as far as it goes. However, we believe that long-term U.S. public obligations will lead to much smaller government in the future. Social Security, Medicare, Medicaid, public employee compensation, and debt obligations will require large tax increases and the reallocation of money from other public services. As a result, future taxpayers will pay a higher “price” for government, but will get fewer, lower-quality services. This will yield a different fiscal illusion where the high price will result in taxpayer demand for less government.