I was reading Larry Kudlow’s post last week and reviewing some older writings on “fiscal illusion.” Citing polling results that show over 60% support across-the-board cuts, and believe that those cuts will solve our economic problems, he writes,
Voters realize full well that a private, free-enterprise economy that holds on to more of its hard-earned money while the government share of the economy shrinks is pro-growth. Limited government is a tax cut.
Unlike the recent fiscal-cliff tax-hike deal, we need to let successful earners, investors, and risk-takers keep more of what they earn as an incentive to remain the activists who drive the economy. Of course, Obama wants another $1 trillion in taxes. But Republicans must just say no. …
As an extension to this hard-line spending message, the GOP must make it clear that spending cuts equal economic growth. Think Friedrich Hayek, Milton Friedman, and James Buchanan — all Nobel prize winners who argued that less spending means more growth.
That list of economists got my attention, in particular his citation of the recently-passed Prof. Buchanan.
Note that “spending cuts equal economic growth” is exactly the opposite of what we hear from Team Krugman. It runs counter to most principles of economics textbooks that were discussed here yesterday. Could it nevertheless be true?
One of the influential books of my graduate studies was Buchanan’s 1977 book Democracy in Deficit, co-authored with Richard Wagner. The basic argument of the book is that Keynesian policies have a bias towards deficits, in part because they broke a norm of public policy that had existed through history towards budget balance. It was one of the first systematic applications of public choice theory to macroeconomics, and it inspired my dissertation and subsequent work (though I turned to its implications for monetary rather than fiscal policy.)
What causes the breakdown of this norm? Buchanan argued that the voter was provided arguments that lead to “fiscal illusion” — they are lead to believe that they can receive government benefits at lower cost than they really are. Deficits matter, of course, but the great unwashed could not be trusted to know how they matter. It was up to an aristocratic class to apply better judgment (something Professor Krugman and other Keynesian writers believe they do daily). Keynes believed in economies run by “wise men,” said Buchanan and Wagner, and Keynes was unconcerned about the complications of having voters who thought they could get $1 of government benefits for $.50. Of course, we know Hayek’s response: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
So if there is fiscal illusion, I wonder how it is that more that 60% believe in across-the-board cuts? Has the size of our debt removed the scales from voters’ eyes? It would be that new way of seeing that would allow us to “rise above” the “makers vs takers” language and form the argument for 2014: reducing spending reduces debt, which frees resources to grow our economy again.