Time to call Bullshit on "Starve The Beast"

via David & Christina Romer, we have this

Region: You recently wrote a very intriguing paper about the interplay between tax changes and government spending. Would you give us a brief description?

David Romer:  [...] In the context of the starve-the-beast theory, my favorite example of the issue of correlation versus causation is the fiscal history of the Korean War. The North invaded the South at the end of June 1950. A month later Truman took a few minutes out from planning the military response and wrote to Congress to say that we needed a massive tax increase because we were going to have to ramp up military spending. A big tax increase was passed and put into effect three months after the invasion. [...]

So if you look just at the data, you see that taxes went up and spending went up afterwards. If you look at correlation, it looks like a great example of tax changes causing spending to change in the same direction. But if you listen to the history I just described, it's clear that, in fact, causation went from the decision to raise spending to the decision to raise taxes.

[...What] we find is no evidence for starve-the-beast. There's no systematic tendency for spending to fall after tax cuts relative to what it otherwise would have been.

Region: But you did find that tax cuts were followed by something else.

CR: Right. Tax cuts led, eventually, to tax increases. Basically, something has to give; there is a government budget constraint. What we thought gave when you cut taxes was spending, but we seem to find that in postwar U.S. history what actually gives is the tax cut itself. A substantial fraction of a tax cut is typically undone in the subsequent five years.