CAMBRIDGE – The United States is famous for its ability to innovate. Aspiring fiscal conservatives around the world thus might be interested in learning four tricks that American politicians commonly use when promising to cut taxes while simultaneously reducing budget deficits.
These are hard promises to keep, for the simple reason that a budget deficit equals government spending minus tax revenue. But, each of the four tricks has been refined over three decades. Indeed, they first acquired their colorful names in the early years of Ronald Reagan’s presidency: the “magic asterisk,” the “rosy scenario,” the Laffer hypothesis, and the “starve the beast” scenario. As shop-worn as these tricks are, voters and journalists still fall for them, so they remain useful tools for anyone posing as a fiscal conservative.
The first term was coined by Reagan’s budget director, David Stockman. Originally, it was an act of desperation, because the numbers in the 1981 budget plan did not add up. “We invented the ‘magic asterisk,’” Stockman wrote in The Triumph of Politics in 1986. “If we couldn’t find the savings in time – and we couldn’t – we would issue an IOU. We would call it ‘Future savings to be identified.’”
Ever since, the magic asterisk has become a familiar American device. Recent examples include the recommendation of the Simpson-Bowles commission – tasked in 2010 with charting a fiscal-consolidation path – to cut real spending growth by precise amounts, without saying where the cuts would be made. US presidential candidate Mitt Romney’s spending plans contain the same conjuring trick. So, too, his plan to eliminate enough tax expenditures to offset the $5 trillion in revenue lost from cutting marginal tax rates by 20%, while refusing to say which tax loopholes he would close.