Tuesday, 9 August 2011

Rob Ford's Fiscal Illusion

In the 169 deputations at the recent Executive Committee all night, citations ranged from Oliver Wendell Holmes, Winston Churchill and… Naomi Klein. The latter was mentioned at least twice in reference to her ‘shock doctrine’ argument as deputants drew parallels between the budget process and the 2007 book. In it, Klein argues unpopular free-market Milton Friedman-type policies are implemented in third world countries through artificial crisis points. Other deputants echoed this sentiment, alleging that the KPMG report was an exercise in empowering private industry. While that may be a secondary benefit, the primary target seems to be an animosity towards the idea of government, as David Rider argues.

The strategy that best fits here isn’t the shock doctrine but the unfortunately named ‘starve the beast’ doctrine (I say unfortunately for the reasons this Shameless article rightfully points out). The doctrine, also supported by Milton Friedman, didn’t have the name applied to it until a 1985 Wall Street Journal Article but was first developed by Republicans in the late 1970s. The underlying idea is to reduce government revenues in order to force it to lower spending in turn. Or, as Ronald Reagan famously put it, “Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance”. 
Starve the beast with cookie cutter ideologies
 The policy was enacted with Reagan’s historic 1981 tax cuts. Operative Grover Norquist made sure as many Republicans as possible signed a tax pledge to sustain the idea and threw under the bus those who did not. George W. Bush’s landmark tax cuts of 2001 and 2003 capped off the starve the beast idea. But during these times, deficits soared and government spending was unrestrained—in fact it grew to record levels. Even conservative Bruce Bartlett, an originator of the starve the beast argument when he was an aide for Republican Senator Jack Kemp disavowed it given its negative effects. 

And yet City Hall looks to continue failed ideological policies that are politically popular.  

It's not just the ideologues either. Recently on Twitter left-leaning Councillor Sarah Doucette criticized ultra-centrist Councillor Josh Matlow for voting to repeal the Vehicle Registration Tax (VRT), arguing that it was more prudent to wait until the next budget to do so. Matlow somewhat conceded this but also hedged that he had no regrets for his vote either (how Matlowvian!).

At the same time, a property tax freeze that was not a campaign promise was enacted and Mayor Ford has mused about phasing out the Land Transfer Tax over the next three years despite the hesitation from Budget Chief Mike del Grande. In other words, all of the principal sources of tax revenue have had attempts to be decreased as the city faces a large budget deficit.
Ideological illusions of progress
 But wait, it gets worse. Not only is there a failure to find evidence that decreasing taxes decreases the size of the government in parallel but there are also some findings that it actually increases spending. Berkeley economists Christina and David Romer published an overview of the starve the beast approach and explained the gap with two hypotheses, the first being the ‘fiscal illusion’. This illusion is caused when a tax cut without an associated spending cut weakens the psychological link between spending and taxes and voters demand greater spending. Its opposite is ‘shared fiscal irresponsibility’, where politicians who want higher spending, like those who want lower taxes, don’t pay attention to the deficit and lose control of it. That is, without taxes and spending being addressed in tandem budgets spiral out of control regardless of whether it is a spending increase or tax decrease.

It is the fiscal illusion risk that is most pressing with Team Ford. By separating tax cuts from spending cuts, value from gross costs and rhetoric from reality, Team Ford presents an illusory image of fiscal Toronto. Like the smoke and mirrors of their campaign promises, there is not any planning or co-ordination. The motivation isn’t good policy, it’s strict adherence to resentment of government. Resentment alone isn’t enough to balance the budget as the failure of starve the beast as shown. Instead, the psychological ideology of Team Ford is imbalanced and so too will be the fiscal legacy of this administration. 

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