Starving the beast: The psychology of budget deficits Jonathan Baron and Edward J. McCaffery USC CLEO Research Paper No. C04-21 USC Law and Economics Research Paper No. 04-24 CLEO RESEARCH PAPER SERIES LAW & ECONOMICS RESEARCH PAPER SERIES Sponsored by the John M. Olin Foundation University of Southern California Law School Los Angeles, CA 90089-0071 This paper can be downloaded without charge from the Social Science Research Network electronic library at http://ssrn.com/abstract=589283 ! "# $%%& ! " " ! # " $ " " % " & $ $ ! " # ! " #$% & ' ( ( ) ' * ) * + ' , - % ! . / . ' / ! #01% - ' 2 ' - , 3 " #0# 3 3 " ## % & 4 & ' ' , - 67, " ! 881%2 ' ' ) . / 9 + : :; ' - 6 : + < = ! > - - ) ' ' 7 ? > ! * & ' - > #@1% ' > - 4 , ! = ' & ' ' - 6 3 " A ##52 7 " A ###%* > - , , ' - ' B " B 885% - ' - ' .- / , C " A ##02 " A 8852 3 " : 881% 9- = = - Æ = ' - - ' = ' = = = D88 ' E5 E1 8F8 % + ! 885% 7 ' % > G' ' - = ' = > ' - = - ' ' - G' - ' G' = - 4 8 0 50%2 #H 4 ' * ' + ) ' ' - = ' + 5 B % : ' = - ' ) ' > > : ) 8H ' ' % ' % ' 4 > * ¯ I ¯ % ¯ ) - ¯ ) % ¯ B )>9 ¯ - ) ' ) 4 J K %* DH J8H DHK ; ' % DH J8H DHK ; = ' ; ? % 7 DH DH 7 DH 8H A DH > DH 8H > DH DH = ' ' ; ? % 7 ' DH DH 7 ' DH 8H A ' DH > ' DH 58H > ' DH 5DH J - K L , ' G % 4 .= ?/ @ ) ; % .= ? : ; %/ ) .9 / .M / .> / 24 20 Short Term 18 Chosen percent spending 22 24 22 20 Long Term 14 14 16 18 Long Term 16 Chosen percent tax Short Term 16 18 20 22 24 16 18 Initial percent tax B * ' G' 20 22 24 Initial percent spending 9 % B ; ' B ' N ' > DH% 8H% ' ' > DH% ' ' 8H - ' 5H O 1#8 O 88888 % - , - * - - @ = L ##5 9 < 885% ' ' ( ' - ! : O 5$# O 888812 ' ' Æ % ' O 5D$ O 88880 - ' % ! ' , - - ' O 5$ O D8D O 88888% O 8888D% G' ' - < ' ! N G' G' ' P = ' + % > - ' G' ; G' - * 4 > %* 7 I DH % 8H ) - DH ) % DH B )>9 H - DH & # @ $H 8H 1H ' - @H% I ' 1H ' 8H 1H - 1H ; ' 8H ; = ? % 7 ' 8H 8H > ' 8H 58H = ? % 7 1H 1H > 1H 51H & # @ 4 % - 4 ' ) ' = ? : % I DH $H % 7 $H 8 7 $H 5H A > $H #H > $H H = 1H 4 1H 51H 4 H 11@H 4 @ @0 8 $@ 5#% 1H B ' 4 ' ' ' 4 4 4 , ' ' > ' ' ) G' N % ! - & - ' ) - 2 888 % ' ' , -2 ' 4 - 4 25 20 15 10 16% 20% 24% 16% 20% 24% 16% 20% 24% Tax1 Spend1 Tax2 Spend2 0 5 Percent of personal income Starting point: 16% 20% 24% B * A ' G' A % 67, ! 885% 4 % 4 ' % , - D11 O O 88888% ) O 55 O 888 1% B % 0H 6 ' - O 88888% ' O $88 O D0@ O 88888% - 4 B 5 .4/ ' ' #H % > I 4 B 5% -% % - , , & . / > 4; - ' > ' 1 0 −1 −2 −4 −3 Percent change in spending Equal Actual Health Pensions Poor Defense Foreign Science Spending category B 5* 7 4 - - - 4 & ' % - , 67, " ! 885% ' ' ) - & - - ' ! - . / G' : Æ ( , ) - % ' % - & * G' - 6 + 4 + ) * - = ' ' + > ' ' < ##@%2 ' ' + ' ' ) ' 67, " ! 885% - % > N ) ' .&3 =? G' ?/ . / ( ( Æ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