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INTRODUCTION: BUDGET DEFICITS, POLITICS, AND BEHAVIORAL ECONOMICS
Budget deficits arise in part because voters support the policies that lead to them. This is so despite the fact that many voters want to avoid deficits. They favor policies that undercut their own goals, and politicians – who often have the same preferences as those who elect them – respond. Politicians (and economists) still differ on the appropriate size of the budget. When those who favor smaller government gain power, they sometimes adopt a strategy of “starving the beast,” which involves cutting taxes today with the expectation that spending cuts will follow tomorrow. The assumption is that tax cuts are easier to swallow than spending cuts, but then aversion to deficits will kick in and permit spending cuts as well.
We present experimental evidence that many people actually do not desire tax cuts without spending cuts. Although people choose to reduce a deficit with spending cuts when they are asked in the abstract what to do, the budget cuts are not so palatable when people are asked about cuts in particular categories. When people are forced by a question to balance the budget, they still show this aversion to specific spending cuts, although they are willing to cut specific spending somewhat to close a deficit. Dedicated taxes also may help people accept both taxes and spending when these are warranted.
Budget deficits, the subject of this volume, almost invariably have a psychological dimension. This occurs because of the confluences of two realities.