An interesting piece by Nathan Lewis at The Daily Reckoning that should be tattooed on the forehead of every misbegotten pundit confusing the airwaves with his bad definitions and sorrier prescriptions. Lewis doesn’t make the usual libertarian mistake of discussing concepts without refining the context in which those concepts are applied. First, he distinguishes between types of spending cuts. Second, he also addresses the issue of public perception and attitude, which most libertarians don’t even consider part of the debate. Third, he takes into account the order in which things are done.

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“The cycle of “stimulus” and “austerity” eventually leads to more spending and higher taxes. It doesn’t work. So what’s the solution?

A better strategy is less spending and lower taxes.

In 1976, Britain was so hard up that it had to go to the IMF for a loan. Without this assistance, the government would have likely defaulted. The IMF insisted on its usual “austerity” plan, with spending reductions and higher taxes of course. In 1979, Margaret Thatcher became prime minister. Thatcher is remembered today for her sweeping reorganization of government, in which public employees, subsidies and state-run businesses were slashed or discarded. She crushed the influence of public unions in the face of widespread strikes.

Despite this, in the 1983 general elections, only 39% of union members voted for the opposing Labor Party. Thatcher was popular. Why? The other side of her strategy was tax cuts. She immediately moved to lower top income tax rates from 83% to 60%. By 1986, the top income tax rate was 40%, and the basic rate had fallen to 25%. Capital gains tax rates were reduced from 75% to 30%, and indexed to inflation. The corporate tax rate was reduced from 52% to 35%.

Ronald Reagan, in the US, had much the same strategy: tax cuts and spending cuts. During his presidency, the top US income tax rate fell from 70% to 28%. His attempts to reduce spending floundered in the Democrat-controlled Congress.

Ideally, spending reductions should focus on the waste, theft and graft – the politicians, bureaucrats, public employees and corporate cronies – not on the public services which are the government’s primary reason for existence. Britain still has its National Health system.

(Lila: I’d diverge from Lewis on this point – I think the government should be out of health care altogether….in theory. In practice, though, I think the NHS is probably a lot better and more cost-effective than the out-of-control big pharma and insurance-dominated monstrosity we have).

I find that these sorts of policies are accompanied by a certain change in mood. The political focus shifts from parasitic self-enrichment to one of national success and failure.

(Lila: Again, it’s not that I think “nationalism” isn’t dangerous, but in the context of predatory internationalism, nationalism has its uses, just as the states – despite their historical involvement in injustices – have a role in checking the excesses of the federal government).

If your initial premise is to find a way to strip-mine the populace for wealth, and then distribute your gains among your cronies, then tax hikes and spending increases are the natural conclusion. Politicians find the answers when they start to ask the questions. Thatcher studied conservative texts, and actually read Friedrich Hayek’s The Road to Serfdom from cover to cover.

You can sense this change in mood when the terms “stimulus” and “austerity” disappear from discussion. Politicians start to talk about “national greatness,” as Vladimir Putin did in 2000 when he introduced Russia’s amazing 13% flat income tax. In the explosive recovery that followed, the Russian government’s income tax revenues soared. In 2001, the first year of the new tax system, income tax revenues increased by an astonishing 46%! This had nothing to do with oil prices, which finished that year at $19.33 per barrel. In 2002, income tax revenues increased another 40%, and crude oil finished the year at $29.42. By 2007, income tax revenues were 624% higher than they were in 2000, and Russia was once again a major world power.”