When even Bush's own Treasury Department says it, you can believe it – the idea that "tax cuts pay for themselves" is officially off the table as public policy. While the report argues that lower present tax rates and lower spending combined would add a drop in the bucket – 90 Billion dollars in an 11 Trillion dollar economy, or $300 dollars per capita. And that is the best case scenario.

What the report doesn't do, even with its own numbers is look at how much of that benefit people are actually going to get. First because it doesn't take into account the inflationary effects of its budget projections, which for a report intended to highlight 'dynamic scoring" is strange, but also because it does not take into account income distribution. If the benefits of that $90 billion are distributed in the same proportions as the revenue reductions as a whole, and since the report documents no "trickle down effect," there is no reason to believe that the benefits of spending cuts are going to be different from the benefits of revenue reductions, then the top 3.7% of households will get $91,000 per household on average. The rest of the country will get, on average $108 per yer of this additional economic activity. That's less than the cost of 1 month of the increased price of gasoline.

These numbers may seem like an exaggeration, however, they are based on the the numbers provided by Treasury, CBO and the census bureau, combined with the income distribution numbers from the Federal Reserve. There is nothing in the report which would indicate that there would be any improvement in the mesoëconomic distribution of income.

And the report does not take into account the problem of risk. In essence the US government has better credit than any individual, or even any corporation. It is the intent of the government to be "as permanent as anything made by man can be", and it pays its bills. No one in the world has paid their bills for 200 years, and hence, no one has quite the credit rating of the government. Regardless of the specifics of the cuts, the ordinary individual will have to pay more because they are, individually, a greater risk and they will have to be paying an entity that has to make a profit. The technical way of saying this is that spending reductions convert regulatory risk into systematic risk. If it were just a risk swap, as the report assumes without even bothering to say so, then the cost of the spending cuts would be based on who they went to. But this isn't the case. Private debt trades at a spread to public debt, and that spread is close only in cases where there is an assumption of corporations that are "too big to fail" and hence partially backed by an implicit government promise to maintain, if not the company, at least the economy the company is part of.

How much of this spread is from risk is a matter of intense debate, however, for the consumer of risk, that is the ordinary person, the total spread is what is important. Regardless of how much riskier his life is, this is what he is going to pay the free market for hedging against that risk. Even ignoring the effects of changing interest rates, that is, that the spread between what the government pays for risk and what you pay for risk changes with interest rates, the results should be sobering for anyone who thinks that smaller government will help them. Historically speaking the spread between the increase in risk, and the spread charged ranges between a bit over .5% for any increase in risk, to 1.75% for ordinary risks, to 3% for very high risk.

Now what this means is that the ordinary person, whose life is made less risky by government spending is not only going to have to pay for whatever services they lose, but they are going to have to pay a premium, because they are a riskiner consumer. Think health insurance as an example – government run health insurance costs less, because the government has a bigger pool of consumers, and because that pool isn't going away. This risk spread then is, in effect, a risk tax that will be applied to ordinary citizens. For every dollar of federal spending cut, one dollar of financing moves to the private market, and thus must pay a higher level of interest. Since the government makes no profit, the new private entity cannot simply accept a lower profit – the government is already losing money.

This means that in the treasury scenario, the ordinary person, and the economy as a whole, will see a net reduction in economic activity as people, sensibly, act to protect themselves from living in a riskier environment. Rational economic actors will, in otherwords, shift to lower risk activities in order to avoid the problems associated with having a more uncertain world to live in. This down shift should be comparable to the spreads charged by the private market. In order to avoid the huge penalties for being high risk, people will avoid putting money at risk.

Lest I be accused of being a socialist, I will point out that the market mechanism works because, under many circumstances, the risk embodied in higher rates has upsides, one is the value of choice – more choices mean more risk, but also some of those choices will provide people with more happiness, or protect against more misery, than the cost of the risk. The other advantage is the mortality of firms – that is, one of the virtues of risk is that sometimes it is time to pay the piper, and take control of resources away from one group of people who haven't done a very good job. In essence, every corporate bankruptcy or large change of management is a miniature revolution, which clears out clogged arteries. Where choice and "creative destruction" produce more gains than the risk costs, the market mechanism works better than other competing alternatives. Where it does not, people pay more, and get less from an unregulated marketplace.

This last point however, is important politically. Where, afterall, is the greatest incentive to privatize? Why in those areas where choice and creative destruction are inefficient. We see this in extreme cases in wars – small power hungry groups seek to privatize the military, or the monetary system. Nothing is better than making more money for doing nothing. But even in less extreme cases – such as electric utilities – the ability to take the benefits of risk, and pass the cost on to others, can be seen. After all, it isn't the electric company executive who risks dying of heat stroke. Governments also make these kinds of mistakes, however, in government there is a direct counterweight, who ever you are, you have a vote in the government, where as you probably don't have a vote in the corporation whose externalizing of cost rains down on your head as acid rain, or whose toxins dumped ages ago poison your children. If a government fails, then the citizen can hold those who failed accountable. Not so with corporations or the market mechanism as a whole.

Treasury's report analyzes none of this, and as a result, comes up with a fictional number of the benefits of the imagined smaller government economy on the other side. And it is a number which, as noted, doesn't mean much to the average consumer, based on their own data of the distribution of benefits. Looked at with a more critical eye, it is a number that says, if anything, that even more of the benefits will go to the top, because the way the top makes its money, in the end, is by selling protection to the poor sods at the bottom of the economy for the riskiness of being poor. That is, they take on risk, because they can afford to lose $10,000 dollars much more than you can.