Alberto Alesina of Harvard’s economics department summarizes some of his research in a column for today’s Wall Street Journal. He and a colleague looked at fiscal policy changes in developed nations and found very strong evidence that spending reductions boost growth. This, of course, contrasts with the lack of evidence for the Keynesian notion that growth is stimulated by a bigger burden of government spending.
Politicians argue for increased stimulus spending, as opposed to spending cuts, on the grounds that it would speed up economic recovery. This argument might have it exactly backward. Indeed, history shows that cutting spending in order to reduce deficits may be the key to promoting economic recovery. …recent stimulus packages have proven that the “multiplier”—the effect on GDP per one dollar of increased government spending—is small. Stimulus spending also means that tax increases are coming in the future; such increases will further threaten economic growth. Economic history shows that even large adjustments in fiscal policy, if based on well-targeted spending cuts, have often led to expansions, not recessions. Fiscal adjustments based on higher taxes, on the other hand, have generally been recessionary. My colleague Silvia Ardagna and I recently co-authored a paper examining this pattern, as have many studies over the past 20 years. Our paper looks at the 107 large fiscal adjustments—defined as a cyclically adjusted deficit reduction of at least 1.5% in one year—that took place in 21 Organization for Economic Cooperation and Development (OECD) countries between 1970 and 2007. …Our results were striking: Over nearly 40 years, expansionary adjustments were based mostly on spending cuts, while recessionary adjustments were based mostly on tax increases. …In the same paper we also examined years of large fiscal expansions, defined as increases in the cyclically adjusted deficit by at least 1.5% of GDP. Over 91 such cases, we found that tax cuts were much more expansionary than spending increases. How can spending cuts be expansionary? First, they signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities. This, in turn, shifts people’s behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time. On the other hand, fiscal adjustments based on tax increases reduce consumers’ disposable income and reduce incentives for productivity. …Europe seems to have learned the lessons of the past decades: In fact, all the countries currently adjusting their fiscal policy are focusing on spending cuts, not tax hikes. Yet fiscal policy in the U.S. will sooner or later imply higher taxes if spending is not soon reduced. The evidence from the last 40 years suggests that spending increases meant to stimulate the economy and tax increases meant to reduce deficits are unlikely to achieve their goals. The opposite combination might.
Alesina’s research echoes the findings in dozens of other studies, a few of which are cited in this Center for Freedom and Prosperity video I narrated.
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[…] study by two Harvard economists found that “large adjustments in fiscal policy, if based on […]
[…] study by two Harvard economists found that “large adjustments in fiscal policy, if based on well-targeted spending cuts, have […]
No doubt leave it in Spenders hands pushes demand pushes growth.
Yet what government takes is Spent in the economy.
Much creates demand for products.
Much is waste or ripped off with high prices like pharma
and military.
How low is enough? Our problems have been as much on Revenue side
as Spending. 1945–1980 we taxed and paid our way with great equality growth .
Since 1980, we borrowed 14,000B that Assisted rich getting ultra rich
That is why today We rank in OECD nations as:
#2 Least Taxed as % of GDP
#2 Least taxed corporations
#4 on Inequality
That is why today 10% own 73% of Net Wealth; 83% financial wealth; get 50% individual income.
50% get 12% of income.
That is not Mexico it is USA
The 8 years of Bush got us an increase of spending from 1800 to 3500
debt from 5700 to 11,900; deficit surplus to 1400; jobs 237,000 net per month to 31.000.
The disaster we face now can ONLY be charged to Bush Cheney
2000 was Peace on Earth balanced budgets as far as the eye can see.
Do not blame Obama for Bush disasters and long range damage result.
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