Even Folks at Harvard and the IMF Are Beginning to Realize You Don’t Solve an Over-Spending Problem with Higher Taxes

In his latest Bloomberg column, Kevin Hassett of the American Enterprise Institute notes that research from places such as Harvard and the International Monetary Fund confirms that spending restraint is the way to successfully reduce red ink – and it’s also the way to improve economic performance.

The antidote to fiscal crisis is fiscal consolidation… Such consolidations have relied on varying degrees of tax increases and spending reductions. Some have successfully reduced debt, some haven’t. The data tell a clear story: What works is cutting government spending. A series of influential papers by Harvard University economist Alberto Alesina and various co-authors found decisive evidence that successful consolidations rely almost exclusively on spending reductions, while unsuccessful consolidations seek to close 50 percent or more of the gap with tax increases. A recent study by the International Monetary Fund supports the principle that cuts, particularly to entitlement programs, are key. …Cuts to pension and health entitlements had the most beneficial effect on economic growth. Tax increases fail to achieve sustained debt reduction for two likely reasons. First, they increase the risk that an economy will experience a double-dip recession. Second, they illustrate that the offending government is unwilling to take a tough stand against soaring entitlements. A welfare state that can’t shrink in a recession will possibly never shrink, which means that today’s high taxes provide an ominous foreshadow of even higher rates to come.

The entire column is worth reading. Kevin is not as firmly against tax increases as I would like, but he is always thorough and the information in his column definitely supports the notion that spending is the problem and therefore any fiscal consolidation should be based on restraining the size of government.