PostHeaderIcon Why can fiscally responsible policy be only achieved by pulling the plug on liberal vermin, and never?


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by raising taxes on hard working folks?

http://topics.wsj.com/article/SB20001424052970203513204576047370292186758.html

By ANDREW G. BIGGS, KEVIN HASSETT AND MATT JENSEN

The federal debt is at its highest level since the aftermath of World War II—and it’s projected to rise further. Simply stabilizing debt levels would require an immediate and permanent 23% increase in all federal tax revenues or equivalent cuts in government expenditures, according to Congressional Budget Office forecasts. What’s clear is that to avoid a crisis, the federal government must undergo a significant retrenchment, or fiscal consolidation. The question is whether to do so by raising taxes or reducing government spending.

Rumors have it that President Obama will propose steps to address growing deficits in his next State of the Union address. The natural impulse of a conciliator might be to split the difference: reduce the deficit with equal parts spending cuts and tax increases. But history suggests that such an approach would be a recipe for failure.

In new research that builds on the pioneering work of Harvard economists Alberto Alesina and Silvia Ardagna, we analyzed the history of fiscal consolidations in 21 countries of the Organization for Economic Cooperation and Development over 37 years. Some of those nations repaired their fiscal problems; many did not. Our goal was to establish a detailed recipe for success. If the United States were to copy past consolidations that succeeded, what would it do?

This is an important question, because failed consolidations are more the rule than the exception. To be blunt, countries in fiscal trouble generally get there by making years of concessions to their left wing, and their fiscal consolidations tend to make too many as well. As a result, successful consolidations are rare: In only around one-fifth of cases do countries reduce their debt-to-GDP ratios by the relatively modest sum of 4.5 percentage points three years following the beginning of a consolidation. Finland from 1996 to 1998 and the United Kingdom in 1997 are two examples of successful consolidations.

The data also clearly indicate that successful attempts to balance budgets rely almost entirely on reduced government expenditures, while unsuccessful ones rely heavily on tax increases. On average, the typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts.

By contrast, the typical successful fiscal consolidation consisted, on average, of 85% spending cuts. While tax increases play little role in successful efforts to balance budgets, there are some cases where governments reduced spending by more than was needed to lower the budget deficit, and then went on to cut taxes. Finland’s consolidation in the late 1990s consisted of 108% spending cuts, accompanied by modest tax cuts.

Consistent with other studies, we found that successful consolidations focused on reducing social transfers, which in the American context means entitlements, and also on cuts to the size and pay of the government work force. A 1996 International Monetary Fund study concluded that “fiscal consolidation that concentrates on the expenditure side, and especially on transfers and government wages, is more likely to succeed in reducing the public debt ratio than tax-based consolidation.” For example, in the U.K’s 1997 consolidation, cuts to transfers made up 32% of expenditure cuts, and cuts to government wages made up 21%.

Likewise, a 1996 research paper by Columbia University economist Roberto Perotti concluded that “the more persistent adjustments are the ones that reduce the deficit mainly by cutting two specific types of outlays: social expenditure and the wage component of government consumption. Adjustments that do not last, by contrast, rely primarily on labor-tax increases and on capital-spending cuts.”

The numbers are striking. Our research shows that the typical successful consolidation allocates 38% of the spending cuts to entitlements and 25% to reductions in government salaries. The residual comes from areas such as subsidies, infrastructure and defense.

Why is reducing entitlements and government pay so important? One explanation is that lower social transfers spur people to work and save. Reducing the government work force shifts resources to the more productive private sector.

Another reason is credibility. Governments that take on entrenched, politically sensitive spending show citizens and financial markets they are serious about fiscal responsibility.

5 Responses to “Why can fiscally responsible policy be only achieved by pulling the plug on liberal vermin, and never?”

  • Freedom was overrated anyway says:

    2000-2006 saw a Republican house, senate and president, and increased spending at record paces.

    Keep thinking Republicans will change.

  • Liberalism is a Disease says:

    Finally. Someone with a brain.

  • Bub says:

    Uhhh we you living in a dirt hole during the Bush years? How about Reagan? Grow up dude.

  • America Under GOP 1928-1932 says:

    “A conservative uses Statistics the same way a Drunk uses a lamp-post…for support, not illumination.”
    -Churchill

  • LarryM says:

    As long as the rich are happy, what’s the big deal? All they have to do is shove more money into their local politicians’ pockets, and this will lead to more tax cuts for them. And to heck with the middle- and lower-class. Heck, all you have to do is increase the war . . . er, I mean . . . defense budget a few hundred billion dollars more per year (this money can come from further cuts in education and other social programs), and middle- and low-class Americans can go into the service for jobs. Simple. The rich get richer, and the rest of us toil to keep them and their political friends happy.

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