Wednesday, December 8, 2010

The Antidote To Fiscal Crisis Is Cutting Government Spending And Not Raising Taxes

From the Bloomberg article, "U.K. Takes Medicine, Greece Turns Doctor Away" by Kevin Hassett:
The antidote to fiscal crisis is fiscal consolidation, a dramatic change in spending and tax policy that reduces the indebtedness of a nation. 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. [emphasis added]

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.

Cutting Is Key

A recent study by the International Monetary Fund supports the principle that cuts, particularly to entitlement programs, are key.

Also see my earlier blog post on this topic, "History Shows Cutting Spending And Taxes Spurs Economic Growth."

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