Spending Cuts Are the Best Way to Shrink Our Debt

[Chris]

...this new paper by Harvard University’s Alberto Alesina, Carlo Favero and Francesco Giaviani of the University of Bocconi makes the case that increasing taxes on the rich (or anyone else for that matter) won’t help our country get out of the slump. The two economists show that the best way to get into a new recession is to try to reduce our debt-to-GDP ratio by raising taxes. They write:
Fiscal adjustments based upon spending cuts are much less costly in terms of output losses than tax based ones. In particular, spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all.Instead, tax-based adjustments have been followed but prolonged and deep recessions. The difference is remarkable in its size and cannot be explained by different monetary policies during the two type of adjustments. In fact,we find that the mild asymmetric (and lagged) response of short-term rates cannot explain the difference between the two types of adjustments: heterogeneity in the response of monetary policy appears with a lag of one to two years, while the heterogenous response of output growth to EB and TB adjustments is immediate. We find that the heterogeneity in the effects oft he two types of fiscal adjustment (tax-based and spending-based) is mainly due to the response of private investment, rather than that to consumption growth.
...Another interesting finding in the Alesina/Giaviani paper is the correlation between spending cuts and business confidence. They find that “business confidence (unlike consumer confidence) picks up immediately after an expenditure-based adjustments.”...
From More Evidence That Spending Cuts Are the Best Way to Shrink Our Debt (http://www.nationalreview.com/corner/315088/more-evidence-spending-cuts-are-best-way-shrink-our-debt-veronique-de-rugy).

The paper: THE OUTPUT EFFECT OF FISCAL CONSOLIDATIONS (http://papers.nber.org/tmp/28993-w18336.pdf)(.PDF)

[Captain Obvious]

Here here!

[Peter1469]

Our deficit spending is so high it is not possible to tax our way out of it.

[KC]

It shouldn't be one or the other. It should be both. Find a way to raise revenue, by tax cuts or increases, plus cut spending.

[Peter1469]

It shouldn't be one or the other. It should be both. Find a way to raise revenue, by tax cuts or increases, plus cut spending.
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Tax increases will likely bring in less revenue. So if that is your goal, have at it.

[KC]

That's why I said tax cut or increases. I have no idea which brings in more revenue, since I don't know which side of the Laffer curve we're on.

[Goldie Locks]

It shouldn't be one or the other. It should be both. Find a way to raise revenue, by tax cuts or increases, plus cut spending.

Sorry, wrong, no tax increase.

[Carygrant]

From More Evidence That Spending Cuts Are the Best Way to Shrink Our Debt (http://www.nationalreview.com/corner/315088/more-evidence-spending-cuts-are-best-way-shrink-our-debt-veronique-de-rugy).


Great . But at the same you need to find measures that give back something to the middle and lower classes -- who invariably pay the bills .
Something sweet that takes away the bitter taste .
Helps them forget about the revenge part of rioting .Hopefully .

[KC]

Sorry, wrong, no tax increase.
Are you even reading what I wrote? I said tax cuts or increases. If one boosts revenue and not the other, fine, let's do that. But there is a large deficit so more revenue is a positive.

[Agravan]

Are you even reading what I wrote? I said tax cuts or increases. If one boosts revenue and not the other, fine, let's do that. But there is a large deficit so more revenue is a positive.

Historically, government receives more revenue when taxes are cut, as there are more jobs, more people working and a bigger tax base.
But, also historically, government tends to take the extra money and, instead of using it to pay down the deficit, instead finds new spending to waste it on.

[Chris]

As uncle Milton might say, starve the beast!




But at the same you need to find measures that give back something to the middle and lower classes -- who invariably pay the bills .
Why not just not take it away from them to begin with?

You must be one of those economists like Thomas Sowell warn us about who are hung up on statistical groups rather than the individuals who in reality move in and out of the groups.

[KC]

Historically, government receives more revenue when taxes are cut, as there are more jobs, more people working and a bigger tax base.

Ah but is that the effect of income tax cuts or other alterations in the tax code, and how much of that has to do with economic boom bust cycle? Also, when you control for differences in monetary policy do the same revenue boosts occur? It just seems like so much goes into it. I sure would like to believe tax cuts could create revenue. Sort of a have your cake and eat it too situation.

And yeah, government tends to spend extra revenue when we have it, but that's just the way it is. I'd rather talk about what ought, because I'm overall pessimistic over what will actually happen.