AUSTERITY IS WHEN YOU SPEND THE MONEY YOURSELF:

Austerity Helps Economic Recovery, Recent Data Show (IBD, 4/05/11)

"It is not that cutting spending creates growth," said Brian Riedl, an economist with the conservative Heritage Foundation. "It is that it removes the barriers to growth. Typically the private sector can spend much more productively than politicians and bureaucrats." [...]

The nonprofit National Bureau of Economic Research published a paper in October 2009 by two Harvard economists on debt and deficits in developed nations.

"Spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns," the study found. "In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions."

Without spending cuts, the authors say, "It is difficult to achieve fiscal stability because spending may rise faster than tax revenue."

Co-author Alberto Alesina says the paper was a summary of a decade's worth of research.

"Spending cuts being absolutely necessary to stabilize a deficit is pretty uncontroverted," he said. The more debated issue is how costly the spending cuts are in the short and medium run.

There will be pain, Alesina said, but without the cuts there will be too much uncertainty: "Investors are going to be more and more worried about what may happen in the future to the tax rates, regulations and so on."

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