March 4, 2013
HAPPILY, THERE'S PLENTY OF ROOM FOR CUTS:
Larger Spending Cuts Would Help the Economy (MICHAEL J. BOSKIN, 3/04/13, WSJ)
Posted by Orrin Judd at March 4, 2013 8:50 PMSince World War II, OECD countries that stabilized their budgets without recession averaged $5-$6 of actual spending cuts per dollar of tax hikes. Examples include the Netherlands in the mid-1990s and Sweden in the mid-2000s. In a paper last year for the Stanford Institute for Economic Policy Research, Stanford's John Cogan and John Taylor, with Volker Wieland and Maik Wolters of Frankfurt, Germany's Goethe University, show that a reduction in federal spending over several years amounting to 3% of GDP--bringing noninterest spending down to pre-financial-crisis levels--will increase short-term GDP.Why? Because expectations of lower future taxes and debt, and therefore higher incomes, increase private spending. The U.S. reduced spending as a share of GDP by 5% from the mid-1980s to mid-1990s. Canada reduced its spending as share of GDP by 8% in the mid-'90s and 2000s. In both cases, the reductions reinforced a period of strong growth.An economically "balanced" deficit-reduction program today would mean $5 of actual, not hypothetical, spending cuts per dollar of tax hikes. The fiscal-cliff deal reached on Jan. 1 instead was scored at $1 of spending cuts for every $40 of tax hikes.