Veronique de Rugy: More Evidence That Spending Cuts Are the Best Way to Shrink Our Debt

This new paper by Harvard University’s Alberto Alesina, Carlo Favero and Francesco Giaviani of the University of Bocconi makes the case that increasing 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 is to try to reduce our debt-to-GDP ratio by raising taxes.

Government Spending

Government Spending (Photo credit: Tax Credits)

My prejudice against Harvard professors having anything much sensible to say, especially when it comes to government spending and taxation, really took a massive hit! The paper author du Rugy refers to is 54 pages long and was commissioned by the European Commission, allegedly to understand how Europe could get out of the economic and financial mess they’re in.

But they have the hit the nail on the head. Here is this from their Abstract of the study:

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 at all.

Instead, tax-based adjustments have been followed by prolonged and deep recessions. The difference is remarkable in its size and cannot be explained by different monetary policies during the two types of adjustments.

Parsing this out: cuts in government spending are much more effective in reducing both the severity and the duration of a than are financial stimuli (government spending) to hasten the recovery. In fact, tax hikes during a recession extend it and deepen it.

Who would have thought? It takes a Harvard professor (with some help from two friends) to figure this out!

Du Rugy properly concludes that, come January, the automatic cuts to government spending already baked into the cake should be allowed to happen:

If [the professors] are right, it means that comes January we should let sequestration follow its course…but prevent from going up.

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