Spending Cuts Are More Effective for Deficit Reduction

Is it better to reduce deficits by cutting spending or by raising taxes?

In his column in Sunday’s New York Times, Paul Krugman complains that President Obama has caved in too much to fiscal conservatives who seek to cut the federal budget deficit more by cutting spending than by raising revenues. The federal debt may not hit the ceiling, but Krugman did.

After he tends to his bruises, Krugman can rest easy.

In a paper published in October 2009 by the National Bureau of Economic Research, “Large Changes in Fiscal Policy: Taxes versus Spending,” Alberto Alesina and Silvia Ardagna addressed the question of whether spending cuts or tax increases are more effective in reducing budget deficits. They examined 107 cases of OECD countries that attempted to cut their deficits by at least 1.5 percent from 1970 to 2007. Their findings?

Alesina and Ardagna wrote that “spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

Their paper was relatively well publicized after it came out, but much of that publicity focused on a different aspect of their research—their conclusion that tax cuts tend to be more expansionary than government spending increases.

Undoubtedly Alesina and Ardagna will be getting more phone calls from the news media than usual in the days ahead. It would be nice if among those calls came an open-minded inquiry from a certain New York Times columnist. But alas, judging by the sound of the impact, it may take a while for those bruises to heal.

Carl Close is Research Fellow and Senior Editor for The Independent Institute and Assistant Editor of The Independent Review and editor of The Lighthouse, The Independent Institute’s weekly e-mail newsletter.
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