37 year Study Shows Spending Cuts, Not Tax Increases, Best for Debt, Growth, Bond, Stock Markets

May 23, 2011

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  • (click picture for link to study)
  • The typical consolidation that failed relied on 47 percent spending cuts and 53 percent tax increases.
  • The typical consolidation that succeeded consisted of 85 percent spending cuts and 15 percent tax increases.
  • The “most wildly successful” efforts by nations, as Brooks put it, went into tax cut territory: Finland in the late 1990s, pointed out by Biggs and Hassett as a model of successful consolidation, had 108 percent spending cuts along with modest tax cuts.
  • Regarding which cuts :  “Specifically, reducing transfer programs and government wages were the most beneficial to growth, according to the 37 year study.”   No real surprise there really. How would cutting waste jeopardize growth?  (Federal workers earning double their private counterparts).
  • Fiscal consolidation can produce wealth effects on growth because of lowered expectations of future tax liabilities and the positive effect on real interest rates.
  • This is now termed the “expectational view” of fiscal consolidations and contrasts with the Keynesian belief that a fiscal consolidation will reduce aggregate demand and GDP
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