Dealing with debt: America needs a growth experiment

May 10, 2010
Europe’s debt problems should inspire Americans to explore just how the U.S. will solve its own fiscal woes. I mean, no one is going to cut us a check like Germany and France just did for Greece. This is a topic I tackle in a piece I just wrote for The Weekly Standard. A few key points:
1) Cutting spending and raising taxes is a risky formula. It doesn’t have a great track record:
Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a new study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.
2) Trying to take more from rich people has its limits. Higher and higher income taxes or even wealth taxes create incentive to find tax havens and avoid productive work or capital allocation.
3) Cutting spending is better than raising taxes. Hey, I even have a study to prove it:
A 2009 study by Harvard University’s Alberto Alesina and Silvia Ardagna. It examined 40 years of debt reduction plans by advanced economies and found that “those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases.” They’re also associated with higher economic growth.
4) Less spending +more growth. This is my money graf from the piece:
But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent. Under those conditions, according a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish. … Indeed, that is typically how successful countries in the UBS study managed to get their books in order; they grew their economies faster than they added debt. … Easier said than done, of course. … And there is no one policy to help make that happen. It will take a full-spectrum effort: lower taxes on companies and capital, pork-free spending on infrastructure and basic research (beyond health care), an education system that teaches students rather than feathering the nests of teachers’ unions. Every aspect of U.S. public policy will need to be optimized for economic growth.
7 comments

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Very interesting piece. As always, cutting spending comes down to politics–nothing more. I am not sure to what extent we have the political environment in the US to implement the kind of cuts that you suggest.

Certainly the overall mood in the electorate supports dealing with the deficit and spending, but when polled on individual entitlements and government programs that consensus and support can quickly evaporate. This means that while Congress and the President may want to implement a plan to cut spending the overall initiative could easily be scuttled by individual politicians protecting their electoral chances with constituents by voting against or killing specific cost-reduction measures.

Unless someone is forcing the US to cut spending as is the case in Greece–and, therefore, providing political cover for individual politicians–it is hard to imagine progress on this front in the near term.

Posted by BillPetti | Report as abusive

If you are arguing that austerity measures are the best approach to economic reform for other Western democracies, then let’s test that hypothesis in the US. Specifically, if California (for example) required a Federal bailout and the US imposed austerities upon Californians similar to those now being imposed upon Greeks by the EU/IMF, would Californians consent? For more, visit the link below and leave your opinion or views:

http://wjmc.blogspot.com/2010/05/how-wou ld-californians-react-to.html

Thanks for the opportunity to comment…

Posted by mckibbinusa | Report as abusive

Kindly note that ‘no longer feathering the nest of teacher’s unions’ is also ‘paying teachers the lowest amount possible, thereby guaranteeing that our teachers are as barely competent and motivated as possible to teach the next generation’…which is self-defeating.

Also, all government spending aimed at spending areas is ‘pork’, depending on whether you got the money, or the other guy did. You can cut his paycheck all you like, don’t cut ours, we aren’t pork, we’re a vital national investment!

Now, paying for basic research is great, but just means that more and more companies will cede the research to the government as a cost center, then go and make the money off the discoveries. Good or bad? Hard to tell.

==Bob

Posted by REDruin | Report as abusive

Good piece James!

I can understand the rationale for cutting spending, and not raising taxes. First, raising taxes reduce growth, and thereby hurt revenue in long term. Second, when policymakers raise taxes, and either dont cut spending or try and do both, they are actually thinking to themselves, “hey we will be raising more money, so why not build that new pet project, or fund my little study group or etc…” Raising taxes promotes pork barrel spending, while cutting spending, well, obviously reduces it.

Interestingly enough, we are witnessing this occurring in the US. Most states are taking a large axe to their budgets, and there is little talk of raising taxes. If they follow through, and pin the unions to the mat, then the states fiscal future may end up alright.

Unfortunately, the elephant in the room, which is not addressed by spending cuts, is entitlements. Unless they are addressed, specifically public workers’ pensions and health benefits, then I dont see how the states can capitalize on the spending cuts, since funding entitlements will always eat into any savings.

Posted by LucidOne | Report as abusive

We do not have much to brag about. Indebtedness, our planet in peril; it’s offsetting to us all. One would expect a consensus and a coarse of action. Why is our expectation violated? What pushes us into inactivity?

Solutions do not emanate from a monetary economy. This monetary system has taken Babylon, Greece, Rome over a cliff. Ego oriented, antiquated [4000 years], it seems quaintly out of place, in the technological world of today.

Not surprisingly, our 5 senses correlate with our needs for clean food, clean water, safety and reproduction. The senses of touch, smell, taste, sound, and of sight. These are resource based research, tools. [As an aside, Homo sappiens respond highly to the “look and feel” of Apple products. That is how we “roll”.] We all researchers in our own right.

The planet provides the resources and our survival is a testament to a high functioning, ability to find and use these resources. We get together and passionately volunteer our time and energy to promote the freedom. If u want high functioning people, u design around and stay within this simple, stackable, 5 sense, system. When u put homo sapiens outside this five sense, research capabilitiy u have people in the streets of Rome, Germany

Funny, no sense of an on going monetary computation, required to sustain life?

Somewhere along the way we picked up this parasite that promotes, taxation, indebtedness, aggression greed…etcetera, etcetera, U could help me fill many pages. As u mention trying to take more from rich people is just the flipside of shameless commerce. This parasite pounds a nail thru the forehead of every homo sapien on the planet poor and rich alike. The evidence shows, as reported world wide, in many, languages, that this monetary system threatens our freedom.

As for human flourishing, when u care about the monetary system u care about the wrong system. When a parasite is found do U promote, regulate – “fix” it?… or eliminate and replace with a resource based, system, that we are designed to deal with? The wealthy need not fear loss, as they will enjoy positions of extremely high influence and with their leadership, we have never been more capable. I expect we will have something to brag about. TICK – TOCK

Posted by evolutis | Report as abusive

Spending cuts is not easy to do while fighting two wars overseas and with the majority of populace worse off than before.In the name of growth here, all we can see is the skimming of money from the middle class and being syphoned into the speculative activity by the unregulated financial trading industry who in the name of allocating capital are churning it for short term gains to line their pockets and balk in the name of paying their share of taxes though have survived by the taxed money bailouts.The financial markets have evolved to be worse than the casino and wagering activity.

Posted by schadha100 | Report as abusive

[...] This post was mentioned on Twitter by brenda giguere, CRNC Washington, Victoria Kintish, Cole Hillier, Brandon Greife and others. Brandon Greife said: Cutting spending is better than raising taxes. Hey, I even have a study to prove it: http://ow.ly/1Jk3l [...]

Chinese firms are moving manufacturing plants to the US because land is cheaper here than in Beijing. THAT is growth

http://storyburn.com

Posted by STORYBURNcom2 | Report as abusive

[...] Pethokoukis on Tackling US Debt Posted on May 11, 2010 by Bill Petti James Pethokoukis writes at his blog that the current sovereign debt crisis in Europe should provide Americans with an opportunity to [...]