Spending Cuts, Not Tax Increases, Might Be The Right Way To Fight Debt And Lower Deficits

See What Obama Can Learn from the Swedes by Rohan Poojara of AEI.

"President Obama will lay out his plan to rein in the nation’s rising deficit in a speech this afternoon. While statements from the White House suggest that he will support GOP-favored steps such as reducing Medicare and Medicaid costs, his call to raise taxes on the wealthy is unlikely to be supported by the Right.

The Republicans have strong academic research backing their stance. Analysis of historical fiscal consolidations (that is, policies intended to reduce deficits and the accumulation of debt) of select OECD countries from 1970 to 2007 by AEI’s Andrew Biggs, Kevin Hassett, and Matthew Jensen show that successful consolidations consisted of 85 percent spending cuts. By contrast, the typical unsuccessful fiscal consolidation consisted of only 47 percent spending cuts and 53 percent tax increases. Additionally, the AEI analysis shows that the negative Keynesian effects of reduced spending can be offset if a large and credible fiscal consolidation generates confidence that more disruptive steps have been avoided down the road and actually lead to the creation of jobs and a boost in economic growth.

One of the countries that served as a model of getting fiscal consolidation right was Sweden in the 1990s. It was able to reduce deficits from 10 percent in 1994 to 2 percent in 1997. The cornerstones of their economic policies of the 1990s are still in place and helped Sweden get through the financial crisis without ruining public finances. AEI will host a panel on April 18 with Anders Borg, Sweden’s minister for Finance. Borg will offer insight into the lessons that the United States can learn from the Swedish model, and be joined by panelists Johnny Munkhammar, Carmen Reinhart, and Vincent Reinhart."