View Full Version : Deficit Spending NOT the Answer?

Gerry Clinchy
06-11-2010, 11:46 PM
The NY Times

Not what you might expect to find in the Op Ed section of the Times

Some theorists will tell you that if governments shift their emphasis to deficit cutting, they risk sending the world back into recession. There are some reasons to think this is so, but events tell a more complicated story.
Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper (http://www.economics.harvard.edu/faculty/alesina/files/Fiscal%2BAdjustments_lessons.pdf), “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt (http://www.jstor.org/pss/3585133?cookieSet=1) in the 1980s. Once again, lower deficits led to higher growth.
So the challenge for the U.S. in the years ahead is to consolidate intelligently. That means reducing deficits while at the same time making the welfare state more efficient, boosting innovation in areas like energy, and spending more money on growth-enhancing sectors like infrastructure.

That’s a tough balancing act.

The biggest task will be to reduce middle-class entitlement spending. Alesina found that spending cuts are a more effective way to stabilize debt than tax increases, though we’ll need both.

The second biggest task is to consolidate while addressing another problem: labor market polarization. According to a Hamilton Project/Center for American Progress study (http://www.americanprogress.org/issues/2010/04/job_polarization_report.html) by David Autor, high-skill sectors saw no net loss of jobs during the recession. Middle-skill sectors like sales saw an 8 percent employment decline. Blue-collar jobs fell by 16 percent.

During the period of consolidation, in other words, the government will have to spend less, but target better. That will require enormous dexterity and intelligence from a political system that has recently shown neither.

06-12-2010, 09:18 AM
If the current administration doesn't have huge deficit spending, how else would they be able to buy votes?