New research suggests that legislators should cut spending and enact growth-inducing policies. The reasoning? According to the study, spending cuts can positively affect economic growth and are the only historically reliable way to lower deficits and debt.
The authors of the study, Alberto Alesina and Francesco Giavazzi, write that “spending-based consolidations [spending cuts] accompanied by the right polices tend to be less recessionary or even have a positive impact on growth.” (emphasis added)
Alesina and Giavazzi also add that “only spending-based adjustments have eventually led to a permanent consolidation of the budget, as measured by the stabilization—if not the reduction—of debt-to-GDP ratios.”
No ordinary person needs a study to know that when government spends less of our money it will be better for the economy, and that less spending means less debt. Yet this proposition seems bewildering to many intellectuals who maintain that spending cuts would bring economic ruin. After all, they say, look at how pointlessly damaging European spending cuts have been.
Paul Krugman, for instance, concludes that the European example illuminates how “slashing spending in a depressed economy depresses the economy even more.”
But Europe has gone beyond cutting spending; it’s also hiked tax rates, which everyone agrees is contractionary. Alesina and Giavazzi’s study cautions that one must disentangle whether spending reductions, tax hikes, both, or neither cause hardship. Indeed, drawing conclusions like Krugman does—without discerning between spending cuts and tax hikes—is like observing an individual who consumes pizzas, sodas, burgers, and broccoli and concluding that broccoli is unhealthy and making him overweight. It’s careless analysis.
Sloppy economics lumps both spending and taxes together; proper economics analyzes them separately as well as together. Once discerned, it’s clear that the composition of “austerity” matters: Tax hikes contract an economy; spending cuts grow an economy.