Cutting Through the Clutter: The Facts About Spending Cuts and Debt

Take a moment to watch the video and be sure to read the entire article. This is information that should be on the mainstream media outlets during this time of debate over the debt limit and government spending. All we seem to hear is that REVENUES must be increased in order to lower the debt. Those on the right say that if you cut government spending and thus reduce the size of the federal government, not only with gov revenues rise but so will the economy of the United States.

You decide which is true after you read this report.

Amplify’d from

Raising the debt limit might put off a downgrade disaster in
August, but that still isn’t enough—as
Standard & Poor’s recent warning
made clear. Perhaps the
most important shot not heard around the world was S&P’s
other admonition: Namely, that the U.S. bond rating will
be downgraded in three months, if not sooner, unless we do
something about government spending. Beyond raising the debt limit,
S&P laid out clear criteria for avoiding a downgrade: 1) reduce
the debt by about $4 trillion; 2) agree to a credible plan within
three months; and 3) guarantee that this newfound fiscal discipline
will actually stick.

If S&P isn’t bluffing, then lawmakers should get serious
about reducing the debt-to-GDP ratio, and they should do it
quickly. But how do we achieve such a task?

Myth 1: You cannot reduce the deficit to an
appropriate level without also raising taxes.

Fact 1: Spending cuts are the most
effective way to reduce the debt-to-GDP ratio.

We are not the first nation to struggle with a dangerous
debt-to-GDP ratio, and thankfully, the academic world has already
produced great insights into what can be done to reduce this ratio
without hurting the economy.

Take the work of Harvard’s
Alberto Alesina and Silvia Ardagna
. They examined 107 efforts
to reduce the debt in 21 OECD nations between 1970–2007. Their
findings suggest that tax cuts are more expansionary than spending
increases in the cases of a fiscal stimulus. Also, they found that
spending cuts are a more effective way to reduce the debt-to-GDP

As you can see in this chart, in cases of successful fiscal
adjustments—defined by the cumulative reduction in debt-to-GDP
ratio three years after fiscal adjustment greater than 4.5
percentage points—spending as a share of GDP fell by about 2
percentage points while revenue also fell by half a percentage
point (left bars). On the other hand, unsuccessful fiscal
adjustment packages—cumulative increases in debt-to-GDP ratio—were
made of smaller spending reductions (only 0.8 percentage-point
reduction) and large revenue increases (right bars).

The IMF found
similar results
and reports that fiscal adjustment on the
requisite scale of what we need today is actually not

During the past three decades, there were 14 episodes in
advanced economies and 26 in emerging economies when individual
countries adjusted their structural primary balance by more than 7
percentage points of GDP. Several economies were also able to
sustain large primary surpluses for five or more years afterwards,
though the record is more mixed in this regard.



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