Austerity Measures Are the Proper Response to a Debt Crisis

I. Economic Effects Consumers (who contribute ~70% of GDP) and investors (who contribute ~10-15% of GDP) feel more secure when both spending and taxes are low. When these groups feel more secure, they spend more, stimulating the economy. "Writing in the Wall Street Journal, Alesina points to the reason for these findings: Spending cuts “signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities. This, in turn, shifts people’s behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time. "[1]Many economists agree with this:"The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts. The survey found that 56 percent of the NABE members surveyed felt that way. "[2]Empricial evidence can cement this hypothesis:"I’ve studied every 3-year peace-time period since the U. S. founding in 1790, and in cases when federal spending declined, real GDP over the same years grew by 11%, on average, not materially different from the average growth rate recorded in periods of rising spending. Government spending cuts have not been bearish for growth. From 1840 to 1843 U. S. federal spending was cut by 51% while real GDP grew by 11%; from 1866 to 1896 spending declined 38% as GDP grew by 9%; from 1874 to 1877 spending fell 20% as GDP advanced by 9%; from 1899 to 1902 spending dropped by 20%, but GDP rose by 13%; finally, between 1921 and 1924 spending decreased 43%, yet GDP climbed by 23%. No 3-year spending cut has occurred since 1949, and since then, GDP growth has slowed. "[3]International economies are also experiencing positive economic effects after switching from being a big spender to being a small spender:"In the Guadian, Sheila Lawlor suggested: The UK’s output figures, which show a quarterly drop of 0.7%, are not surprising. Economies with big public spending to GDP ratios have difficulty growing. But there is a solution, to cut public spending and embark on structural reform, proven as the sure path to growth. The evidence from a variety of economies shows that cutting public spending and structural reforms brings growth: Brazil since 1990, Ireland in the 1990s, Sweden from the 1990s. "[4][5] To conclude:"Stock prices fall with growing government involvement in the economy or with rising inflation. The sharp rise in the government's share of output in the last decade and the threat of greater inflation in the next one are important factors behind the 30 percent decline in the inflation-adjusted Dow Jones Industrial Average since 2000. Eye-popping deficits of the past year have lowered optimism about the future, kept stock prices depressed, and reduced key elements in new investment spending. These negative side effects of the stimulus spending are certainly slowing down the recuperative process that market forces are attempting to generate. "[6]II. Solving Debt Problems When it comes down to it, the real question is whether or not tax increases can have the same effect as cutting spending. When analyzed in detail, it can be clearly seen that spending cuts are more direct and more immediate than tax increases. "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. .. they found that spending cuts are a more effective way to reduce the debt-to-GDP ratio:For fiscal adjustments we show that spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions. "[7]Again, the majority of economists tend to see spending cuts as more direct in cutting debt the tax increases. [2]Raising revenue does not always mean that the money being raised would go to pay off the deficit; in other words, the money could go to making our debt situation even worse. Cutting spending would be more direct. Sources:[1]: . http://blog.heritage.org...[2]: . http://www.cnbc.com...[3]: . http://www.forbes.com...[4]: . http://www.guardian.co.uk...[5]: . http://www.economicshelp.org...[6]: . http://www.cato.org...[7]: . http://reason.com...