Austerity Measures Are the Proper Response to a Debt Crisis

I. Rationale Behind Austerity and Why Is Austerity Wrong The rationale behind austerity is justified: "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. ' 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. '"[1] In fact, "[A] small reduction in current government purchases could signal large future reductions, and therefore cause consumption to rise by more than the fall in government purchases. Surprisingly, these possibilities are more than just theoretical curiosities. Giavazzi and Pagano (1990) show that fiscal reform packages in Denmark and Ireland in the 1980s caused consumption booms, and they argue that effects operating through expectations were the reason. Similarly, Alesina and Perotti (1997) show that deficit reductions coming from cuts in government employment and transfers are much more likely to be maintained than reductions coming from tax increases, and that, consistent with the importance of expectations, the first type of deficit reduction is often expansionary while the second type usually is not. "[2] Even so, Dr. Krugman does detract from this. However, his advice hasn't really been that sound - "In the 1990s it was Krugman who most loudly championed Japan"s innumerable and reckless "stimulus" schemes, together with dozens of rounds of "quantitative easing". Japan followed his advice and ever since then has suffered a secular stagnation. Since 1990 Japan"s public debt has ballooned from 68% to 233% of GDP; its money supply is up 286%, while its industrial output is lower by 3.4% and its equity index is down by 73%. "[3] - so it should, at the very least, be taken with a fine tooth comb if not just trashed. II. Economic Effects My opponent didn't really make a convincing argument in his first argument, and he really doesn't make one now. I will repeat this: "From 1840 to 1843 U. S. federal spending was cut by 51% while real GDP grew by 11%; from 1866 to 1869 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] III. Consensus Among Economists "The National Association for Business Economics (NABE), and its 236 members, said the government should extend payroll tax cuts, current income tax rates, current tax rates for investment, and other tax cuts passed under George W. Bush, which are set to expire by the end of this year. "[4] Most economists still want taxes to be kept relatively low, and even so, "Economists of the Center for Data Analysis (CDA) issued a report in 2010 addressing the Bush tax cut extensions and surmised that the 10-year economic impact of the Democrats" and President Obama"s ploy to inflate taxes on the nation"s "wealthy" would be devastating. : Slower economic growth: Inflation-adjusted gross domestic product (GDP) would fall by a total of $1.1 trillion between FY 2011 and FY 2020. GDP in 2018 would fall by $145 billion alone. The growth rate of the economy would be slower for the entire 10-year period. Fewer jobs: Slower economic growth would result in less job creation. Employment would fall by an average of 693,000 per year over this period " in one year alone, 2016, job losses top 876,000. More unemployed Americans: Slower growth in employment translates to a higher unemployment rate, which would rise more each year during the 10-year period than it would without the Obama tax hikes. "[4] Obama's tax hikes clearly aren't part of the solution. IV. Empirical Evidence One, my opponent doesn't make a convincing argument on the correlation between spending cuts and economic growth. Why? Because he's trying to reverse the correlation, and this simply won't work. [3] Notice no massive spending cut has been taken since 1949, and there are no spurts in growth. As Charles Kadlec explains, "The path to more robust growth is first to stop doing what demonstrably has not worked for the past two years. As I wrote in "Toward a New Economic Consensus," studies by professors from Harvard to the London School of Economics are providing a growing body of empirical evidence that shows the combination of spending restraint and reductions in tax rates are the best ways to stimulate economic growth and employment. "[5] On higher tax rates stimulating growth, this is just a fallacy: "At best, tax increases would slow the already stalled recovery, and at worst, would reverse it altogether. A slowed recovery or double-dip recession would further reduce the chances that the more than 14 million Americans currently looking for work would find a job in the near future. "[6][7] "The results of this more reliable test indicate that tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent. "[8] Therefore, my plan does work. V. International Economies "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. "[1] Also, notice Ireland has implemented spending cuts for a longer time, along with few tax increases, and they are surging along ahead of Europe. VI. Solving Debt Problems As I explained earlier, squeezing the rich doesn't really work, and higher marginal tax rates don't mean more tax revenues as a percentage of 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). "[9] Chart is easily seen in that source. And, Ireland has been improving more than other countries because of their duration. Thanks again for the debate Elder. Sources: [1]: . http://blog.heritage.org... [2]: . http://www.nationalreview.com... [3]: . http://www.forbes.com... [4]: . http://www.thenewamerican.com... [5]: . http://www.forbes.com... [6]: . http://www.heritage.org... [7]: . http://blog.heritage.org... [8]: . http://washingtonexaminer.com... [9]: . http://reason.com...