Harvard Economists Find that Spending Cuts Lead to Expansions and Tax Increases Lead to Recessions

(p. A19) Economic history shows that even large adjustments in fiscal policy, if based on well-targeted spending cuts, have often led to expansions, not recessions. Fiscal adjustments based on higher taxes, on the other hand, have generally been recessionary.

My colleague Silvia Ardagna and I recently co-authored a paper examining this pattern, as have many studies over the past 20 years. Our paper looks at the 107 large fiscal adjustments–defined as a cyclically adjusted deficit reduction of at least 1.5% in one year–that took place in 21 Organization for Economic Cooperation and Development (OECD) countries between 1970 and 2007.
. . .
Our results were striking: Over nearly 40 years, expansionary adjustments were based mostly on spending cuts, while recessionary adjustments were based mostly on tax increases. And these results would have been even stronger had our definition of an expansionary period been more lenient (extending, for example, to the top 50% of the OECD). In addition, adjustments based on spending cuts were accompanied by longer-lasting reductions in ratios of debt to GDP.
. . .
The evidence from the last 40 years suggests that spending increases meant to stimulate the economy and tax increases meant to reduce deficits are unlikely to achieve their goals. The opposite combination might.

For the full commentary, see:
ALBERTO ALESINA. “Tax Cuts vs. ‘Stimulus’: The Evidence Is In; A review of over 200 fiscal adjustments in 21 countries shows that spending discipline and tax cuts are the best ways to spur economic growth.” The Wall Street Journal (Weds., November 23, 2010): A19.
(Note: ellipses added.)

A version of the Alesina and Ardagna paper that is downloadable online is:

Alesina, Alberto, and Silvia Ardagna. “Large Changes in Fiscal Policy: Taxes Versus Spending.” 2009.

The published version of the Alesina and Ardagna paper is:
Alesina, Alberto, and Silvia Ardagna. “Large Changes in Fiscal Policy: Taxes Versus Spending.” In Tax Policy and the Economy, edited by Jeffrey R. Brown. Chicago: The University of Chicago Press, 2010, pp. 35-68.

Leave a Reply

Your email address will not be published.