What Cross-Country Evidence Tells Us About the Federal Debt

Earlier today, the Republican staff of the Senate Budget Committee released a report titled Spending Cuts And Economic Growth: What Does The Cross- Country Empirical Evidence Show? The report represents a significant contribution to the debate now raging over the federal debt crisis. Among other things, it analyzes the experience of countries that are ahead of the U.S. on the debt curve to see what has worked and what hasn’t.
The staff report should be studied in full, but here are a few highlights. First, a summary of the conclusions:

The federal debt held by the public has doubled, in nominal terms, in less than four years. It now stands at over 62 percent of GDP, the highest level since 1951. What costs does this place on our economy? With our fragile economy still suffering high unemployment, can we risk attempting to slow the accumulation of more debt by reducing government spending? This paper examines these questions by surveying the available literature and empirical evidence regarding the economic effects of government debt and spending reductions on economic growth.
The available evidence shows that:
1) a national debt crisis could result in economic collapse;
2) our high national debt already imposes sustained economic costs;
3) our growing debt can be slowed by immediate reductions in government spending;
4) reductions in federal spending, as part of successful fiscal consolidations, have demonstrably led to economic growth;
5) fiscal consolidations focused on spending cuts are far more successful than those relying on tax increases and those that evenly combine tax increases and spending cuts.

This graph depicts the Congressional Budget Office’s projections of the amount of interest the federal government will pay on its debt annually under President Obama’s proposed budget. It perhaps shows as well as anything why every expert, without exception, says that our present fiscal course, as laid out by the Obama administration, is unsustainable:
InterestProjection0026.jpg
The central argument of today’s report is that experience shows that spending reductions are much more effective than tax increases as a means of dealing with unsustainable debt:

Indeed, a consistent and striking conclusion from a large and growing body of evidence is that successful efforts to climb out of debt are composed mostly of spending reductions, and that these reductions not only do not tend to harm economies but, rather tend to lead to economic growth.24
For instance, a recent extensive review of countries that faced perilously high debt levels, by Andrew Biggs, Kevin Hassett, and Matthew Jensen, considered the experiences of 21 OECD countries over a 37 year period.25 They find that countries that failed to successfully reduce their debt are more the rule than the exception–success appears to be achieved in approximately one-fifth of cases. On average, the typical unsuccessful country used a combination of 53 percent tax increases and 47 percent spending cuts. By contrast, the typical successful country used, on average, 85 percent spending cuts. The authors conclude that “…fiscal consolidations based upon expenditure cuts have tended to be more effective than tax-based consolidations based on the evidence from empirical studies.”

There is much more. The Republican staff report is must reading for anyone who wants to understand our current budget crisis.

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