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The open seat in NY-26 has gone to the Democrats, yet some conservatives still argue that despite its political unpopularity the GOP budget needs to be implemented because immediate and significant spending cuts can cause significant economic growth. But does this claim hold up? It turns out that conservatives are overstating the evidence from a key study they use to make this case and that the reality is much more sobering.
Conservatives and Republicans have attempted to find empirical evidence to support their belief that economic growth can come with austerity. They frequently cite a study done by Harvard economists Alberto Alesina and Silvia Ardagna. The study looked at what the best ways for countries to reduce their deficits have been: whether through spending cuts or revenue increases. Their data shows that over the long-term, spending cuts are a better way to bring long-term deficits under control. A second study by Alesina went further and argued that “large, credible and decisive” cuts can be immediately followed by “sustained” growth.
This study has since found its way into different strains of conservative and Republican literature. Jeff Sessions, the ranking Republican on the Senate budget committee released a white paper on May 12th that looked at “Fact-Based Budgeting” and included statements like this:
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.
Alesina’s work is cited in the footnotes. The work has also been positively cited in the pages of the Weekly Standard and in other sources.
So what’s problematic with Alesina’s results? Alesina has indeed found cases where reducing spending was followed by economic growth and reduced deficits. The problem: he found very few cases. More specifically he found 9 examples out of 107 attempts to reduce spending.
Even if we are more generous with our parameters, the data is still not an overwhelming majority. If we are only interested in times where reducing spending was followed by an economic expansion, the result is 26 cases. If we are interested in the number of times that reduced spending was followed by successfully reducing the deficit (doesn’t mean the economy had to grow!) we find 21 cases in his data.
Chad Stone, Chief Economist of the Center on Budget and Policy Priorities, very generously went through the study to provide the above numbers to FrumForum. The following are the six countries that have seen a reduction in spending followed by both economic growth and a reduction in the deficit, with the years noting when the policies were enacted:
Finland (1998)
Ireland (2000)
Netherlands (1996)
New Zealand (1993, 1994)
Norway (1979, 1980, 1996)
Sweden (2004)
A question for any policy maker then becomes: is America in 2011 in the same situation that the Netherlands, Norway, Sweden, or any of the other high-tax European or Scandinavian countries are in? Are any of their economic situations that led to those spending cuts being followed by lower deficits and higher growth anything like the situation America is currently in?
But perhaps more immediately problematic for conservatives is that when the IMF looked at these arguments they found that growth and deficit reduction occurred in countries where cuts in spending were accompanied with easing and looser monetary policy from central banks. This means those countries also had policies such as the conservative-derided quantitative easing (QE2). (The IMF’s report states: “it appears that the difference in monetary policy responses accounts for much, though probably not all, of the difference in output performance.”)
As David Beckworth noted: “Fiscal tightening coincided with a recovery only because monetary policy was easing.”
So the evidence for Republicans is much less heartening. It seems that reducing spending only causes economic growth in a minority of cases, and that in those cases, the reduction in spending needs to be off-set by a monetary policy that is expansionary. The GOP currently is in denial about how big the economic growth from spending cuts will be and opposed to monetary stimulus due to the intellectual capture of the party by gold-standard and hard money advocates.
And this is why some Republicans and conservatives will still support the GOP budget. They really do believe it will work, and the only thing that can make it better are higher interest rates.
Follow Noah on Twitter: @noahkgreen
“Alesina has indeed found cases where reducing spending was followed by economic growth and reduced deficits. The problem: he found very few cases. More specifically he found 9 examples out of 107 attempts to reduce spending.”
Meanwhile, Wausie has found cases where increasing taxes was followed by economic growth and reduced deficits:
How many times did reduced spending result in declines in economic growth, particularly in the short-term?
Also, what kinds of spending was reduced? For example, does reducing spending on R&D, infrastructure and education result in better long-term growth? How does reduced spending on defense effect the economy versus other areas?
What about reduced spending that results in 100,000s of lay-offs (teachers, police officers and other government employees)? How does that compare with reduced spending on say agricultural subsidies and corporate welfare?
Also, how many examples are there where INCREASED spending resulted in stronger economic growth? We just had a stimulus bill that clearly resulted in increased economic activity. Maybe increased spending pays for itself over time.
Why do you folks attach these biased monster charts all the time??
Some of the contributors on here are known crackheads.
Smarg,
Charts are good. We all don’t run from facts and logic like you Teabaggers do. Magical voodoo economics like you supposive “conservatives” believe in will only take you so far.
LOL!! We all know what the Fleebaggers contribute to–the debt, subsidized illegitimacy, parasitism, and moral anarchy.
Smarg,
I would like to see you actually quantify your statement that “fleebaggers” cost society? Why don’t you bring us some numbers and facts to back-up your statements? Bring us some context to what you say. Maybe some of us would then agree with you and your rhetoric.
army,
Here you go. Enjoy.
http://www.heritage.org/Research/Reports/2010/08/The-Entitlement-Crisis
http://www.realclearpolitics.com/articles/2010/07/30/the_tipping_point_of_american_debt_tax_spending_gdp_106545.html
http://home.comcast.net/~lcmgroupe/2010/Article-Preserve_and_Protect-Tipping_Points.htm
Smarg,
I love your response.
Your first reference or link is from Heritage and their claim that “entitlements” are bankrupting the country, which in itself is a rather dubious thing to state. So by this reference you are saying that all past and present Americans are “fleebags”, as we all receive “entitlements” or benefit from these very successful social programs.
Your second link is just some generic article about debt. Since the GOP is entirely responsible for the debt and deficits (we were on the road to entirely paying down the debt and were in a surplus under Clinton), I guess you mean the fleebaggers are primarily Republicans and those who voted for them, which I would assume includes yourself.
Your third reference is a bit weird. Kind of a doomsday conspiracy website. Not sure what that has to do with fleebags or morals or whatever your original point was?
Moral anarchy sounds like fun.
Of course! Just go to Detroit, New Orleans, East St. Louis, Chicago, or Cleveland to observe it.
Wall Street is the epicenter of moral anarchy. Smarg: morals don’t just apply to sexual behavior.
Obviously a chart, based on historical data, must be “biased” since it refutes your understanding of the world, yes?
This reminds me of the argument I have so often as to whether tax cuts really stimulate the economy. When pressed to come up with instances where tax cuts provided economic stimulus without an increase in the national debt they in general fail. Thus, the stimulus may have simply been a result of putting more money in the economy, and not a demonstration that targeted government spending of the same magnitude wouldn’t have had greater positive results.
Conservatives hate taxes. We get that. Conservatives hate government spending. We get that. And there is a legitimate argument to be made for keeping taxes and government spending from getting too high in a society that is still dedicated to personal liberties, rather than collective success. We get that.
But when Conservatives try using strained economic arguments to demonstrate that their tax cuts and government spending cuts lead not only to increasing personal liberties, but to increasing our collective success as a nation, it usually fails.
Not that this will ever get them to stop making the argument. Escatologists can keep pushing back their date for the end of the world and keep believing it’s about to come, and Republicans can keep seeing their economic policies fail to deliver the societal benefits they promise and keep believing that the next tax cut will be the one that reduces unemployment to 2.3%. It’s a faith based system.
+ 1
Thank you for the reasoned response/counter to a rational post.
The survey has been completely discredited by the IMF no less. And yet like the Laffer curve conservatives still cling to it. But then it’s been apparent for a long time that conservatives are largely delusional in matters of history, science and economics.
Ugh. I am so tired of economic fraud. Nothing is more common in politics (from both sides) than using some random economic data to imply a causal relationship to some result. It doesn’t work that way. It’s a complex and interconnected system, not a set of isolated events directly leading to isolated results.
Indy,
No it is not on “both sides”, as you say. Can you give us an example where a Democrat is lying about economic data? Just give us one example. The Republicans do it all the time. They even do it directly in legislation like the Ryan plan and its 2.8% unemployment, a number that was such a lie that the Heritage Foundation had to scrub it from their website.
It is funny, but not only do conservatives lie all the time, but they use false equivalencies like Indy just did to somehow justify the lying.
What is really funny is you calling me a conservative. You can’t even tell friends (or at least sympathetic observers) from the enemy. Any criticism at all is a little too much for your delicate constitution?
Here, BTW is one (and I can find hundreds or thousands, not just one) example of economic fraud from the left:
Now, are you objective enough to tell me why this is fraud? Hint: look at the title.
Indy….are you arguing that the deregulation of the banking and financial sector along with the merger of investment banking and regular banks did not lead to greater profits and salaries for the people working in those markets? Are you really saying that by allowing them to create new unregulated products, their salaries and bonus’s were not the result of said legislation? Are you really saying that the banking and financial sectors share of our national gross profit was not the result of legislation cutting them loose to create all kinds of bets that never existed prior to the various deregulatory acts in the 90s and early 00′s? Is that what you are saying? Are you saying that regulations would not have stopped them from creating swaps, tranches and so on? Is that what you are saying?
Indy,
If you read what I said, I in fact do not call you a conservative. Love to see a source for your chart. I do not see a straight out lie in this chart. In fact, there very likely is a relationship between financial deregulation and financial services industry wages. You may disagree with the analysis, but no straight out lie. Very different than Sessions saying: “a large and growing body of evidence”.
Are you really going to try to derail the point? Go to the daily kos. You can find ten of them just like this one in an hour. Not just from random diarists either. Front pagers. Fraud is not lying. It is the intent to mislead. It doesn’t say ‘deregulation MAY have caused industry wages to go up’. Is says it DID cause it.
I see now that you know you are wrong, you want to change the argument to determine who tells the most egregious economic lies. Well, you win that one. It’s the right. The left is smarter, and therefore more subtle.
Indy,
I do not see all kinds of lying on Daily Kos like you suggest. Give some examples. Your chart above with no source and that is suppose to be an example of a “liberal” lie and equivalent to all the lies (like in this post) we hear from conservatives consistently all the time, particularly on economic matters is a bit of a joke.
Indy, this article did not seem to rely on ‘random data’ to draw a causal relationship, in my opinion. I take it Indy stands for independent? those are the people always going about saying “both sides do it” as their excuse to vote against their (and the rest of us) interests, aren’t they? Not saying you do…
LOL. I see the armstp line of attack isn’t unique to him and smearing the other guy is the way to go. Yes, as a matter of fact, I have been voting against my personal economic interests lately. I’ve been voting Democratic. Some days I do wonder why though.
I have been voting against my personal economic interests lately. I’ve been voting Democratic. Some days I do wonder why though.
Well, unless you’re in the top 1% of wealth-holders in America … perhaps even the top 1/2% … you are probably smart enough to realize that currently voting Republican may look beneficial to your short-term economic interests – but are potentially ruinous to your long-term economic interests.
This was different in the pre-Reagan era. I think an upper-middle class voter, or even a rich-not-superrich voter could expect the GOP to be standing up for their long term economic interests. No more. That’s one major reason why my wife and I, who sit comfortably in the top 10% of household incomes in America (perhaps even top 6%), can’t even think of voting for a GOP candidate these days. We know that GOP leadership doesn’t really care about our prosperity 10 years down the line, unless we somehow through luck, hard work, and talent manage to pull ourselves up a few more rungs into the truly elite.
you are probably smart enough to realize that currently voting Republican may look beneficial to your short-term economic interests – but are potentially ruinous to your long-term economic interests
I am among the people republicans fight tooth and nail for. Voting republican is in my personal economic interest until I’m dead most likely. It is currently ruinous for our country, however. So if you define my ‘long-term economic interests’ as looking out for the interests of my kids and my country then I guess I agree.
Indy,
“…smearing the other guy is the way to go.”
I am not smearing anyone. I am simply stating that “conservatives”: lie all the time, particularly regarding economics, and “liberals” do not. You bring up a a false equivalency that they both equally do it. I simply ask you to prove it.
armstp has it right here. Pointing out the “false equivalency” meme is useful these days when one side is peddling out and out snake oil, while the other side might be accused of overselling the benefits of bran flakes.
I’ve no problem with the charge that bran flakes won’t solve every health problem … but for the most part, it’s good for you … while there’s all the possibility in the world that the snake oil that someone is trying to sell you has a better chance of killing you than actually curing any of your ills.
“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.”
There is no proof of this statement. Growing body of evidence? Bullshit.
Why do Republicans like Jeff Session lie all the time? The example in the article above is a great example. What is it with conservatives and lying? We really do not see this on the “liberal” side. Why is it that one side seems to do all the lying? Is there just a different moral compasss on that side.
It’s because they are “Christians” and everyone knows it’s ok to lie if you are a Christan. Jeebus said so.
Indy….are you arguing that the deregulation of the banking and financial sector along with the merger of investment banking and regular banks did not lead to greater profits and salaries for the people working in those markets?
No, I’m not. I’m claiming I don’t know what caused ‘surging’ financial system wages. And neither does the maker of the chart, and neither do you. But is the point of the chart to lead you to believe it is deregulation by ‘Reagan’? Yes, it is. There is no equivocation.
Deregulation of financial markets could very well have resulted in increases in financial services wages. Anything that expands the size of the financial services markets, which deregulation has clearly done, results in a great demand of financial service labor talent. That alone could have pushed wages hire. In addition, as Sinan points out above, deregulation would have increased profits, particularly from things like unregulated derivatives and the increased risks banks took when their capital requirements were lowered. The higher profits also likely resulted in higher compensation in the financial services industry. That chart you quote as some kind of “liberal” big lie actual makes a lot of sense. Where exactly is the lie? You could say you need more evidence than one simple chart, but that does not mean the chart is a lie.
If you do not believe that unregulated products and services did not create vast profits for the big traders and bankers then you should do a bit of research on it. Start with The Quants. Then the Big Short. Come on back when you get to the part where the quants are creating products and making billions on bets that their own bosses did not understand…
I can say that we saw CEO salaries start to soar in the Reagan era, and public displays of greed become acceptable social behavior. I don’t care who or what you blame for this but I just wanted to point this out. We changed as a society, under Reagan.
I say the original sin was the massive cuts in capital gains taxes, which sent out the signal that money received from having money should be taxed at a lower rate than money received as compensation for one’s own hard work.
I have seen no data which constitutes irrefutable proof that a direct casual relationship exists between reduced government spending and economic growth. It may be that the case can be made for it but currently there seems to be nothing with demonstrates that it is anything more than coincidence.
Does someone have a source for a logical argument that demonstrates how reduced government spending results in an economic surge? I am sure that we all can point to deregulation as a cause of economic growth (sometimes bad economic growth, such as in the financial sector) but reduced spending?
The logical argument is that government activity in the marketplace crowds out opportunities for free market opportunities which might be more economically sound, create entrepreneurship, and eliminate fraud and waste.
And without question, there are places where this has taken place – say, the Soviet Union. But here in the US the places where that opportunity exists to stimulate the economy via cutting government spending are extraordinarily few.
balcon,
but there is also an equally large or larger argument that there is a multiplier effect to government spending which actually grows the economy.
I think the crowding out argument is a bit thin. Try and think of a practical example of where government spending crowds out economic growth. I think the Soviet Union is apples and oranges. For example, if you look at the biggest areas of government spending, say the defense industry, where is the crowding out. I doubt there would be private armies of any significance without government defense spending (in countries with very low military spending there is no private sector jumping in to fill the gap). Or how about in the areas of transportation? What about spending on the social safety net? How does that crowd out economic growth?
Of course! Just go to Detroit, New Orleans, East St. Louis, Chicago, or Cleveland to observe it.
Well, I know David Vitter might be in NO. But I’m unfamiliar with the others I’m afraid.
Indy, as near as I can tell, you are not saying that the data is cooked in your chart. You dislike the conclusion drawn, but you aren’t attacking the numbers themselves and you’re not saying that they intentionally left out vastly mitigating numbers. You just don’t like the definitiveness of their conclusion. Fair enough, but you are actually highlighting the difference between the Repubs and the Dems.
For example, I’ve read multiple right-wingers say that revenues went up under Reagan. First, they use actual dollars rather than year denominated dollars. That’s a lie and is an intentional cooking of the data. Second, they don’t cite the huge increase in government spending which was a direct injection into the economy. Intentionally ignoring hundreds of billions in borrowed funds being injected annually into the economy is a lie. Third, they ignore the fact that revenues dropped sharply but the bottom was caught by 6 (count ‘em, 6) tax hikes signed by Reagan. Paying attention to cuts in one year and ignoring the clawback of those cuts by multiple tax hikes is a lie.
If you read Larry Kudlow during the Bush years, you’d also understand. His selective citation of data was second to none. If the official unemployment numbers didn’t bolster his guy but the household numbers did, then household was cited. He would flip that on a dime if it sounded better the next month.
Indy, as near as I can tell, you are not saying that the data is cooked in your chart. You dislike the conclusion drawn, but you aren’t attacking the numbers themselves and you’re not saying that they intentionally left out vastly mitigating numbers. You just don’t like the definitiveness of their conclusion. Fair enough, but you are actually highlighting the difference between the Repubs and the Dems.
It is correct to say that I don’t think the data in the chart is cooked. I didn’t check, of course, but I have no reason to doubt the accuracy of the data points. You can’t draw this conclusion from this chart even if every piece of data is absolutely correct. It is an example of confirmation bias. Just because two sets of data coexist on a chart does not, in any way, shape or form, imply a causal relationship between the two just because you already think it might, unless you can actually repeat the experiment under exactly the same conditions and get the exactly the same result. There may be a relationship and there may not be. But that is not the conclusion that they wish you to draw, is it?
For example, I’ve read multiple right-wingers say that revenues went up under Reagan. First, they use actual dollars rather than year denominated dollars. That’s a lie and is an intentional cooking of the data. Second, they don’t cite the huge increase in government spending which was a direct injection into the economy. Intentionally ignoring hundreds of billions in borrowed funds being injected annually into the economy is a lie. Third, they ignore the fact that revenues dropped sharply but the bottom was caught by 6 (count ‘em, 6) tax hikes signed by Reagan. Paying attention to cuts in one year and ignoring the clawback of those cuts by multiple tax hikes is a lie.
Sure, but this was my whole point, wasn’t it? What I said was: Nothing is more common in politics (from both sides) than using some random economic data to imply a causal relationship to some result. It doesn’t work that way. It’s a complex and interconnected system, not a set of isolated events directly leading to isolated results. As I said, the right is more egregious about it and I don’t dispute that. That the left claims to be immune from it is just funny as far as I am concerned.
And again, I don’t claim equivalency between the left and right in all things. Rush Limbaugh and Rachael Maddow are not the same. One is a lying sack of shit. The other is smart, funny, lives in the real world, and generally accurate. I’ll leave it to you to figure out which I think is which.
But in drawing faulty conclusions from economic data, both are guilty, though not to the exact same degree or in exactly the same way.
Gotta’ disagree with you about the Laffer Curve, Otto. I think it actually makes quite a bit of sense.
The problem is that Republicans think the curve only has one half. The other half, which I believe we’ve been in since Reagan (except for the Clinton years where we seemed to be near the optimal inflection point) shows tax cuts creating a reduction of revenue. That’s why you’ll never see a right-winger produce a Laffer Curve with values on it. It actually proves that tax cuts reduce revenues unless you label the inflection point with some outrageously low value.
Noah
Conservatives and Republicans? Are they not one and the same?We are becoming quite accustomed to the idea of separation of one party into two. May there is a pattern here based on Preston Manning’s Reform party. David Frum’s rhetorics seems to be working very well.
B.T.W. some of us find the charts here most welcome , but do wish they were utilized in elections.
People don’t want to hear politicians babble about deficits , but they might want to see some of those charts.
Sinan // May 25, 2011 at 3:38 pm
If you do not believe that unregulated products and services did not create vast profits for the big traders and bankers then you should do a bit of research on it.
You want to take a guess at what my Master’s degree is in? Mathematical finance. When you can, say, accurately price a simple interest rate swap, come back and we’ll talk.
P.S. I’ve never worked in the financial services industry or anywhere near Wall Street, but I do have a much better than average idea how it all works.
Republicans == cut taxes, cut spending.
Democrats == raise taxes, increase spending.
What is the most likely outcome for the economy: getting more growth from more spending and tax collection or getting more growth from less spending and collecting less taxes?
Or is the proper answer alternating between the two?
Both parties are imperfect. The Democrats are the lesser of two evils. The Republicans are, well, you fill in the blank.
Favorite Michele Bachmann Quotes // Jul 1, 2011 at 3:42 am
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