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Spending Cuts Hurt Less than Tax Increases

Posted at 2:15 p.m. on Nov. 15, 2012

Garett Jones points out that a paper from the International Monetary Fund often cited to “show that spending cuts don’t grow the economy…also provides evidence that tax hikes cause more trouble than spending cuts in the short run.”

“Both GDP and consumer spending tell the same story: Spending cuts are the less painful path to fiscal rectitude.  When countries tried to get right with the bond markets, this IMF study found that  nations that mostly raised taxes suffered about twice as much as nations that mostly cut spending.”

5comments
Budget & Taxes, Economy

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  • http://twitter.com/WmRyland William Ryland

    This study doesn’t surprise me, since it doesn’t differentiate between high-, middle-, and low-income tax rates. If you take money out of consumers’ pockets, they aren’t going to spend, and that will hurt the economy more immediately than spending cuts.

    The key here is that middle-income consumers drive the economy with their spending — not high-income business-owners, who invest based on demand and market conditions, not based on how much money they have in their bank accounts.

    • Wunderkid

      Further – and I only skimmed this article, so I’m willing to admit I may have missed it – there’s no consideration of the starting point of the taxes. Surely there’s a point of diminishing returns from spending cuts vs. tax cuts, given our historically low tax rates, today.

  • http://twitter.com/Plumazul David Bluefeather

    I was going to state the obvious, but William Ryland beat me to it. Raising taxes on the middle class is the problem and that is NOT what the POTUS wants to do.

  • Majorajam

    This contradicts the theory of the very DSGE models the IMF ostensibly utlize to create policy advice, but that’s far from the worst part of this bit of chutzpah. The worst part is the idea that the IMF are meant to represent the other side of this debate.

    To the content in qustion, the reality is that the IMF are misunderstanding the context of their sample and its relevance. In your typical historical balance of payments crisis, debtor nations are most responsible for imbalances, and spending cuts are a more expedient means of remediating the problem. The context here is unique in the last 80 years in that the global system is the issue, starting with creditor nations, and spending cuts in this instance would only be expedient In bringing back financial contaigon, cascading defauls and coordinated debt deflation.

    The IMF’s comedy of blunders in Europe, after decades of blunxers elsewhere, should be all we need to understand just how inexpert their expertise is.

    • Majorajam

      That was poorly expressed, but the primary issue here is that monetary/financial/economic crises are about imbalances, and fixing them is about adjustment. Adjustment for us will means decreased consumption and more investment which

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