A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked

Abstract

Most developed countries face the need for significant policy changes to balance their budgets over the long run. Yet there is significant disagreement in the literature concerning the identification and impact of successful fiscal consolidations. In this paper, we explore the impact that differing assumptions and methodologies have on conclusions, and derive bounds across specifications that can be used by policymakers in designing their own reforms. Using cyclically adjusted panel data for select OECD countries from 1970-2007, we explore how the compositions of successful and unsuccessful consolidations differ for varying definitions of success. While conclusions about the growth impact of reforms vary depending on methodology, we find that there is much less disagreement concerning composition. Specifically, we find strong evidence that expenditure cuts outweigh revenue increases in successful consolidations. We also find evidence that the type of the spending cuts is an important determinant of success, as is the type of tax increases. We use these results as a guide, and discuss specific proposals for reducing the United States' deficit that draw on the lessons from past consolidations.

Download this working paper as a PDF

Andrew G. Biggs is a resident scholar at AEI. Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI. Matthew Jensen is a research assistant at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Kevin A.
Hassett

 

Andrew G.
Biggs

 

Matthew H.
Jensen

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 01
    MON
  • 02
    TUE
  • 03
    WED
  • 04
    THU
  • 05
    FRI
Wednesday, September 03, 2014 | 9:00 a.m. – 10:30 a.m.
From anarchy to Augustus: Lessons on dealing with disorder, from Rome’s first emperor

We invite you to join us for two panel discussions on how Augustus created order from chaos 2,000 years ago, and what makes for durable domestic and international political systems in the 21st century.

Wednesday, September 03, 2014 | 12:00 p.m. – 1:30 p.m.
Multiple choice: Expanding opportunity through innovation in K–12 education

Please join us for a book launch event and panel discussion about how a marketplace of education options can help today's students succeed in tomorrow's economy. Attendees will receive a complimentary copy of the featured book.

Thursday, September 04, 2014 | 12:00 p.m. – 1:30 p.m.
How conservatives can save the safety net

Please join us for a luncheon event in which our panel will discuss what conservatives can learn from how liberals talk and think about the safety net and where free-market economics, federalism, and social responsibility intersect to lift people out of poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.