Henninger: Escape From Spending Hell

March 13 | Posted by mrossol | US Debt

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So it looks like we’ve all been sentenced to spending at least two more years in budget hell with Barack Obama. Under the rules of budget hell set the past four years by the prince of Pennsylvania Avenue, you’re not allowed to do anything real about federal spending. You can only fight over federal spending. Forever.

Paul Ryan on Tuesday tossed his third House GOP budget into this void. He hopes to reduce long-term spending to an average of 19.5% of GDP. The Beltway press called it an opening “salvo.” Yesterday his Senate counterpart, new Budget Committee Chair Patty Murray, introduced the Democrats’ budget, teeing up what the Washington Post called a “budget duel.” Welcome to the Obama street-fighting army, Sen. Murray.

All hope is not lost. Amid the sequester smackdown with the White House, Republicans did something off-script: They called the Obama bluff. They let the sequester’s spending cuts occur, and the apocalypse didn’t descend. The only thing that cracked was the president’s approval rating.

The sequester’s big discovery was that spending reduction isn’t a political third rail. But if the winds are starting to shift, Republicans are going to need all the help they can get to convince the American people that more cuts in spending will preserve and protect their economy.

Help is at hand—economist Alberto Alesina.

Mr. Alesina, a professor at Harvard University, may be the last economist that Democrats want to deal with at the moment Americans are finding sympathy for spending cuts.

Ever since Ronald Reagan legitimized the efficacy of tax cuts, Democrats have sought to discredit his idea and restore the New Deal theory of a Keynesian multiplier, which dates to 1931. It holds that more public spending will revive a struggling economy.

No president has believed more in the miracle of the multiplier than Barack Obama. Across four years he has led the country on a kind of Keynesian death march, pushing federal spending to 25% of GDP and producing weak growth. We’re looking at four more years before the Keynesian mast unless the Republicans can offer an intellectually respectable alternative.

Mr. Alesina has identified the alternative. His, and others’, work the past decade with how struggling economies revive suggests that the Obama spend-more solution is the opposite of what the U.S. should be doing.

There is general agreement on at least two things about the current U.S. economy. It is emerging from the deepest recession since the Great Depression, and its debt level is unsustainable. The path back to stronger growth, argues Mr. Alesina, is a combination of significant, permanent cuts in public spending and relatively small tax increases, if any.

This view isn’t born of “right-wing” ideology. Mr. Alesina is an Italian, as are many of his co-authors. As Europeans, Mr. Alesina and his colleagues were forced to confront the biggest challenge facing Western economies the past 40 years. Europe rose from the ashes of war, but how would it rise from the ashes of debt, as benevolent postwar spending programs outstripped revenue?

Mr. Alesina and his colleagues wanted to answer the most basic question: What works?

They sought the answer (which they published in an August 2012 paper on “fiscal consolidations” for the National Bureau of Economic Research) by analyzing an International Monetary Fund history of all the fiscal plans that 17 OECD governments enacted between 1978 and 2009, including the U.S., Canada and Japan. Together, these countries tried everything to grow—raise spending, cut spending, raise taxes or cut them, in endless combinations. What helped?

“Adjustments based upon spending cuts,” the economists concluded, “are much less costly in terms of output losses than tax-based ones. Spending-based adjustments”—that is, cuts—”have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments”—tax increases—”have been associated with prolonged and deep recessions.”

The debate over “failed austerity” is misleading because it emphasizes spending cuts but rarely mentions tax increases. “Austerity” plans, the Alesina studies suggest, fail to revive growth when they too heavily rely on raising taxes on income and capital—as across Europe and now in the U.S.

There is no magic ride back to prosperity. The Alesina team is describing the least-bad antidote for the long-term poison of destructive national debt. Fiscal plans based on large, permanent spending cuts are associated with renewed growth more than any alternative policy mix that has been tried. Indeed, spending cuts without big tax increases look to be the only thing that really works. The leading example the past 15 years is . . . Canada. And just an observation: The Dow proceeded to its high after the sequester happened. The cuts were the first credible step in rebuilding private-sector confidence.

The Patty Murray budget: A $975 billion spending cut and a $975 billion tax increase.

The Paul Ryan budget: $4.6 trillion of spending cuts and no new taxes beyond the fiscal-cliff increases.

Neither budget is anything the world has never seen. The available record suggests which of the two is the road to perdition.

Write to henninger@wsj.com
Henninger: Escape From Spending Hell – WSJ.com.

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