That is the so-called “balanced” result of January’s “fiscal cliff agreement” between Congressional Republicans and the White House, according to a column by Stanford professor Michael Boskin in the Wall Street Journal this week.
Boskin writes, “An economically ‘balanced’ deficit-reduction program today would mean $5 of actual, not hypothetical, spending cuts per dollar of tax hikes.”
The hypothetical spending cuts to which Boskin refers are those that took effect last Friday as a result of the “sequester.” You’ll remember the $85 billion in “cuts” for 2013 are actually only cuts in the rate of spending increase. The ratchet effect continues.
Since World War II, OECD countries that stabilized their budgets without recession averaged $5-$6 of actual spending cuts per dollar of tax hikes. Examples include the Netherlands in the mid-1990s and Sweden in the mid-2000s. In a paper last year for the Stanford Institute for Economic Policy Research, Stanford’s John Cogan and John Taylor, with Volker Wieland and Maik Wolters of Frankfurt, Germany’s Goethe University, show that a reduction in federal spending over several years amounting to 3% of GDP—bringing noninterest spending down to pre-financial-crisis levels—will increase short-term GDP.
If this is an example of a “balanced approach,” it is no serious approach at all.