Gov. Brown’s “balanced approach” Recipe for Economic Disaster
05/15/2012 4 Comments
The balanced approach to economic recover as proposed by Governor Brown is to cut spending while raising taxes on the wealthy. How well has this approach worked? Veronique de Rugy a Senior Research Fellow at the George Mason Mercatus Center for free market economics has some insight in Two Kinds of Austerity
This approach to austerity, also known in the United States as the “balanced approach,” has unfortunately proven a recipe for disaster. In a 2009 paper, Harvard University’s Alberto Alesina and Silvia Ardagna looked at 107 attempts to reduce the ratio of debt to gross domestic product over 30 years in countries in the Organisation for Economic Co-operation and Development. They found fiscal adjustments consisting of both tax increases and spending cuts generally failed to stabilize the debt and were also more likely to cause economic contractions. On the other hand, successful austerity packages resulted from making spending cuts without tax increases. They also found this form of austerity is more likely associated with economic expansion rather than with recession.
Veronique provides some concrete examples that the real solution is to just cut spending and not raise taxes.
The Baltic nations of Latvia, Lithuania and Estonia provide good examples of successful fiscal adjustments. In the last few years, and contrary to the rest of Europe, the Baltic countries have focused on significantly cutting government spending without equivalent increases in taxes. As a result, the Cato Institute’s Dan Mitchell reports, between 2008 and 2011, Estonia and Lithuania reduced nominal spending by 5 percent, and Latvia by 11 percent. France and the United Kingdom increased spending more than 8 percent over the same period, and Spain and Italy increased spending by 3 percent. In contrast to these others, the Baltic states have experienced some of the largest economic gains in the world: Between 2009 and 2010, Estonia’s economy rose from an annual GDP growth of minus-13 percent to 3.1 percent.
California’s political leaders looked to Europe for examples when “going green,” and that did not work out well. However, it may be useful now if they took a look at how the Baltic nations succeeded in generating an economic recovery by not raising taxes and just cutting spending. Raising taxes is just driving the revenue generators out of the state, making the problem worse.