Gov. Brown’s “balanced approach” Recipe for Economic Disaster

Russ Steele

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.

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About Russ Steele
Freelance writer and climate change blogger. Russ spent twenty years in the Air Force as a navigator specializing in electronics warfare and digital systems. After his service he was employed for sixteen years as concept developer for TRW, an aerospace and automotive company, and then was CEO of a non-profit Internet provider for 18 months. Russ's articles have appeared in Comstock's Business, Capitol Journal, Trailer Life, Monitoring Times, and Idaho Magazine.

4 Responses to Gov. Brown’s “balanced approach” Recipe for Economic Disaster

  1. WALTER RUSSELL MEAD: The California Mess Worsens.

    Via Meadia has long thought of California as a failing state. A mix of tight regulatory and environmental restrictions that satisfy the aspirations of rich Californians with an influx of low skilled immigrants who desperately need a wide open economic environment even if that means lax regulations would be difficult to manage under the best of conditions. California’s powerful public unions with their culture of entitlement makes it all much harder; so too does the state’s messy governance with referendums and legislative deadlock combining to produce a truly dysfunctional system.

    It is all getting worse in a dismal cycle. New business is stifled even as many employers and successful people flee the state or opt not to go there in the first place. The housing bubble covered over some of California’s starker problems, but it will be some time before the residential construction industry picks up again — especially if the rest of California’s economy continues to languish.

  2. D. King says:

    The only thing left for the California economy is the dying.

  3. gjrebane says:

    I would outline a number of other fiscal, entrepreneurial, and free market capitalistic policies Estonia put in place since it regained freedom in 1991, but my mom counseled modesty in such cases 😉 Here and in socialist Europe, people scream about austere cuts when government spending doesn’t increase as fast as they had hoped. What hope does that provide for whom?

  4. sean2829 says:

    If it makes you feel any better, you are not alone in having a Democratic governor that feels the state government priorities and needs trump the needs of the people that live and work in the state. Maryland just raised taxes by $260 million a year. http://www.washingtontimes.com/news/2012/may/16/assembly-oks-260m-tax-hike-teacher-pension-shift/?page=all#pagebreak There is only one ray of sunshine to this. The most liberal and affluent county in the state is Montgomery County, a Washington DC suburb which is where Gov. O’Malley is from. The limit of $100K for single and $150K for married folks will likely hit many two earner families in that subdivision. He’s not done yet either. They want to open a full blown casino in Prince Georges County, one of the wealthiest African American majority counties in the nation. O’Malley also wants to raise our gas taxes to refill the transportaton trust fund that he raided for the general fund a couple of years ago. We are also looking at a $1.50 monthly surcharge for the privlege of buying off-shore wind power in the near future. By the way, he is ambitious and on schedule to run for president in 2016. He is busy applying every policy to the state that the liberal left thinks we ought to have. (Why not, he won’t need to run for re-election again and it will help his campaign fund raising.)

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