Originally Posted by
Free Exchange
Finding the Republicans’ golden ratio
Jul 9th 2011, 19:59 by A.M. | LONDON
MY COLLEAGUE R.A. blogged earlier this week on David Brook’s broadside against Republican intransigence on budget negotiations. Our Leader this week picks up on the theme:
Earlier this year House Republicans produced a report noting that an 85%-15% split between spending cuts and tax rises was the average for successful fiscal consolidations, according to historical evidence. The White House is offering an 83%-17% split (hardly a huge distance) and a promise that none of the revenue increase will come from higher marginal rates, only from eliminating loopholes. If the Republicans were real tax reformers, they would seize this offer.
The 85%-15% split, which Republicans argue is optimal for deficit reduction, struck me as severe. In Britain an austerity programme split 3:1 in favour of spending has been met with street protests. The IMF programmes in Ireland and Greece do not come close to an 85%-15% split.
The Republican’s golden ratio seemed even more striking, after looking at this must-see chart:
Ezra Klein points out that no recent American deficit-reduction budget has even approached an 85%-15% split—least of all, it turns out, a Republican one. Ronald Reagan’s deficit cutting budgets of 1982, 1984 and 1987 were the closest. But there was one major difference: President Reagan favoured tax increases. Spending cuts accounted for less than 25% of his deficit reduction measures. Tax rises over 75%.
The President whose austerity budgets were tilted most in favour of spending cuts was a Democrat—Bill Clinton (although tax rises still accounted for almost a third of his deficit reduction measures). President Clinton’s 2:1 ratio in favour of spending cuts turned out to be enough to balance the federal budget for the first time since the 1970s. So where does the Republican 85%-15% figure come from?
The House Republican report relied on a single study to generate its headline figure:
Economists Andrew Biggs, Kevin Hassett, and Matt Jensen demonstrated that the degree of success in reducing budget deficits and stabilizing the debt-to-GDP ratio correlates to the share of spending cuts in fiscal consolidation programs. Biggs, Hassett, and Jensen found that successful fiscal consolidations averaged 85% spending cuts and 15% revenue increases, while unsuccessful fiscal consolidations averaged 47% spending cuts and 53% revenue increases.
Having just read the Biggs, Hasset and Jensen paper, I note two features. First, the vast majority of the successful consolidations studied took place in Europe, in particular Scandinavia, Italy and Portugal. Scandinavian and southern European governments tend to tax more and spend more than America's (as a percentage of GDP). They may therefore have more public-spending fat to cut than America, and less scope to raise taxes.
Second, the study relies on a dataset which the IMF rejected for, “[failing] to identify consolidations when governments took substantial actions to reduce the deficit, but the actions were associated with severe economic downturns”. When Biggs, Hasset and Jensen apply their methodology to fiscal consolidations which the IMF define as successful, “the lowest expenditure share for a successful fiscal consolidation was just over 66% and the highest just under 83%”.
Put simply, no fiscal consolidation that the IMF has judged to be successful relied on public spending cuts for more than 83% of its impact. In successful fiscal consolidations, tax rises accounted for between 17% and 33% of deficit-reduction measures.
I am not an academic economist, however, so let us set aside those objections, and presume the Biggs, Hasset and Jensen paper is methodologically sound. Even so the House Republican report is based on a single academic study. The report cites several other academic papers, all of which strongly favour spending cuts over tax rises. None of these papers, however, advocate an 85%-15% ratio. Some find an optimal ratio significantly less tilted to spending cuts.
But then maybe I am making too much of the 85%-15% ration. After all the Republicans are clearly not wed to their golden ratio. As Mr Klein also pointed out a few weeks back, the latest House Republicans proposals would have public spending cuts account for more than 85% of deficit reduction measures.
Anything with a whiff of Obama will be rejected by Republican leadership. Their entire existence has been reduced to.....making sure Obama is a one term president.
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