Spend Less, Owe Less, Grow the Economy

Mar 15 2011

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Fiscal consolidations are programs to reduce government budget deficits and stabilize debt as a percentage of GDP.

Fiscal consolidation programs that rely predominately or entirely on spending reductions are more likely to achieve their goals of government budget deficit reduction and debt stabilization as a percentage of GDP than programs that rely primarily on tax increases.

In the long term, fiscal consolidation programs that reduce government spending as a percentage of GDP accelerate economic growth.

In the short term, fiscal consolidation programs that rely predominately or entirely on spending reductions have expansionary “non-Keynesian” effects that may offset the contractionary Keynesian reduction in aggregate demand.

In some cases, “non-Keynesian” effects may be strong enough to make fiscal consolidation programs expansionary in the short term.

Eliminating agencies and programs; cutting the number and compensation of government workers; and reducing transfer payments to households and firms have strong “non-Keynesian” effects.

Reforming government pension and health insurance programs for the elderly to make them sustainably solvent may also have strong “non-Keynesian” effects even if reforms are phased in slowly, do not affect current beneficiaries, and do not significantly reduce government outlays in the short term.

Link to full study

Link to the Press Release

Link to Rep. Brady's Remarks

Link to video clip of press Conference

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