A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked
Kevin A. Hassett, Andrew G. Biggs, Matthew H. Jensen | AEI Online
December 27, 2010

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Abstract

Most developed countries face the need for significant policy changes to balance their budgets over the long run. Yet there is significant disagreement in the literature concerning the identification and impact of successful fiscal consolidations. In this paper, we explore the impact that differing assumptions and methodologies have on conclusions, and derive bounds across specifications that can be used by policymakers in designing their own reforms. Using cyclically adjusted panel data for select OECD countries from 1970-2007, we explore how the compositions of successful and unsuccessful consolidations differ for varying definitions of success. While conclusions about the growth impact of reforms vary depending on methodology, we find that there is much less disagreement concerning composition. Specifically, we find strong evidence that expenditure cuts outweigh revenue increases in successful consolidations. We also find evidence that the type of the spending cuts is an important determinant of success, as is the type of tax increases. We use these results as a guide, and discuss specific proposals for reducing the United States' deficit that draw on the lessons from past consolidations.

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Andrew G. Biggs is a resident scholar at AEI. Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI. Matthew Jensen is a research assistant at AEI.

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About the Author

 

Kevin A.
Hassett
  • Before joining AEI, Mr. Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at the Graduate School of Business of Columbia University, as well as a policy consultant to the Treasury Department during the George H. W. Bush and Clinton administrations. He served as an economic adviser to the George W. Bush 2004 presidential campaign, chief economic adviser to Senator John McCain during the 2000 presidential primaries, senior economic adviser to the McCain 2008 presidential campaign, and economic adviser to the Mitt Romney 2012 presidential campaign.   Mr. Hassett is a columnist for National Review.

  • Phone: 202-862-7157
    Email: khassett@aei.org

  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org
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Andrew G.
Biggs

  • Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

    Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President's Commission to Strengthen Social Security. Biggs has been interviewed on radio and television as an expert on retirement issues and on public vs. private sector compensation. He has published widely in academic publications as well as in daily newspapers such as The New York Times, The Wall Street Journal, and The Washington Post. He has also testified before Congress on numerous occasions. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future.

    Biggs holds a bachelor’s degree from Queen's University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

  • Phone: 202-862-5841
    Email: andrew.biggs@aei.org

  • Assistant Info

    Name: Veronika Polakova
    Phone: 202-862-4880
    Email: veronika.polakova@aei.org
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Matthew H.
Jensen

  • Matthew Jensen is a research associate for economic policy studies. He maintains an active research agenda focused on public finance and taxation, and he coordinates the ongoing development of AEI’s International Tax Database. Jensen has written for The Wall Street Journal, US News, and Tax Notes, among others, and he frequently appears on radio and television. Before joining AEI, he worked for a hedge fund in Minneapolis.

  • Email: Matt.Jensen@AEI.org
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