Study: Stimulus Spending Doesn't Work

Alberto Alesina is a professor of political economy at Harvard, and he has been studying the issue of tax cuts vs stimulus spending for quite a few years. He just published an article in the Wall Street Journal explaining his findings.
http://online.wsj.com/article/SB10001424052748704271804575405311447498820.html

Politicians argue for increased stimulus spending, as opposed to spending cuts, on the grounds that it would speed up economic recovery. This argument might have it exactly backward. Indeed, history shows that cutting spending in order to reduce deficits may be the key to promoting economic recovery.

Economic history shows that even large adjustments in fiscal policy, if based on well-targeted spending cuts, have often led to expansions, not recessions. Fiscal adjustments based on higher taxes, on the other hand, have generally been recessionary...

How can spending cuts be expansionary? First, they signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities. This, in turn, shifts people's behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time.

On the other hand, fiscal adjustments based on tax increases reduce consumers' disposable income and reduce incentives for productivity.

In short, stimulus spending doesn't work, but cutting taxes AND SPENDING does.

Does this message sound like something we've been hearing from the Tea Party folks for almost two years?


It's past time to reign in spending that is far past "out of control" and is venturing into "maniacally stupid and irresponsible" territory. We need to lower spending across the board BELOW 2008 levels, eliminate the deficit, and start paying down our national debt.

And we need to do this NOW!