Collected Writings
Should the United States cut its deficit in the short
term? This has been the subject of intense debate
among politicians, policy analysts and thinkers over the
past year. What are the consequences of cu!ing the
deficit with interest rates low, unemployment high and
growth uncertain?
A recent paper by Alberto F. Alesina and Silvia Ardagna
(2009), “Large Changes in Fiscal Policy: Taxes Versus
Spending” (henceforth A & A), looks at a cross section of
deficit reduction policies among different countries. It
examines examples where large-scale deficit reduction is
associated with economic expansion and where the
debt-to-GDP ratio falls in the medium-term (3 years
a#er the adjustment). Based on this research, many
popular commentators suggest that the U.S. can adopt such
a policy and grow.