Saturday, October 30, 2010

Countries With Big Deficits Should Focus More On Spending Cuts

The New York Times reports that Greece and other countries hit by fiscal woes plans a greater emphazis on tax increases rathet than spending cuts.

That's good for them, because while tax increases may in some cases be more politically convenient, they are also far less effective in terms of reducing a deficit, while being more destructive in terms of the effect on output compared to spending cuts. This a theory that has both strong theoretical and empirical support.