I think it was Reinhart and Rogoff who advocated in This Time Is Different: Eight Centuries of Financial Folly that if we want to fix the United States economic problems we need about $7 of “real” spending cuts to $1 of increased tax revenue through structural tax reform. Yea, it has to be real spending cuts and meaningful tax reforms.  Europe has chosen the no pain approach and chosen policies that are light on spending cuts and heavy on tax increases. This is not a ratio that has succeeded in the past so it is not surprising that Europe’s economy has slowed down and the tax revenue situation is much worse. So we can reform our economic policies now or we can do it later with a much weaker economy. I guess it is too much to hope that we can be a little bit smarter about policies that work to fix our economy than Europe.

Of the supposed savings, then, $1.6 trillion comes from tax hikes and $577 billion comes from spending cuts, not counting saved interest. So 73% of the savings comes from taxes, 27% from spending cuts. That’s $3 of tax hikes for every $1 of spending cuts.

Even if you include interest savings, 60% of the debt reduction comes from tax hikes. Obama is making the exact mistake Europe is making by employing a tax-hike heavy version of fiscal austerity. Indeed, a 2010 analysis by AEI scholars found that successful fiscal consolidations are heavy on spending cuts, light on tax hikes. Even Bill Clinton’s debt reduction plan was 2-1 in favor of spending cuts. The Obama plan is dangerously unbalanced, especially given the weak economic recovery.

European-style austerity: Obama’s new ”˜balanced’ debt plan is 73% tax hikes
James Pethokoukis
Wed, 14 Nov 2012 15:57:11 GMT