T-Hawks versus S-Hawks

Deficit hawks are not all the same. While doves believe that deficits are necessary during recessions, and have tried to appropriate the word “growth” as their own, hawks come in two distinct types. T-hawks aim to cut fiscal deficits by raising taxes, in contrast to spending-cutters which I call S-hawks.  Alberto Alesina has a good essay making this point more elegantly in CITY Journal:

In 2011, the International Monetary Fund identified episodes from 1980 to 2005 in which 17 developed countries had aggressively reduced deficits. The IMF classified each episode as either “expenditure-based” or “tax-based,” depending on whether the government had mainly cut spending or hiked taxes. When Carlo Favero, Francesco Giavazzi, and I studied the results, it turned out that the two kinds of deficit reduction had starkly different effects: cutting spending resulted in very small, short-lived—if any—recessions, and raising taxes resulted in prolonged recessions.

We weren’t the first people to distinguish between the two kinds of deficit-cutting, of course. In the past, such critics as Paul Krugman, Christina Romer, and some economists at the IMF have responded that the two approaches don’t have different results. When an economy performs well after government spending cuts, they say, it’s actually because the business cycle has picked up, or else because the government’s monetary policy happened to be more expansionary at the time. But my colleagues and I took both factors into account in our research, carefully analyzing the business cycle and monetary policy in relation to each fiscal episode, and concluded that the difference between expenditure-based and tax-based actions remained.

… But the deficit doves are right to be wary of tax-hiking deficit reductions, as Italy, which has struggled with a high debt-to-GDP ratio for the last 20 years, demonstrates. Various Italian governments have repeatedly tried to reduce that ratio by raising more revenue, a course that has crippled the Italian economy and left the ratio firmly in place, just as the deficit doves would predict. Last November, Italy’s current government passed a very large tax hike; the country’s economy promptly nose-dived and is expected to show negative 2.6 percent growth for 2012. (Italy is finally starting to realize its errors: it has initiated a “spending review,” which should lead to spending cuts in the near future, and passed labor-market reforms.)

… My own view is that reducing the size of government is more important than protecting every dollar in the pockets of the wealthiest 1 percent. But however the resulting tax burden is distributed, the important thing is that we cut spending. Whoever wins the next presidential election in the United States will need to present a plan that changes the trajectory of the country’s debt-to-GDP ratio. It’s exceedingly important that he do it the right way.

Quick analysis: It seems the academic disagreement shows the way to political compromise.  Left academics say there is no economic difference between T and S deficit reductions. Right academics say S is better than T.  Clearly, there is room for agreement on S, so a compromise solution will be a good faith proposal by the White House to reduce spending. Will that happen?  Well, it’s the smart thing to do, but won’t happen if there are political factions that matter more than good economics.

3 responses to “T-Hawks versus S-Hawks

  1. This is absurd. Any analysis of the UK, Europe, or even NJ shows that spending cuts have hurt the economy and increased unemployment….which has reduced revenue…which has completely offset the impact the cuts were supposed to have on the deficit. In NJ, lawmakers even bet the governor, saying he could reduce taxes if his spending cuts actually helped the state deficit…all it did was push up unemployment in NJ to 9.8% while the rest of the country was falling. How many financial crises did we have between 1980 and 2005 where the public was overburdened w/debt? This has to be a joke. We have actual results from the last 3 years that show this analysis to be completely wrong.

  2. But an S-Hawk in the abstract has zero credibility. Should we slash government funding for cancer research? National Defense? Health care for poor people? One has to suspect that Kane and Hubbard would prefer that most of the cuts to fall on the bottom 10% rather than the top 1%.

  3. T-hawks consistently demonstrate the absurdity of their position through unbending opposition to means testing entitlements. Somehow progressively higher tax rates which eventually reduce the net value of entitlements below zero for high income earners are highly desirable but progressively lower rates of Social Security payments or progressivley higher Medicare deductables and Co-pays which achieve the same result are anethma.

    Why exactly do we need to tax Zuckerburg in order to pay for Buffet’s Medicare?

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