According to the WaPo, former Republican senator Alan Simpson of Wyoming and Erskine Bowles, White House chief of staff under President Bill Clinton, who are the co-chairs of President Obama's deficit reduction commission, are warning that current budgetary trends are a cancer "that will destroy the country from within" unless checked by tough action in Washington.
Bowles "pointed to steps taken recently by the new coalition government in Britain, which also faces an acute budgetary problem, as a guide to what the commission might use in its recommendations. That would mean about three-quarters of the deficit reduction would be accomplished through spending cuts, and the remainder with additional revenue.
Which prompted Matthew Yglesias to opine that the proposals will be rejected by both liberals and conservatives. of the latter, he claims that "there’s no way a package like this could, would, or should garner the kind of support among liberals that would be needed to" pass the bill without Republican help.
It is doubtless unrealistic to think the budget deficit can cut without a combination of tax increases cuts and spending cuts.
But that leaves open the question of what mix is the right one.
Oddly enough, evidence from Sweden--of all places--suggests that Bowles' model of relying mainly on spending cuts is the right one. A WSJ op-ed by Andreas Bergh and Magnus Henrekson relates that:
Americans are debating whether to substantially expand the size of their government. As Swedish economists who live in the developed world's largest welfare state, we urge our friends in the New World to look carefully before they leap.
Fifty years ago, Sweden and America spent about the same on their government, a bit under 30% of GDP. This is no longer true. In the years leading up to Sweden's financial crisis in the early 1990s, government spending went as high as 60% of GDP. In America it barely budged, increasing only to about 33%.
While America was maintaining its standing as one of the world's wealthiest nations, Sweden's standing fell. In 1970, Sweden was the fourth richest country in the world on a per capita basis. By 1993, it had fallen to 17th.
This led us to ask whether Sweden's dramatic increase in the size of government contributed to its sluggish growth. Our research shows that it did. ...
The weight of the evidence demonstrates that when government spending increases by 10 percentage points of GDP, the annual growth rate drops by 0.5 to 1 percentage point. This may not sound like much, but over 30 years this would result in the loss of trillions of dollars each year in an economy as large as America's. ...
We also investigated the claim that Sweden is proof that big government does not harm the economy. While Sweden has done very well compared to other developed countries in the last 15 years, it has also implemented sweeping pro-market reforms. Examples include a national system of free school choice based on vouchers up through senior year of high school, a financially stable public pension system that can adjust payouts if contributions to the system fall for some reason, and comprehensive tax reform that has lowered marginal tax rates tremendously. ...
Sweden's recent growth is thus the result of opting for free-market solutions instead of growing government. ...
Many Americans argue that the U.S. could safely increase its spending share from roughly 32% of GDP to 37%–38% of GDP. The evidence suggests otherwise. The U.S. needs to acknowledge the trade-off between government size and economic growth. A larger government sector may decrease some economic inequality, but will ultimately leave Americans sharing smaller pieces of a smaller pie.
The academic research to which the op-ed refers is readily available on SSRN. A good summary is provided by Bergh's paper, The Rise, Fall and Revival of a Capitalist Welfare State - What are the Policy Lessons from the Swedish Success Story? His review of the evidence concludes that:
- The accelerating economic growth in Sweden from around 1870 was most likely largely a result of liberalizations and well functioning capitalist institutions.
- From 1970, problems mounted in Sweden. The economy was no longer capitalist, rules were unstable, policy unpredictable and work incentives were weakened by the design of taxes and benefits.
- During the growth period 1870-1970, Sweden also experienced increasing equality of income and wealth.
- The causes of Swedish equality are not exceptionally high taxes, highly progressive taxes, extensive labor market regulations (including employment protection laws), or high levels of income support even or the progressive Swedish social policy (socialtjänstlagen): These policies were implemented in the 1970s, and by then Swedish income distribution was already more egalitarian than most other countries.
- The actual causes of Swedish equality are hard to know for sure. Good candidates are unions and centralized wage bargaining, primary school reforms, early land reforms and increased productivity in agriculture, and early social insurance schemes – but more research on this is needed.
- It is possible to increase economic freedom substantially without dismantling the welfare state: Despite huge increases in economic freedom, most welfare state scholars agree that the Swedish welfare state has not lost its defining characteristics.
- To successfully combine a big welfare state with good economic performance, it helps if political decision making is consensual and rational, and if the economy in general is characterized by high levels of economic freedom.
