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Why Consolidate?

STANFORD – Around the world, raging debates about whether, when, how, and how much to reduce large budget deficits and high levels of sovereign debt are dividing policymakers and publics. Diametrically opposed spending, tax, monetary, and regulatory policies and proposals are proliferating. To consolidate (the budget), or not to consolidate, that is the question.

The political left clamors for more spending, higher taxes on high-income earners, and delayed fiscal consolidation. For example, the economist and New York Times columnist Paul Krugman proposes waiting 10-15 years. (Many of the same people argued for analogous reasons against the Federal Reserve’s successful disinflation policies in the early 1980’s.) The political right calls for more rapid deficit reduction by cutting spending.

In Europe, policymakers, including the European Central Bank, demand consolidation for high-debt countries, but are flexible in negotiations; voters, however, reject it – most recently in Italy. In the United States, Republicans propose to balance the budget within ten years by reforming entitlement spending and taxes (with fewer exemptions, deductions, and credits providing the revenue needed to reduce personal tax rates and a corporate rate that, at 35%, is the highest in the OECD).

America’s Senate Democrats propose $1.5 trillion in higher taxes over ten years (on top of the $600 billion agreed in early January), $100 billion (twice that, for House Democrats) in new stimulus spending, and modest longer-term expenditure cuts. Their version of tax reform would mean reducing deductions for the wealthy and corporations, with no rate reductions.