Expect More Bailouts, de Veronique de Rugy

Short of declaring bankruptcy, Greece should cut its spending and mainly reform its entitlement programs. Using a large data set covering over 20 O.E.C.D. countries and spanning nearly four decades, the economists Andrew Biggs, Kevin Hassett and Matt Jensen identify more than 100 instances in which countries addressed their budget gaps. They find that “the typical unsuccessful fiscal consolidation consisted of 53 percent tax increases and 47 percent spending cuts. By contrast, the typical successful fiscal consolidation consisted of 85 percent spending cuts.” Their findings are consistent with the work of Harvard’s Alberto Alesina and Silvia Ardagna.

They also found that successful consolidations involve important reductions in social transfers and that “cuts to government wage expenditures, meaning the size and pay of the public sector work force, and cuts to subsidies are typical in both successful and unsuccessful consolidations.” Unfortunately, only a minority of countries chose to cut spending. Most relied on revenue increases, which were unsuccessful in reducing the debt ratio.