Romer: Cutting Spending Won't Boost Growth

The New York Times reports:

DEALING with our nation’s gaping budget deficit is going to hurt. So here is a question for policy makers: What would hurt more, raising taxes or reducing spending?

The Republicans who walked out of budget negotiations the other week think they know the answer. They insist that higher taxes would threaten our fragile economic recovery and do serious long-term damage. Better to cut federal spending, they say.

President Obama pressured Republicans last week to accept higher taxes, in addition to reduced spending, as part of a plan to pare the deficit.

The economic evidence doesn’t support the anti-tax view. Both tax increases and spending cuts will tend to slow the recovery in the near term, but spending cuts will likely slow it more. Over the longer term, sensible tax increases will probably do less damage to economic growth and productivity than cuts in governmentinvestment.

Tax increases and spending cuts hurt the economy in the short run by reducing demand. Increase taxes, and Americans would have less money to spend. Reduce spending, and less government money would be pumped into the economy.

Professional forecasters estimate that a tax increase equivalent to 1 percent of the nation’s economic output usually reduces gross domestic product by about 1 percent after 18 months. A spending cut of that size, by contrast, reduces G.D.P. by about 1.5 percent — substantially more.