In December 2010, we released a working paper on fiscal consolidations accompanied by a Wall Street Journal op-ed, both co-authored with our AEI colleague Kevin Hassett. The goal was to analyze what worked—and what didn't—in balancing national budgets. The paper’s findings have generated some interest, including being cited approvingly by congressional Republicans and critiqued by one of the Economist magazine’s Free Exchange bloggers.
Our methodology was straightforward. We studied over 20 Organization for Economic Cooperation and Development countries for a period spanning nearly four decades. We first isolated instances in which countries took steps to address their budget gaps. These steps are referred to as “fiscal consolidations.” The literature prescribes two ways to identify fiscal consolidations, one popularized by Harvard economist Alberto Alesina and the other established by the International Monetary Fund. We used both. Some of the fiscal consolidations were spending-based, others relied more on taxes.
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