The specter of a credit downgrade looms. But far more frightening is the cause of the potential downgrade: a debt-to-GDP ratio that will balloon to 90 percent within 7 years and 100 percent within 10. Other nations that have experienced that level of debt have seen their growth rates cut in half.
Luckily, we are not flying blind. Others have wrestled with huge debt loads and some have made meaningful reforms. What’s more, these experiences have been exhaustively studied by economists and there is remarkable agreement about the most effective way to deal with a huge debt load.
I review that literature in a new, short, policy brief. Here is the bottom line:
The experience of nearly two dozen developed economies suggests that the surest way for policy makers to rein in destructive deficits and stabilize the debt is to cut spending, not increase revenue.