July 29, 2011

The Real Debt Crisis: What Can Be Done?

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The specter of a credit downgrade looms, and it is frightful. A downgrade threatens to push interest rates higher, making it more difficult for consumers to borrow, for businesses to hire, and for the economy to grow. But even more frightening is the cause of the potential downgrade: unsustainable deficits fueled by government spending. There is, however, a way to exorcise this threat. 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.