After the election campaign, the nation likely will turn in one way, shape or form to dealing with the budget. Several analysts and bipartisan groups have had their say on what the ultimate plan should be. Among those statements is a paper by Andrew G. Biggs, Kevin A. Hassett and Matthew Jensen of the American Enterprise Institute, entitled “A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked.” This paper, released in December 2010, has received an enviable amount of attention for a fairly technical enterprise.
To tell you what I am going to tell you: The authors argue that the United States should reduce its deficit much more (they pick 85 percent) by reducing spending, and thus much less by raising revenues, than the most widely recognized bipartisan plans (which are at about 50-50). I think they overplay their statistical hand. This post gets a bit nerdy, but in my view the reasoning comes down to a fairly fundamental issue. So all but the faint of heart, please read on.