Summary of Climbing Out of Debt

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Years after the Great Recession, a glut of debt afflicts the world’s advanced economies. As central banks begin to close the door on accommodative monetary policies, interest rates will rise and the debt burden will increase. World leaders will have to figure out how to service rising interest payments while enabling economic growth. Economists Alberto Alesina, Carlo A. Favero and Francesco Giavazzi make cogent arguments for spending reductions rather than tax hikes to boost economic activity. getAbstract suggests this clear and compelling read to economists and analysts. 

In this summary, you will learn

  • How the developed economies have incurred large debt burdens,
  • What remedies exist to address elevated debt levels and
  • Why spending reductions tend to be less harmful to growth than tax increases.
 

About the Authors

Alberto Alesina is a professor at Harvard University. Carlo A. Favero and Francesco Giavazzi are professors at Bocconi University in Milan.

 

Summary

The Great Recession left the developed world’s economies mired in debt. Even after a slow recovery, the average national debt still equals 104% of GDP, with Japan at 240%, Greece at nearly 185%, and Italy and Portugal at more than 120%. As interest rates go up, governments will spend more money on loan payments and less on improving roads and schools and investing in future growth. Governments can lower debt by deficit reduction – either through spending cuts or revenue generation – or through economic growth. Policy makers need to devise a solution that cuts deficits without provoking a recession. A flawed approach could reduce debt while also decreasing output, which would only raise the debt-to-GDP ratio.


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