Paul Ryan Speaks and Makes No Economic Sense

Last night, as House Budget Committee Chair Paul Ryan offered a response to the President's State of the Union Address, he argued that government spending is hurting the economy. He talked about budget deficits and national debt. And he claimed he had ideas to fix it. Unfortunately, his solution, most comprehensively borne out in his "Roadmap," and the principles behind it exacerbate a whole slew of economic problems and have little basis in economic reality.

Let's look at Ryan's first claim - that his Roadmap reduces the deficit. It does, but not until well past the middle part of the century. According the Center on Budget and Policy Priorities:

Because of the Ryan plan's enormous tax cuts for the affluent, even the very large benefit cuts that the plan would make in Medicare, Medicaid, and Social Security - and the plan's middle-class tax increases - would not put the federal budget on a sustainable course for decades. The federal debt would soar to about 175 percent of the gross domestic product (GDP) by 2050. In contrast, most fiscal policy analysts recommend that the debt-to-GDP ratio be stabilized within the next ten years, and at a far lower level.

This contrasts directly with the Rivlin-Dominici plan, which would reduce the federal debt to 60 percent of GDP by 2020, the Bowles-Simpson plan, which would reduce the debt to 60% of GDP by 2023 and 40% by 2035, and even the plan assembled by Demos, the Century Foundation, and the Economic Policy Institute, which reduces the debt to 83% of GDP in 2020.

It is clear that Ryan's plan is not one focused on balancing the budget and reducing deficits or debt. Since Ryan is no fiscal hawk, what does Paul Ryan really care about?

The one thing the Roadmap does incredibly effectively is make dramatic cuts to popular government programs (it basically eliminates Medicare and makes sweeping cuts in Social Security). His reasoning for his massive cuts his that he claims that government spending is bad for the economy. But there is no economic logic to this either - especially right now.

I understand where Ryan's thinking comes from - in good economic times, government investment that leads to borrowing can "crowd out" private investment by raising interest rates, thereby diverting economic activity away from the private sector. This can be a legitimate concern in boom times, which is part of the reason having smaller deficits in good times is generally a good idea; a sizeable government deficit can lead to higher interest rates, which hurt the economy.

These, however, are nothing close to good economic times, and government is not driving out private sector investment and therefore not hurting job creation. How do we know this? There is virtually no inflation - economists are more worried about deflation right now - and a huge shortage of demand. Interest rates are basically the lowest they can possibly be, and the Federal Reserve keeps trying to drive them down. (That's why the Federal Reserve has gone to quantitative easing; it can't lower rates any further.)

Furthermore, it's not clear that Ryan understands the actual danger of debt, because he has effectively said he intends to play chicken with the upcoming vote on the debt limit. On this point, one cannot be any clearer - the best way to quickly explode interest rates is to ruin the full faith and credit of the United States by not increasing the debt limit. Not doing so would increase interest rates and injure the economy dramatically, a reality that fails to square with Ryan's complaints about the economic dangers of debt.

Finally, Ryan compared America's debt situation to that of Greece, Ireland, and Great Britain. This is embarrassing, for him. The Greek and Irish debt crises are completely different animals - the Greece's problems are derived largely from being on the Euro (not an issue for us), and the Irish crisis is financial sector driven; our fiscal issues are not. In Britain, a conservative government is leading a true austerity push, and has become unpopular virtually overnight. So, Britain is an apt analogy but not in the way Ryan means. Rather, it's a warning for what would happen here if American conservatives got their way.

All told, it is hard to find the actual economics behind Ryan's world view, an odd and scary phenomenon to discover in a Budget Committee Chair. Instead, his approach to the economy begins and ends at a strong dislike for government, an odd and scary phenomenon to find in someone who works for the government.