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Economic Outlook: Ryan’s “Path to Prosperity”, But For Who?

Yesterday, Paul Ryan unveiled his budget proposal for 2014, titled “The Path to Prosperity”. Instead of taking his Vice Presidential defeat as a sign that America rejects his fiscal doctrine, Ryan has doubled down on his ideas.

A common criticism of Ryan’s plan during the Presidential campaign was that he never specified how he would achieve a balanced budget, but merely said that cuts will equal this amount, and without raising taxes we will have a balanced budget in 10 years.

The plan is now public domain, and it is safe to say “the devil is in the details”. Here are some highlights of the Ryan proposal:

  • Repeal the Affordable Care Act
  • Cut spending on Education, R & D, cap Pell Grants
  • Cut funding for a trans-American high speed rail and other infrastructure improvements
  • Turn Medicare into a voucher program (ensuring it is underfunded for those with serious chronic conditions)
  • Re-instate the work requirement for Welfare
  • Reduce spending on welfare programs, such as SNAP (food stamp programs)
  • Maintain current high levels of defense spending
  • Does not address the issue of Social Security spending
  • Create a two-bracket tax-system: Reduce top tax rates to 25% (from 39.6), make the lower rate 10% (no more people with 0 or negative tax rates).
  • Reduce the corporate tax rate to 25%, presumably lower capital gains taxes, repeal the Alternative Minimum Tax
  • No additional revenue through closing tax loopholes

The only thing I agree with is Ryan’s assertion that welfare should have its work requirement reinstated. However, this can only occur once unemployment reaches a certain level; you cannot tell people they need to work to receive welfare payments if that work does not exist. By cutting discretionary spending, there will be less government jobs, and the private sector does not seem to feel any need to increase hiring anytime soon despite record profits, so this is really a squeeze on those “takers” that the G.O.P. loves to hate. (Also, this provision was only intended to be temporary as the economy recovers, so the one provision I agree with in Ryan’s budget is not exclusive to Ryan’s budget).

Everything else amounts to class warfare. Cutting spending on education will hurt those who rely on public education (and make Obama’s pre-school / child care programs more difficult to fund, making it harder for lower income workers who cannot readily afford personal child-care). Repealing the Affordable Care Act, reducing Pell grants, and reducing Welfare payments will all disproportionately affect the poorest Americans.

The only discretionary programs that Ryan does not think needs to be cut are defense. This is an odd position, as defense spending accounts for whopping 24% of the 2013 Federal budget (for comparison sake, education (4%) and welfare (11%), do not even combine to come close to defense spending). Yes we have a spending problem, a military spending problem (and social security and medicare need to be overhauled in the long run, but that has nothing to do with getting the American economy producing at potential in the short run), yet somehow the fiscal conservative Ryan found cuts in every other program other than defense.

https://chart.googleapis.com/chart?cht=p3&chs=600x200&chf=bg,s,e8e8ff&chd=t:23,24,4,24,11,2,3,1,3,7&chl=Pensions%2023%|Health%20Care%2024%|Education%204%|Defense%2024%|Welfare%2011%|Protection%202%|Transportation%203%|General%20Government%201%|Other%20Spending%203%|Interest%207%&chtt=Budgeted%20Federal%20Spending%20for%20%20-%20FY%202013

 

On the other hand, Ryan wants to make the wealthy even wealthier. Reducing the tax rates for the wealthiest to 25% (their lowest level in decades), corporate and capital gains taxes (which all go almost exclusively to the richest Americans), will make the rich richer. By levying a minimum 10% tax rate on even the poorest Americans, those who will be squeezed by Ryan’s proposed cuts in discretionary spending will also see their tax bill rise. In effect, Ryan has financed lower taxes for the wealthy with higher taxes for the poor. He has replaced an Alternative Minimum tax for the wealthy with a minimum tax for many people who currently do not pay any taxes (due to being below a certain income threshold and having standard deductions erase their tax bill).

The Democratic plan is, as expected, much more in touch with what America needs:

“The Senate Democratic budget proposal, which began leaking out just as Ryan announced his proposal, would shrink budget deficits by $1.85 trillion over 10 years but not balance the budget. It is largely the work of Democratic Senator Patty Murray of Washington, who heads the Senate Budget Committee.

It would rely on an equal mix of spending cuts and tax hikes on the wealthy. At the same time, it would create a $100 billion fund for rebuilding crumbling roads and bridges, creating construction jobs.”

This budget relies on short term stimulus to reduce unemployment and get the economy working closer to potential output. It realizes the need to put idle labor to work, while reducing the deficit gradually through a combination of closing tax loopholes and spending reductions. It would keep hard fought victories such as the Affordable Care Act and higher taxes on the wealthy in place, while keeping the deficit at a sustainable level.

Paul Krugman recently wrote an interesting piece on cyclically adjusted deficits:

First, fluctuations in the deficit tend to be driven by the business cycle; when the economy slumps, revenues fall and some kinds of expenditure, like unemployment benefits, rise. You want to take out these “automatic stabilizers” when assessing the underlying state of the budget.”

Second, we don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP”

The piece basically highlights that once you account for entitlement spending dropping and GDP increasing as the economy recovers, we already have a sustainable fiscal outlook. The “need” to balance the budget in 10 years is made up, and the benefits of doing so questionable at best (and non-existent at worst). But the social and economic costs, both in the short run and long run of Ryan’s proposal, are real, and they are high.

So when you hear about Ryan’s “Path to Prosperity”, ask yourself who is it really a path to prosperity for? Is it a path to prosperity for those who need help getting there, or those who are already prosperous? Will it increase of decrease inequality and social immobility that has come to define this country?

I will let you draw your own conclusions, as the two plans are essentially the same as they have been since the election.  Obama has recently conceded that a deal may not be able to be reached, that the sides may be too ideologically opposed. This would be unfortunate, but it also is starting to seem like a more and more realistic outcome. “The Sequester” looks mild compared to Ryan’s alternative, and unless the GOP is willing to move considerably from this proposal, it is unlikely a deal will be done until after 2014 congressional elections.

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