Monday, September 3, 2012

The Great Republican Disappointment

Those who are familiar with this blog know that are our greatest concern, the issue that trumps all others, is the national debt. Much of our criticism against the Obama Administration has been directed at its policies that contributed to a twofold increase in the national debt. So, I was very pleased to learn about Vice Presidential Candidate Paul Ryan's focus on fiscal matters, which lead me to even consider supporting Mitt Romney's candidacy. His ambitious plan makes the claim that between 2011 - 2023, the deficit and the national debt will be reduced from 8.75% and 68% of the GDP to 1.25% and 61%, then between 2023 - 2050, the deficit will be transformed into a surplus of 3% and the national debt will reach a historic low of 10%. This will be accomplished by significant budget cuts, starting with $5.3 trillion in spending reductions over the course of the decade, accompanied by entitlement and tax reform. But, in questions of policy, rhetoric and intentions are meaningless, for G-d is in the details. So, in order to determine the viability of his plan, we must explore the pertinent details, from the eyes of an accountant, not an ideologue.

When an economist calculates the fiscal outcomes of a budget, they must always input economic assumptions into the equation, such as: the presumed rate of economic growth, the rate of revenue collected and federal spending, as a percentage of the GDP. As a general rule, when creating a viable, long term budget, its important to rely on conservative revenue projections and liberal cost projections, because families and nations alike inevitably will face unexpected costs and losses of revenue. To optimistically assume an increase in income and a decrease in costs leaves us open to larger than expected budget shortfalls. So, the first great disappointment of Ryan's budget plan is that his rosy fiscal outcomes are based on implausible economic assumptions. The first is that between 2011 - 2023, federal tax revenues as a percentage of the GDP will be raised from 15% to the historic norm of 18.75%, then reaching a plateau of 19.0% in 2030. Given his calls for aggressive tax cuts and the resistance of Democrats to tax increases for all but the wealthiest of Americans, such robust revenue increases are highly unlikely.

Ryan's spending projections are even more implausible. From 2011 - 2023, spending by the federal government will supposedly be reduced from 24% to 20.25% of the GDP and then between 2030 - 2050, it will drop to 16%. This is based on the extremely unlikely assumption that between 2013 - 2050, discretionary spending (defense, infrastructure, education, food safety, energy research, national parks, civil service, the FBI, etc.) will  be reduced from 12.5% to 3.75% of the GDP! Defenders of Ryan's plan respond that reductions in spending, coupled with long term economic growth will allow federal spending to continuously decrease as a percentage of the GDP. Although I am optimistic about the private sector's capacity for growth and innovation, when putting forth a crucial budget, we cannot take growth as a given. By definition, a fiscally conservative budget is one that is built around cautious, if not pessimistic assumptions. This should not be viewed as a philosophical exercise, but a question of policy that will impact the fiscal and economic health of present and future generations. 

Ryan's zeal for cutting waste and shrinking the size of government does not extend to the military. His 2013 budget actually increases defense spending by $8 billion, from $546 billion to $554 billion. In addition, the plan would shield the pentagon from the automatic cuts that other departments face. This is problematic on multiple levels. Individuals, such as myself, who believe in strong national defense, cannot deny that the waste and inefficiency that plagues other sectors of the federal government are also present in the pentagon. For example, a 2011 audit found that over the course of two years, management failures pushed the development of new weapons systems $70 billion over budget. The Commission On Wartime Contracting found that military wasted at least $30 billion on no-bid-contracts in Iraq and Afghanistan! And most shocking of all, in 2009, then Secretary of Defense Donald Rumsfeld stated "According to some estimates we cannot track $2.3 trillion in transactions!" And  you do not have to be an isolationist to question if our military presence in over 130 nations should be evaluated on a case by case basis, to eliminate waste and redundancy. Unfortunately, when it comes to the Pentagon, the respect that most conservatives hold for the brave men and women of the armed forces, paralyzes their usual vigilance against big government waste.

The verdict on Ryan's tax plan is more complex. On one hand, I am naturally sympathetic to his general paradigm of cutting spending and decreasing taxes. Specifically, his plan seeks to lower and consolidate personal income tax rates at 25% and 10% and the corporate tax rates at 25%. On the other hand, in the context of our spiraling national debt, any policy that would reduce revenue, would greatly exacerbate the problem. According to the Tax Policy Center, over the course of a decade, Ryan's tax cuts would reduce revenues by $4.6 trillion. Ryan's response is that the loss of revenue would be more than offset by the elimination of loopholes and deductions. In principle, I support these policies, because over 10 years, eliminating the tax free treatment of employer sponsored health insurance would generate $2.0 trillion in revenue and eliminating the mortgage interest deduction would bring in an additional $1.6 trillion. And these are just two of many deductions that are very costly to the public coffer. However I am deeply skeptical that Ryan would be able to gain enough support from the political establishment to phase out very popular deductions that are protected by vested financial interests, represented by powerful lobbyists. Given that most politicians take the path of least resistance, it is almost certain that any reduction in tax rates would not be accompanied by the painful, but necessary elimination of tax deductions. Hence, the unintended consequences of Ryan's plan would be even greater national debt.

Perhaps the greatest flaw in Ryan's plan is not fiscal, but political. There is absolutely no way that Republicans will be able to sell painful cuts in social spending, while insisting on increasing military spending.
This is all the more true for tax cuts that would disproportionately benefit the wealthy. Regardless of their actual impact, such policies would be a golden gift to the Democrats, because they would readily lend themselves to their narrative that "Republicans are the party of the rich" who "do not care about the poor." And they cast serious doubts on Republican claims of being the party of fiscal conservatism and debt reduction. The only way to inspire other Americans to accept difficult spending cuts would be for Ryan and the Republican Party to lead by example and accept sacrifices to their own pet programs and policies. Democrats will never be willing or able to sell the need for sacrifice to their own constituencies, unless Republicans are first willing to do so with their own. If we maintain the current paradigm of democrats resisting needed cuts in spending and Republicans fighting to maintain unsustainable tax cuts, the result will be a continued increase of debt and unfunded liabilities. But, in spite of its many flaws, Ryan's plan serves the invaluable purpose of increasing awareness of our debt crisis and sparking debate on taboo subjects such as the reform of social security and medicare. My hope is that Ryan will go back to the drawing board and use his energy and intellect to produce a plan that goes beyond ideology and promotes true fiscal conservatism.

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