Thursday, April 28, 2011

WHY PAUL RYAN'S BUDGET PLAN WON'T WORK

Right around the time Paul Ryan (R-WI) and the GOP came out with their Medicare-destroying, tax-cut-kick-backs-for-the-rich, budget proposal the Wall Street Journal presented us with this: "Time for a Budget Game-Changer." In the article economists Gary Becker and John Taylor join forces with former Secretary of State George Shultz to call for a strategy of economic growth, full employment, and deficit reduction — all without inflation.

So far so good.

To get there the GOP's Three Amigos praise - and then claim - that the House Republican budget plan is a good one. But only if they can assure Wall Street and businesses that current tax levels will not be raised.

OK, now I smell a rat. A trickle-down rat, that is.

To make their point - and using an argument straight out of an introductory economics textbook - they point out that when private investment is high, unemployment is low.

This is when the medieval alchemy begins.


To make their point Becker and friends trot out figures from 2006, which was right before the bubble economy started to collapse. Then they compare 2006 with numbers from 2010, when the federal government was still working to prevent a Second Great Depression by bailing out Wall Street and the banks with taxpayer dollars.

Then, with textbook-like precision, they wrote what effectively sounded like "Blah, blah, blah ..." What they actually wrote was:

In 2006, investment — business fixed investment plus residential investment — as a share of GDP was high, at 17 percent, and unemployment was low, at 5 percent. By 2010 private investment as a share of GDP was down to 12 percent, and unemployment was up to more than 9 percent. In the year 2000, investment as a share of GDP was 17 percent while unemployment averaged around 4 percent. This is a regular pattern.
See what I mean by "Blah, blah, blah ..."?

Moving away from the textbook jargon, what Becker and friends said was: "Private Investment, Good = More Jobs."

What they completely ignored is how those Bush year jobs were created. During the period they cover virtually all of the "private" investment and job creation they refer to rested on artificially low interest rates (which gave us the bubble), borrowed money (thank you home equity loans), empty tax cuts (which benefited the rich, and fed the bubble) and reckless deregulation (which gave us credit default swaps and junk mortgages, which also fed the bubble).


I wouldn't allow my freshman students get away with what Becker and friends wrote if they also ignored the underlying - and extremely relevant - data. Indeed, if they're letting their students get away with this stuff it's no wonder Paul Ryan thinks he has a good budget. People like Becker and friends are essentially signing off on analytic crap.

Citing results, to promote an economic program, without checking the underlying data almost makes you wonder what these guys are smoking ...



In fact, a simple search of what helped one sector of our economy "grow" during the Bush "wonder years" would have yielded the following.

President Reagan's budget director, David Stockman, recently pointed out that economic growth during the Bush years was pretty much an illusion. It was built on a bubble of debt. Focusing only on one sector of the economy, he points out that total household debt in 1975 – which includes mortgages, credit cards, and auto loans – stood at about $730 billion, or 45% of what our economy produced that year (our GDP). At the end of the bubble peak in 2007, total household debt had reached $13.8 trillion and was 96% of GDP.

Translation. Up until the market collapse in 2008 Americans were living the good life on borrowed money. Becker and friends ignore this, as if we have the time to play their trickle-down, let's-wipe-out-Medicare games (again).



At the end of the day, the private investment numbers Becker, Taylor and Schultz cite were spiked by deregulation, reckless debt, empty tax cuts, and a bubble economy. Yet, they still praise and use their cherry picked years - without explaining the underlying causes - as if the Bush "wonder years" should be emulated.

Apparently Becker and friends think ignoring the facts is a good economic model because they not only praise the results of 2006, but they applaud Paul Ryan's budget plan - in spite of the fact that it lays the groundwork for doing it all over again.

By ignoring how we got into this mess, Paul Ryan's Medicare-busting, trickle-down, tax-cuts for-the-rich, let's-do-it-all-over-again, budget proposal - like Becker and Friends WSJ piece - rests on faulty data, and is analytically bankrupt. We can't do it again.

More importantly, if we look at the numbers, it simply won't work.

- Mark

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