paul ryan's roadmap

While I was away on vacation, my favorite New York Times columnist Paul Krugman wrote a scathing attack on my boy Paul Ryan's Roadmap for America's Future.  The article was entitled The Flimflam Man, and asserted that Ryan was intentionally trying to mislead the American people and was hence a flimflam.  The article ended with this doozy:

So why have so many in Washington, especially in the news media, been taken in by this flimflam? It’s not just inability to do the math, although that’s part of it. There’s also the unwillingness of self-styled centrists to face up to the realities of the modern Republican Party; they want to pretend, in the teeth of overwhelming evidence, that there are still people in the G.O.P. making sense. And last but not least, there’s deference to power — the G.O.P. is a resurgent political force, so one mustn’t point out that its intellectual heroes have no clothes. 

But they don’t. The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future.

 Krugman's whole thesis is that Ryan's plan is so absolutely, unequivocally useless that he is attempting to defraud the electorate by offering it up as a potential solution to our long term fiscal woes caused from vastly expanding entitlement payouts when baby boomers begin to retire.  Krugman expoused the following four major attacks on the Ryan plan in making this assessment.  They are 1) The CBO did not score the revenue portion of the Roadmap when it scored the budget effects of the plans spending cuts, 2) The proposed tax cuts would vastly outweigh any revenue savings negating any positive effect on the budget, 3) The fundamental tax reforms proposed by Ryan would benefit the rich while increasing taxes on the middle class and poor, 4) The plan would end Medicare.  I will address each of these criticisms in kind, and show why Mr. Krugman, rather than Mr. Ryan is the one without any serious ideas of how to avert the looming fiscal disaster that is entitlement spending.

1) The CBO did not score the revenue portion of the Roadmap when it scored the budget effects of the plans spending cuts

Well, I have to give it to Mr. Krugman here, he is right on this one.  But Mr. Krugman says "At Mr. Ryan’s request, it produced an estimate of the budget effects of his proposed spending cuts — period. It didn’t address the revenue losses from his tax cuts."  But the truth is very different than Krugman's assertion that Mr. Ryan asked the CBO to ignore the revenue side of his plan.  The fact is that it is not part of the CBO's job description.  The CBO only estimates spending levels NOT revenue.  That is for the office of the Joint Committee on Taxation (JCT), not the CBO.  Ryan asked the JCT to score his plan early in the year, however, there was this trillion dollar entitlement that was being force fed through every conceivable procedural loophole in Congress that happened to take up all their time.  For this reason they turned down Mr. Ryan's request because his plan was still only in the early planning stages.  So although the revenue side was not scored by a government accounting agency, I believe it is extremely misleading and dishonest of Krugman to assert that this was done at Mr. Ryan's request as a tactic to mislead the public.

2) The proposed tax cuts would vastly outweigh any revenue savings negating any positive effect on the budget

Mr. Krugman references a study by the Tax Policy Center (TPC), a left leaning joint venture of the Urban Institute and the Brookings Institute (both left leaning themselves) that determined that although Ryan's plan would effectively reduce spending, the tax cuts would cost approximately $4 trillion of additional  revenue over the first decade it takes effect relative to the tax rates that are currently in place (Note that it used the comparison scenario as one in which ALL the Bush tax cuts are allowed to expire).  This is evidence, according to Mr. Krugman, that Ryan's plan would do little to curb the deficit, as the TPC estimated that using their revenue projections coupled with Mr. Ryan's spending cuts the deficit would remain at approximately $1.3 trillion in 2020.

There are so many things I have to say about this I don't know where to start.  First and foremost, you have to take into account exactly what Mr. Ryan's revenue side of the plan actually is: fundamental tax code reform.  He would eliminate almost all deductions, exemptions and tax credits that are used disproportionately by the rich to shield income from taxation.  He would create only two personal income tax rates: 10% on the first $50,000 of taxable income, and 25% on everything above that.  One of the few exemptions he does allow to remain is a very generous standard deduction and personal exemption that would equal approximately $39,000 for a family of four, in order to protect poor workers from being taxed until their income reaches a level where they can effectively support themselves.  He would also eliminate taxes on interest, capital gains and dividends, which would greatly decrease the incentives to invest and hire thereby spurring economic growth.  Lastly, he would eliminate the corporate tax, which at 35% is second in the industrialized world only to Japan, and replace it with a business consumption tax (similar to a value added tax) at 8.5%.  This would make U.S. business more competitive while also forcing eliminating any tax benefit for corporations located overseas.  To eliminate the competitive disadvantage on American businesses and products, the BCT is not imposed on U.S. exports when they leave the U.S., while instead it is imposed on foreign imports when they enter the U.S. Current WTO rules prevent a corporate income tax from being border adjustable, so this fundamental reform is one of the few realistic ways of addressing the issues regarding the competitive tax disadvantage faced by many U.S. based corporations.

Now like I said, this is serious tax reform on a level unprecedented since the advent of the income tax.  Therefore, it is extremely difficult to forecast how it will affect revenue levels.  Mr. Ryan has repeatedly stated that his goal is to create a simplified tax system that still maintains historical levels of revenue which is approximately 18% of GDP.  The income and corporate tax rates in the plan are outlined above were put in place with that goal in mind.  According to the study done by the TPC, these taxation levels would only amount to about 16% of GDP and hence the revenue shortfall that Mr. Krugman cites as evidence of the plans lack of credibility.  However, there are also serious questions regarding the accuracy of the TPC's forecasts.  Mr. Ryan addresses the criticism that his proposal would cost trillions in revenues on his website here, but here are his main points:

• It is always important to examine the underlying baseline against which a plan is measured in these statements.  
• The tax plan in the Roadmap is designed to generally track the CBO’s “alternative fiscal scenario” baseline for revenues.  As a result, the Roadmap has fully accounted for any “revenue loss” that results from CBO’s “alternative fiscal scenario.”  As noted above, this baseline assumes that all of the 2001/2003 tax provisions are extended and the AMT is permanently patched for inflation (i.e. current tax policy as we know it is extended in future).  In contrast, the so-called “current law” baseline assumes much higher revenue amounts because all of the 2001/2003 tax provisions are repealed after this year, as dictated under current law, and the AMT is not indexed for inflation, allowing it to hit more and more middle-class taxpayers each year.  
• As a result, CBO’s current law baseline for revenues is $3 trillion higher over 10 years than its alternative fiscal scenario, meaning that any proposal aiming to track current tax policy would automatically be judged as losing $3 trillion in revenue relative to current law.     
• The current-law revenue baseline already builds in a host of tax increases that virtually no policymakers are proposing.  Relative to this current law baseline, any tax plan that doesn’t implicitly raise taxes significantly is labeled a major revenue loser.  It is telling, for instance, that the Tax Policy Center scored Presidential candidate Obama’s tax proposals and concluded that it would “lose” over $2.9 trillion in revenue over 10 years, relative to current law. 

As you can see, relative to any serious proposal other thank allowing the entirety of the Bush Tax cuts expire and allowing the alternative minimum tax to hit millions of more American's per year, almost any plan is going to lose revenue.  As Mr. Ryan correctly notes even Mr. Obama's plans to soak the rich would lose nearly $3 trillion of revenue according to the TPC analysis, which is not all that far off from is $4 trillion prediction for Mr. Ryan's plan (NOTE - I just want to say is a little disheartening to live in an age where a difference of $1 trillion is not that much).  Additionally, the TPC analysis is admittedly done in static terms.  Under their analysis cutting taxes as proposed by Mr. Ryan will do nothing to spur increased growth and will hence not bring in any additional revenue due to this growth.  Now I'm not saying that tax changes such as these will completely pay for themselves, but they absolutely will grow the economy and increase total taxable revenue faster than the alternative.  This will make up for at least part of the shortfall outlined above.  Additionally, although the TPC has a great deal of experience and expertise in analyzing personal income rates and their effects of revenues, they are not sure exactly how the BCT would affect revenues relative to the current corporate income tax, for this reason they made several assumptions that negatively affected in effectiveness and hence forcasted lower revenues.  In their defense this is extremely hard to judge because of the sheer size and nature of the tax changes outlined by the plan, but it does add uncertainty to their analysis.  Lastly they made a number of assumptions regarding subchapter S and other similar pass through tax business associations that they would take all their income through tax free dividends rather other avenues such as wages.  Admittedly this would be possible under the current version of the plan, although it is highly likely that because it has now been identified, this loophole would be eliminated before final passage of the bill Therefore the revenue estimates should be revised upwards.

In conclusion regarding the revenue shortfall that Krugman uses to attack the plan, it was based on an analysis that would undoubtedly reach the conclusion that it lost revenue compared to a politically untenable scenario.  It is also biased in favor estimating the revenue on the low side.  And lastly and most importantly, this is nothing more than a proposal.  The taxation numbers put forward by Mr. Ryan were designed to hit a long term revenue target of 18% of GDP.  If these estimates prove to be off, which the arguably are not or are very close if not, Mr. Ryan has repeatedly stated that he would be willing to adjust the plan to meet that target.  In the end I think Mr. Krugman's main beef with the plan is that he believes the historical average of federal revenue at 18% of GDP is too low, but instead of stating his obvious belief that the government knows how to spend money better than you do, he callously attacks a serious proposal using numbers he knows fit his argument but are not realistically relevant.

3) The fundamental tax reforms proposed by Ryan would benefit the rich while increasing taxes on the middle class and poor

Mr. Krugman claims that "The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half, giving them 117 percent of the plan’s total tax cuts. That’s not a misprint. Even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population."  First and foremost, Mr. Ryan's plan would allow anyone and everyone to choose whether to pay through the current tax system or his simplified tax system listed above.  Therefore it is simply not true that taxes would be raised on anyone.  Mr. Krugman either ignores this fact or hasn't done his homework for one of his articles.  Secondly, although the marginal tax rates would come down the most for the rich, the elimination of exemptions and other deductions which are mostly utilized by the rich would offset that partially a leading to less of a decrease in their effective tax rates.  But what is important here is that a dramatic simplification of the tax code whereby marginal rates are lower leads to more incentives for marginal production - i.e. growth.  By incentivizing people to work you will get more of it and the prosperity associated with it.  A simpler tax code will also have the added benefits of simplifying enforcement and make it harder for anyone to hide income.

4) The plan would end Medicare

Although the plan would restructure Medicare in a way that would give the individual consumer more control, it would not end the program.  There is only one sure fire way that Medicare would be destroyed and that is to do nothing.  Look at the percentage of federal revenue that would be required to fund social security and Medicare if they remain on their current paths (for an ominous look at the impending disaster, check out the National Center for Policy Analysis' Website):

Now here is what Mr. Ryan's policy does to ensure the solvency of Medicare according to his website:

• It preserves the existing Medicare program for those currently enrolled or becoming eligible in the next 10 years (those 55 and older today) - So Americans can receive the benefits they planned for throughout their working lives.  For those currently under 55 – as they become Medicare-eligible – it creates a Medicare payment, initially averaging $11,000, to be used to purchase a Medicare certified plan. The payment is adjusted to reflect medical inflation, and pegged to income, with low-income individuals receiving greater support. The plan also provides risk adjustment, so those with greater medical needs receive a higher payment.
• The proposal also fully funds Medical Savings Accounts [MSAs] for low-income beneficiaries, while continuing to allow all beneficiaries, regardless of income, to set up tax-free MSAs.
• Based on consultation with the Office of the Actuary of the Centers for Medicare and Medicaid Services and using Congressional Budget Office [CBO] these reforms will make Medicare permanently solvent
• Modernizes Medicaid and strengthens the health care safety net by reforming high-risk pools, giving States maximum flexibility to tailor Medicaid programs to the specific needs of their populations. Allows Medicaid recipients to take part in the same variety of options and high-quality care available to everyone through the tax credit option.

Now I'll admit that this would change how Medicare is structured by giving the consumer the power of choice to determine what plans best fit their needs.  However, to claim that it would end Medicare is disingenuous at best.

In conclusion, to claim that Mr. Ryan's proposal is not a serious one is absolutely absurd.  It addresses the impending collapse of social security and Medicare by making both programs permanently solvent while also giving consumers choices about how their coverage is structured, as well as how their social security income is invested.  It restructures the tax code to promote work, savings and is highly beneficial to long term investment.  Lastly, and unfortunately, it is the only serious proposal made by any member of Congress or of the executive that will prevent the looming fiscal crisis with regards to entitlements.  Calling it unserious and fraudulent is itself an unserious statement, and it is further evidence that Paul Krugman is not a legitimate commentator.  Even the TPC, whose numbers Krugman cited in his attack and are pretty hostile themselves to the plan, issued this statement on Friday defending Mr. Ryan's proposal and calling it "a useful contribution to the debate."  I guess some people will buy Krugman's argument that the government knows what best and that we can tax only the rich to pay for everything without any adverse consequences.  However, both Mr. Ryan and I believe that it is time for the American people to see a serious proposal that is fair, simple, and moves away from the expanding culture of dependency towards the qualities that this country was founded.  The same principles that made it into the greatest country the world has ever seen - freedom, liberty, hard work, self dependency and the power of the individual to choose what is best for them.  Please visit the Roadmap for America's Future and decide for yourself.

paul krugman for budget director!

So Peter Orszag recently resigned as director of the Office of Management and Budget.  I figure that he wants to get out before the fiscal train wreck comes to a head, and I'm sure the director of the budget's job isn't any easier when Congress refuses to even pass a budget (as they have done this year).  There has been some speculation regarding who Obama will nominate to replace Orszag, but I recently found this article by Simon Johnson, the former chief economist at the International Monetary Fund.  It had the laughable premise of suggesting Paul Krugman as Orszag's replacement.  Right now Krugman is getting a lot of heat for his recent op-ed which suggested, if not promised, that the U.S. was doomed to slip into another great depression if the U.S. did not spend billions and billions of deficit dollars to stimulate the economy (article here).  Really?  A depression is inevitable without massive increases in government spending?  Now although I don't agree with the premise that government spending alone will turn the economy around, I don't think that anyone other than Krugman believes that it is the only way to avoid a depression.

Unfortunately this is a tough hypothesis to test; however, we do know that for the past two years almost everything that has been suggested by Mr. Krugman has been implemented as policy by Mr. Obama.  As has been outlined by The Wall Street Journal and others, Obama has followed Krugman's advice to spend, spend, spend in order to counteract the negative aspects of a lack of demand; Mr Krugman has stated numerous times that he believes that depressed demand is the main culprit for our current economic troubles.  In order to stimulate demand, the government needs to spend because private industry will not.  That is the Krugman economic fix.

President Obama has heeded his warning.  First there was Mr. Obama's first budget, in which overall federal spending rose 18%, or $536 billion.  And this doesn't even reflect the true increase in spending.  Thanks to low interest rates the feds were able to save about $65 billion on debt servicing, so the true increase in federal outlays was closer to 22%.  And that was only in ONE YEAR.  Throw in the $800 billion dollar stimulus (which was not included in the budget) and total spending increased by roughly $1.4 trillion.  This increased spending meant that total federal expenditures reached over 24% of GDP, a post-war record.  How much more spending does Mr. Krugman want?  Under Obama we already now have one in every four dollars earned by American redistributed by 535 people sitting in Washington, D.C.  And lest we forget, that spending will increase even more when the the trillion dollar plus health care entitlement begins running huge deficits. 

Despite all this spending and the promise of economic recovery that came with it, the results have not materialized.  And this isn't the only reason to question Mr. Krugman's credentials to run the Budget Office.  Check out this Krugman Article from 2003 when he blasted the Bush administration for increasing deficit spending.  According to Krugman, he refinanced to fixed rate mortgage because he was sure that interest rates were sure to rise.  The Bush administration's reckless spending and tax cuts — which increased the deficit to about 3% of GDP — would have to cause interest rates to sky rocket.  Here he is in his own words:

But what's really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government's solvency.

That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P. But that misses the point. "Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen." So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.

Oh wait I'm sorry.  I guess Mr. Krugman does understand that budget deficits can be a problem, although it is only when the party in power is one he does not agree with. He was worried when deficits were 3% of GDP, but now that it is almost 10% he insists on more spending.  Demand-siders (my new name for those insisting on government spending as the best way for economic recovery) will counter by saying the spending is needed now to avoid a recession, but regardless whether it is needed or not will not change the effects of those deficits.  Even if the spending is desperately needed, higher deficit levels coupled with the looming social security/medicare insolvency (which Mr. Krugman did rightly point out) can lead to tremendously bad consequences.  Most likely these will be soaring interest rates and the inflation that accompanies the monetizing of the debt.  Mr. Krugman can't have it both ways, and unfortunately I think his 2003 analysis was closer to correct.

All of this is just further evidence that Krugman isn't much of an economist anymore and is more just a liberal columnist.  He simply uses his economic background to attempt to justify typical liberal policies: increase spending and redistribution of wealth.  He loves to bash business and blames excessive risk as the major cause of the recession.  He has called long term unemployment a "slow-motion human and social disaster" that must be counteracted at almost any cost; however, he also called the Waxman-Markey Cap-and-trade bill "well short of what the planet really needs."  You don't have to be a economics professor at Princeton to recognize that increasing the cost of energy and more environmental regulation will slow economic growth, making it even harder for the unemployed to find work. When he attacked Senator Jim Bunning's block of the extension of unemployment benefits for people that have been out of work for up to two years, he claimed that it was "bizarre" that anyone would think that providing employment benefits in continuum would disincentivize people to work.  However, a textbook authored by Paul Krugman called "Macroeconomics" contains the following passage:

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . .  In other countries, particularly in Europe, benefits are more generous and last longer.  The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job .  Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European Countries.

 Like I stated Krugman seems less and less like a economist and more and more like a typical political columnist.  This in and of itself is not a bad thing, however, when people try to defend Obama's economic policies they often point to Mr. Krugman for justification.  I refuse to defer to his diminishing authority.

paul krugman and the austrian business cycle

A lot of people read Paul Krugman's op-ed's each week in the New York Times. He is perhaps the most read economist in the United States. In fact, when it comes to his research areas, such as location theory and economic geography, he was able to win a Nobel Prize in economics. However, the it is a complete fallacy to equate this award with Krugman's ability to make macroeconomic predictions based on Keynesian theories. Krugman won the 2008 Nobel Prize due to of his research relating to economies of scale and and their effects on urbanization in developed nations. This empirical research and the associated theories have almost nothing to do with the political rhetoric that he spews in his column on a weekly basis.

For instance in his column this week entitled Reagan Did It, Krugman postulates that Reagan's deregulation of the the banking and financial markets caused Americans to abandon fiscal thrift and take on too much debt, which caused the current economic downturn. Here a a few illustrative quotes from the article:

The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America’s financial rules was Reagan’s biggest legacy. And it’s the gift that keeps on taking . . . It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis . . . These defaults in turn wreaked havoc with a financial system that — also mainly thanks to Reagan-era deregulation — took on too much risk with too little capital.

First, I am not even going to address the individual freedom and personal liberty issue that government should not be in the business of telling its citizens how much debt they are allowed to take on. According to Krugman, an all-knowing financial regulator/bureaucrat knows how much debt an individual should be allowed to accumulate, rather than allowing the market let a variety of creditors determine the proper amount for each individual on a person-by-person basis based on a multitude of risk related factors. Instead I want to address why Krugman is completely off-point when he claims the "deregulation" and the associated increase in private debt (and by the way he does not point out any specific provisions of the Garn-St. Germain Depository Institutions Act that would provide incentives for individuals to take on too much debt) caused the recession we face today. In fact, Krugman does little more in the article than assert that a lack of governmental regulation of the credit markets was the reason that consumers took on large amounts of debt.

Krugman is correct when he points out that excessive private debt had a role to play in the economic downturn. However, the reason for this increase in American indebtedness cannot be attributed to the abstract theory of "Reagan Deregulation." Perhaps the reason that Krugman attributes this increase in debt to deregulation is because he does not accept the Austrian theory of the business cycle. Krugman has received much acclaim for this 1998 article entitled The Hangover Theory, in which he dismissed the Austrian business cycle theory. However, as many commentators have been quick to point out, Krugman at best misapplied the theory and at worst he deliberately misrepresented it in order to make a political point. For instance, he claimed that the theory can be described in the following way:

In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it. Maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity. . . Eventually, however, reality strikes investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses . . . Here's the problem . . . [a]s a matter of simple arithmetic, total spending in the economy is necessarily equal to total income. Every sale is also a purchase, and vice-versa. So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

However, Krugman's characterization oversimplifies the theory. He claims that theory postulates that for "whatever the reason" for the malinvestment, there must be an economic downturn proportional to that malinvestment. However, the theory states that the control of the monetary supply by a central bank, which can artificially lower interest rates by directly injecting newly created money directly into the credit markets, causes unsustainable booms and busts because investors, who under normal market conditions would more highly value present capital over future investments with too much risk to justify the necessary debt are induced to malinvest because of the artificially lower interest rate. Krugman ignores the central bank's critical role in causing the boom by distorting the risk analysis and eliminating an interest rate that accurately reflects market conditions. Additionally, the theory does not necessarily require high unemployment during the "bust" part of the cycle. Instead, the theory claims that unemployment during the recession results from rigidity in real wages and that if wages were allowed to decrease, a increase in unemployment might not necessarily occur during the liquidation of the bad investments.

The Austrian theory very accurately describes the causes of the current economic downturn and even the traditionally leery media has begun to accept the fed's role in the recession. By keeping interest rates lower than they would have been absent monetary expansion that exceeded the accompanying increase in economic output, the fed created the conditions necessary for the housing bubble and other malinvestments of capital. If interest rates had been determined by market conditions, many of the homeowners who are currently defaulting would not have been approved for such large loans, and financial institutions would not have taken on such a large share of high risk sub-prime and option-ARM loans. Krugman would have you believe that greedy businessmen were trying to game the system absent proper regulation and things like mortgage backed securities were a way they could quickly profit from this excessive risk. Now I am not saying that the fact that these loans were securitized and spread to all sectors of the financial industry were not also major contributing factors to harshness of the downturn, by they would not have been created in the first place (at least not on such a large scale) but for the fed's loose money policies throughout the first half of the decade.