Paul Ryan (R-WI) is taking significant criticism following his interview with Ezra Klein of the Washington Post, in which he said the following:
We need to do things to free up credit. We need regulatory forbearance there. Right now, the policymakers and regulators are doing opposite things. So you’re right that there’s a lot of capital parked out there, and we need to coax it out into the markets. I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.
Ryan is incorrect about the effect of raising the fed funds rate, as many have since pointed out.
Paul Krugman, for instance, had this to say:
I don’t even know where to start with this. What does Ryan think the fed funds rate is? (It’s the rate at which banks lend each other money overnight, usually to help meet reserve requirements.) He obviously doesn’t know the the Fed funds rate basically equals the return on federal paper, so that raising that rate would make banks more, not less, likely to stay with that federal paper. I’m sure someone will try to come up with a reason why Ryan is being smart here, but the truth is that he’s stone-cold ignorant.
Ryan has since walked back his original statement and suggested he meant to say something entirely different. Few on the left seem willing to give Ryan the benefit of the doubt (Krugman, for example, said Ryan's walkback was dishonest). That's probably in part because Ryan appears to be a rising star on the right and is, according to David Brooks, the most "intellectually ambitious Republican in Congress." With that burden to bear, Ryan will rarely, if ever, get the benefit of the doubt when he misspeaks, whether fair or not.
I am willing to give Ryan the benefit of the doubt here and accept that he misspoke. I am far less concerned about Ryan's off-the-cuff statement to Ezra Klein than I am about his "roadmap" which he released after carefully considering and studying economic policy.
Ryan's "roadmap" is a detailed 99 page document released in January 2010. In summary, the roadmap calls for radical policy changes, including the following:
- Cut taxes of top 1% by half
- Eliminate all taxes on capital gains, dividends, and interest
- Repeal the AMT
- Repeal the corporate tax
- Institute an 8.5% value added tax
- Eliminate Medicare for everyone who would be eligible to participate in Medicare after 2020
- Eliminate the Children's Health Insurance Program (CHIP)
- Increase the retirement age for social security to 67
- Reduce social security benefit payments for retirees (other than the poorest 30%) by 16% in 2050 and by 28% in 2080
- Privatize significant portions of social security by shifting social security money to individually-directed investment accounts
- Establishes federal guarantee of private social security investment accounts (so even if you lose all of your privately-directed social security money in the stock market, the government will pay you the full amount you initially invested)
Frankly, Ryan's plan is a disaster. The roadmap was designed to take drastic measures to eliminate the deficit and, eventually, the national debt. Not only does Ryan's roadmap promote draconian and foolish policies in pursuit of a goal of no national debt, it utterly fails to achieve that one stated goal. In fact, Ryan's roadmap would put the US economy in a far worse position than it's in today while making American lives miserable in the process.
According to the non-partisan Center on Budget and Policy Priorities, full implementation of Ryan's roadmap would raise the debt to GDP ratio to 175%, a staggering number which would likely crush the US economy. For perspective, the US debt to GDP ratio has never exceeded 122% which is where the US economy was in 1945 following the Great Depression and World War II. Greece, which is driving much of the EU economic panic, has a debt to GDP ratio of about 115% today. A 175% level is not sustainable. Ryan of course disagrees with the CBPP's analysis and wrote a response. The CBPP has responded to Ryan's response. Both documents are worth reading (as you can guess, I think the CBPP makes a far more compelling case than Ryan).
Ryan likes to cite the non-partisan CBO report on his planwhich states that under Ryan's plan, the national debt would be reduced to zero by 2080. What Ryan fails to mention is that the CBO, as directed by Ryan's staff, assumed in its analysis that total federal tax revenues would remain equal under Ryan's plan as under current fiscal policy (see page 4 of CBO's report). Unfortunately for Ryan, there is no chance that total federal tax revenues under Ryan's plan would remain identical to current levels. According to the non-partisan Tax Policy Center, federal revenues would decrease from 19% of GDP to about 16.8% under Ryan's plan by 2020, increasing the deficit by hundreds of billions per year. Even with the significant spending cuts proposed by Ryan, tax revenues under his plan wouldn't reach 19% of GDP (current levels) until at least 2040, by which time several trillion dollars would have been added to the national debt.
Given that Ryan's plan couldn't possibly achieve it's one stated goal, that makes the draconian cuts in Medicare and other services particularly disturbing. With respect to Medicare, Ryan would give seniors a voucher to purchase private health insurance each year rather than cover seniors through Medicare (which would be gradually eliminated). According to The Economist, 65 year-old seniors would receive vouchers worth $7,900 by 2020 when, under optimistic assumptions, insurance would cost 65 year-old seniors about $10,800 per year. The Economist notes:
What every senior citizen currently gets for free, under Medicare, will instead cost them an extra $2,900 a year, if they have it. For most, that will mean giving up benefits and getting less medical care, or going without insurance entirely. And every year, by design, Mr Ryan's proposal will widen the gap between the voucher and the cost of medical care by 0.7%, even after accounting for the effect his proposal will have on holding down medical costs. Every year, seniors will get worse and worse care.
Even worse for some seniors is the fact that the voucher value remains constant irrespective of geography. So, seniors living in a part of the country with pricier health care will fare poorly under Ryan's plan, whereas seniors living in a part of the country with cheaper health care will fare relatively better.
Ryan's proposals for social security hardly fare better. Imagine if Ryan's proposal for privatizing significant portions of social security had been in place in 2008 when the markets began to spiral downwards. Huge portions of retirement funds would have evaporated along with IRAs and 401(k)s. Under Ryan's plan, that would have been a catastrophe for taxpayers. That's because, under Ryan's plan, the federal government would have continued paying the seniors who lost their social security money in the market as if that money had never been invested at all. Effectively, the federal government would have bailed out senior citizens whose social security investments disappeared. Whatever one thinks of the wisdom of such a bailout, everyone can agree it would have been extremely expensive for taxpayers and hardly a step towards eliminating the national debt which Ryan's roadmap seems to favor above all else.
Given the magnitude of the awfulness of Ryan's roadmap, it's shocking to see Republican commentators lining up to support it. Fred Barnes, for example, said of Ryan's roadmap:
[It's] the most important proposal in domestic policy since Ronald Reagan embraced supply-side economics in the 1980 presidential campaign. It's not only the freshest, boldest, and most comprehensive Republican thinking, it's also the most relevant. If Republicans adopt the road map as their basic ideological blueprint, it offers them the prospect of a landslide in the midterm election this year, followed by victory in the presidential election in 2012.
So far, Republican politicians are demonstrating more sense than Republican commentators and are staying far away from endorsing Ryan's plan. They recognize it for what it is: political, economic and social policy kryptonite.
Ryan's quote to Ezra Klein about the fed funds rate was embarrassing to be sure, but while raising the fed funds rate by 1% wouldn't help the economy right now, it also wouldn't end it. The same cannot be said of Ryan's roadmap.