Paul Ryan's Budget Bridge to Nowhere
Rep. Paul Ryan calls the Federal budget plan that he unveiled on April 5 a "Path to Prosperity". Critics on the Left have called it a "Road to Ruin". However, it is probably best characterized as an "Interstate to Irrelevance". This is because it pays so little attention to what is by far the most important factor affecting federal finances, the rate of economic growth.
It isn't that Ryan ignores growth completely, as do the Administration, the CBO, and Social Security Trustees. In Ryan's April 5th Op-Ed in The Wall Street Journal, the words "economic growth" do appear, but you have to read 400 of his 1152 words before you encounter them. Ryan lists five "major components" to his plan, and none of them is faster economic growth per se. Growth is mentioned in passing in his fifth point, "Tax Reform", but Ryan takes pains to portray his tax reforms as "revenue neutral", which is Washington-speak for "growth neutered".
How important is economic growth to the federal budget? If the economy had grown at a 3.0% real rate for the past four fiscal years, FY2010 Federal revenues would have been about $0.8 trillion higher, Obama's counterproductive "stimulus" program would never even have been proposed, and the federal government would probably have run a FY2010 budget surplus instead of a $1.3 trillion deficit.
On the economic growth front, Ryan's plan is "an elephant that labors mightily and brings forth a mouse". His budget proposes huge spending cuts, the repeal of Obamacare and all of its associated tax hikes, and far-reaching individual and corporate income tax reform - and then projects that all of this change will yield only an additional 0.23 percentage points of annual real GDP growth over the next ten fiscal years.
Ryan must be given credit for "showing his work". His budget message provides a link to an "Economic Analysis of the House Budget Resolution" by the Center for Data Analysis at The Heritage Foundation. This report estimates that the policy changes proposed by Ryan would increase the rate of real economic growth during the 10-year FY2012 - FY2021 period by 0.23 percentage points, from 2.96% to 3.19%.
Unfortunately, some of the numbers in the "Economic Analysis" simply don't add up. The report predicts that Ryan's budget plan would reduce the unemployment rate in 2021 from 5.2% to 2.8%. Given that the labor force in 2021 will probably be about 171 million, it would take at least 4.1 million incremental jobs to produce a 2.4 percentage point reduction in the unemployment rate. This is far more than the 2.1 million more jobs that the report predicts that the Ryan plan will produce. Also, 2.8% is an unemployment rate that America has not seen since August of 1953, so this looks like some kind of error.
Assuming for the moment that the economic growth numbers in the "Economic Analysis" are correct, neither the CBO's 2.96% nor Ryan's 3.19% would be adequate to pull America out of the economic hole that it fell into during FY2007 - FY2010. Deep recessions are supposed to be followed by strong recoveries that make up for the GDP growth lost during the downturn.
Because 3.0% is the minimum average annual real growth rate that allows America to be the exceptional nation that it is meant to be, we would need to average 4.09% growth over the ten fiscal years ending in FY2021 in order to fully recover from the Great Recession. Accordingly, Ryan's budget is qualitatively no better than those being offered by the CBO and the Administration. It is not a plan for getting America where it needs to go.
This having been said, even a tiny, 0.23 percentage point increase in economic growth would have an appreciable impact. Ryan notes that his budget would increase total real ($2010) GDP over the 10-year period by $1.7 trillion. At a federal "tax take" of 18.5% of GDP, this equates to an additional $308 billion in real revenue. However, this is small compared with the magnitude of both the projected deficits and the spending cuts proposed in the Ryan plan.
In the end, Ryan's budget plan is irrelevant to the situation that America finds itself in. It offers too much pain and uncertainty for the sake of too little growth. No one is going to storm the barricades for the sake of 0.23 percentage points of GDP growth. The Republicans will have to come up with a much more visionary, and much more growth-oriented, program if they are to take back the White House and the Senate in 2012 - or even win large spending cuts in FY2012.
A plan to achieve 4.09% real growth from now through FY2021 would be much more exciting. It would get America back on the prosperity track. Over the ten-year budget period it would increase real GDP ($2010) by $8.7 trillion, more than five times the $1.7 trillion promised by the Ryan plan. Assuming that real GDP per worker increased at the rate that it did in the booming 1990s (1.9%/year), 4.09% real growth would get us to true full employment by FY2021, with 34.2 million more Americans working than are today.
Ronald Reagan knew that economic growth and jobs have to come first. Let's hope that the Republicans can relearn his growth model in time.