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How the Ryan Budget Fails Our Economy by Failing Economics

How the Ryan Budget Fails Our Economy by Failing Economics

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The conservative economic framework at the core of the Ryan budget remains stuck on supply-side and trickle-down theories that have been discredited and are out of touch with today’s economy.
The conservative economic framework at the core of the Ryan budget remains stuck on supply-side and trickle-down theories that have been discredited and are out of touch with today’s economy.

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Published by: Center for American Progress on Apr 09, 2014
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1 Center for American Progress | How the Ryan Budget Fails Our Economy by Failing Economics
How the Ryan Budget Fails Our Economy by Failing Economics
By Harry Stein and Michael Madowitz April 9, 2014
 When House Budge Commitee Chairman Paul Ryan (R-WI) inroduced his laes  budge resoluion,
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 i predicably included harsh cus o he vial programs or poor and middle-class Americans ha are a he core o he progressive agenda.
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 Bu he House Republican budge is no jus conrary o progressive values; i is also he wrong approach or our economic realiy. Some o is economic flaws in logic are undamenal and basic; or example, he House Republican budge includes misun-dersandings abou supply and demand, ocusing on he supply side o he economy despie he ac ha our curren economic problems are rooed in a lack o demand. I also ignores decades o empirical evidence on he effecs o upper-income ax raes on economic growh and inequaliy. Oher policy misakes are more suble, bu no less damaging. Ryan’s budge redisrib-ues income upward, increasing drag on our slow recovery. I also proposes he block graning o assisance programs, making uure recessions more severe. Tere is nohing new here. Rep. Ryan’s budges have all been disappoiningly similar and lack a balanced approach o address our counry’s economic challenges. And given he rack record o his agenda, i is no jus everyday Americans bu also he broader U.S. economy ha would suffer i he House Republican budge were ever enaced ino law.
Supply and demand
 As he did when here were 15.2 million, 13.7 million, 12.7 million, and 11.7 million  Americans unsuccessully rying o find jobs, Rep. Ryan looked a he 10.5 million  Americans who were acively looking or work in February 2014 and somehow ound a lack o labor supply.
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 Economiss have no been in greaer agreemen abou he chal-lenges he economy aces in a leas a generaion: Te counry has a shorall in aggre-gae demand and has since Rep. Ryan sared proposing budges. Te harsh auseriy measures in each Ryan budge are sold as he way o ge America moving, even hough his is he exac opposie o wha exbook economics calls or o address a demand shorall. Unsurprisingly, he Congressional Budge Office, or CBO, projecs ha his laes budge will acually shrink he economy or he nex hree years.
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2 Center for American Progress | How the Ryan Budget Fails Our Economy by Failing Economics
Some economiss have described he behavior o he U.S. economy over he pas decade as a “secular sagnaion,” meaning ha we have had a shorall o aggregae demand ha is no cyclical󲀔as is ypical in a recession. Insead, his shorall is a longer-erm problem ha could become a new normal i no properly addressed.
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 Te soluion o his problem is o raise aggregae demand, which we can do in hree ways: looser moneary policy, by running higher deficis o und ax cus, or by increasing governmen spending. Higher shor-erm deficis would be imporan or boh he ax cu and governmen spending opions in order o injec new resources ino he economy.
 
Loose moneary policy is problemaic as a long-run policy boh because ineres raes are already basically zero and  because lower ineres raes encourage leverage, raising he risk o asse bubbles. ax cus migh be effecive i hey were argeed a low-income households, which are mos likely o spend he money and boos aggregae demand. Since households are sill deleveraging afer he financial crisis, however, i is likely ha individuals a all income levels would use mos o his money o reduce heir deb levels, which has litle effec on demand.Economiss grappling wih secular sagnaion, including Larry Summers, Brad DeLong, and Lawrence Ball, have advocaed or public invesmen as he mos cos-effecive way o raise long-erm aggregae demand o deal wih his shorall.
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 Boosing governmen spending on public invesmens could pose problems i we were already chronically overinvesing in public inrasrucure, bu here is litle reason o believe his is he case. Since governmen invesmen has allen as a share o gross domesic produc, or GDP, rom is hisorical average over he pas several decades, here is more han enough room o make new public invesmens wihou crowding ou privae invesmen.
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Making oday’s economic problems worse󲀔as his Ryan budge again does wih mis-guided auseriy󲀔has long-erm economic and fiscal consequences. As we have seen in Europe, using auseriy o balance budges is ofen sel-deeaing; a governmen akes money ou o he economy o balance is budge, causing he economy o conrac and resuling in larger uure deficis as ax revenues all wih GDP.
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 CBO highlighed his problem in is mos recen budge oulook:
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 Persistently weak conditions in the labor market have led some workers to permanently leave the labor force, and the lasting effects of high long-term unemployment have boosted the natural rate of unemployment relative to its prerecession level. In addition, the low level of investment during the past several years has held down the growth of capital services, and, despite CBO’s projection of brisk growth in investment in coming  years, the agency does not expect the capital stock in 2024 to be as large as it would have been in the absence of the recession. Also, CBO estimates that the protracted weakness in demand and large amount of slack in the labor market have lowered  potential total factor productivity (the average real output per unit of combined labor and capital services) by reducing the speed with which resources are being reallocated to their most productive uses, slowing the rate at which workers are gaining new skills, and restraining businesses’ spending for research and development.
 
3 Center for American Progress | How the Ryan Budget Fails Our Economy by Failing Economics
CBO’s revisions o is economic orecas have increased is defici projecions by more han $1 rillion over he nex 10 years.
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 Tis exra $1 rillion in deficis does no occur  because he governmen is spending more or axing less: By embracing auseriy a he  wrong ime, Congress has permanenly shrunk he size o he U.S. economy, making our defici siuaion worse under any budge plan.
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Giving away the future to hit an arbitrary number
 A large porion o public invesmen is unded by he nondeense discreionary budge. Bu insead o making new invesmens, he House Republican budge cus nondeense discreionary spending below even he economically desrucive levels imposed by sequesraion.
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 I did he same hing las year, bu even House Republicans ulimaely rejeced hose unrealisic cus when hey ailed o wrie deailed spending bills o imple-men heir own budge.
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 While Rep. Ryan seems o have aken no policy lessons rom his ailure, he does seem o have learned one imporan poliical lesson: Tis year, his  budge does no require any new cus or fiscal year 2015󲀔he only year or which his Congress has o wrie deailed spending bills. Saring in FY 2016, he budge reurns o he deep, absrac cus o nondeense discre-ionary spending i could no make add up las year. Over 10 years, i cus nondeense discreionary programs by $791 billion.
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 By 2024, he final year or which he budge provides spend-ing caps, i cus nondeense discreionary spending o a level ha is 19 percen lower han even he sequeser levels rom FY 2013, once inflaion is aken ino accoun. Te Ryan budge’s FY 2024 nondeense discreionary levels are 34 percen lower han he pre-auseriy level rom FY 2010.Te 2013 sequeser cus hrew more han 57,000 children ou o Head Sar preschools,
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 salled scienific research,
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 and eliminaed hundreds o housands o jobs.
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 Te effecs would have been even worse i Congress had allowed sequesraion o coninue unabaed.
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 CBO esimaed ha sequesra-ion would have reduced GDP by 0.6 percen and eliminaed 800,000 jobs by he end o 2014.
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 Bu even sequesraion would be a ar beter economic policy han his House Republican budge.
FIGURE 1
The Ryan budget's extreme austerity
Base nondefense discretionary budget authority, in billions of constant 2014 dollars
Sources: Congressional Budget Office, "An Analysis of the President's Budgetary Proposals for Fiscal Year 2011" (2010), available at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/112xx/doc11280/03-24-apb.pdf; Joel Friedman, Sharon Parrott, and Richard Kogan, "Too Little to Go Around" (Washington, Center on Budget and Policy Priorities, 2013), available at http://www.cbpp.org/cms/index.cfm?fa=view&id=3969; House Budget Committee, "The Path to Prosperity: Fiscal Year 2015 Budget Resolution" (2014), available at http://budget.house.gov/ uploadedfiles/fy15_blueprint.pdf.
 0100200300400500600
579476385
FY 2010(Pre-austerity)FY 2013(Sequester)FY 2024(Ryan budget)

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