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By Paul Davidson | Alternet
Your guide to Ryan’s irresponsible budget fantasies and the lessons of economic history he missed.
Vice-presidential hopeful Paul Ryan has a giant liability for someone hailed for his economic vision: He knows next to nothing about the facts of economic history.
Ryan is celebrated by Republicans as a “super-wonk” who “masterfully and forcefully presents his free market, fiscal-policy beliefs” and brings “serious economic firepower” to the Republican ticket. Yet in truth, his vision of America’s economic future has already been proven wrong. Ryan’s claim that he has outlined what he calls a “path to prosperity” is ridiculous. What he has concocted is a bad trip on the road to ruin.
Ryan’s “Concurrent Resolution On The Budget, Fiscal Year 2013” was submitted to the House of Representatives on March 23, 2012. In this resolution, Ryan argued that unless Congress reins in government spending and thereby reduces the federal debt-to-GDP ratio, the country is doomed. Accordingly, his budget resolution calls for an 8 percent reduction in on-budget federal spending in 2013 and a 13 percent reduction in 2014 (both figures relative to appropriate federal budget these expenditures for 2012). This Ryan claims will shrink the federal deficit from approximately 7.8 percent of GDP to 4 percent in 2014 and simultaneously shrink the size of the federal government from 23 percent of GDP to a projected 20 percent by the beginning of 2015.
Since military spending is not reduced, these cuts must be made in other federal spending programs such as transportation, funding for scientific research and development, education, environmental protection and Interior Department diligence regarding offshore drilling in the Gulf of Mexico (remember the BP spill!), and so on. Ryan expects his proposed cuts to equal $700 billion over the next decade.
A sage has noted that “Those who cannot remember the past are doomed to repeat its errors.” So it is with Paul Ryan and his misguided slashing proposals. Ryan should have remembered how 1) the USA slid back into the great Depression in 1937-’38, after four years of slow but significant progress in reviving the American economy from the greatest depth of the Great Depression in 1931-1932; and 2) how the Reagan administration cut the unemployment rate almost in half.
The Great Depression Lesson
During his first term (1932-1936), President Franklin Roosevelt ran large annual deficits of between 2 and 5 percent of GDP. In 1932, the federal debt-to-GDP ratio was approximately 20 percent. By 1936, the national debt had increased or approximately 40 percent of GDP, while the real GDP (adjusted for price level changes) was once again approaching the peak level it had reached in 1929. Unemployment declined from approximately 25 percent in 1932 to 16 percent officially in 1936. (Keep in mind that at the time, workers employed on public works projects financed by the federal government were listed officially as ”unemployed” thereby swelling the official unemployment rate. If these employed public work laborers are removed from the unemployment list, it is estimated that only 10 percent were unemployed in 1936.)
Despite the improvement in the economy, many, including people in Roosevelt’s administration, wrongly feared that if the government debt-to-GDP ratio increased much further, the federal government would have to declare bankruptcy. (Shades of Greece today.)
Accordingly, in 1937 Roosevelt yielded to pressure to reduce the size of the deficit as well as the debt-to-GDP ratio. Roosevelt sent a budget to Congress that slashed spending in 1937 by over 13 percent and another 11 percent in 1938. The result was a catastrophe. From the fall of 1937 to the summer of 1938, the economy collapsed, with industrial production declining by 33 percent, GDP falling by 13 percent and unemployment rising by approximately 5 percentage points.
Roosevelt then abandoned his deficit reduction program and the economy again began to grow. With the advent of the World War II, all fears of the deficit and debt-to-GDP ratio were forgotten. As a result, federal debt-to-GDP rose to over 100 percent of GDP to pay for mobilization and fighting the war. Despite the large debt-to-GDP ratio, the postwar period was one of great prosperity for at least another quarter of a century.
Fast-forward to the present day. Ryan’s proposed budget would have the U.S. reduce spending significantly in the next two years and therefore repeat the error of the Roosevelt administration in 1937 and 1938 that plunged us back into the Great Depression. How’s that for economic folly?
The Reagan Deficit Lesson
Ryan would also do well to remember what occurred under the Reagan administration from 1980 to 1988. In December 1979, the unemployment rate was 6 percent. By June 1980, it had spiked to 7.6 pecent. By September 1982, the unemployment rate had climbed past the 10 percent mark. The rate remained over 10 percent for a full 10 months, topping out at 10.8 percent in both November and December 1982.
In 1983, the Reagan administration increased government spending by almost 30 percent more than it had been when Reagan took office in 1981. Government expenditures continued to rise throughout the rest of the Reagan administration until it was approximately double what it was in 1980. The debt-to-GDP ratio was 26 percent when Reagan took office. It rose to 41 percent by the end of 1988. The effect of this big government deficit spending starting in 1983 was that by the summer of 1983, the unemployment rate was below 10 percent, and by June 1984 it was at 7.2 percent. By the time Reagan left office at the beginning of 1989 the unemployment rate was 5.2 percent.
Obviously, Paul Ryan has learned nothing from the economic past history of the U.S. under either Democratic or Republican presidents. These economic facts should have taught Ryan that the worst thing one can do is cut government spending when the American economy is struggling to reduce unemployment and increase economic growth to achieve some measure of economic prosperity.
Ryan’s Clouded Crystal Ball
Unsurprisingly for someone so ignorant of economic history, Paul Ryan doesn’t do well when he tries to predict conditions in the future. On February 14, 2009 in an op-ed article in the New York Times, Ryan argued that the Obama $787 billion stimulus plan will bring forth high inflation. Ryan wrote that inflation would occur as the Federal Reserve prints money for the government to spend on economic recovery. This expansion of the money supply must be inflationary, Ryan declared, because ”it is a situation in which too few goods are being chased by too much money.”
On February 22, 2009, the New York Times printed my response to Ryan’s forecast of inflation:
“Paul D. Ryan repeats the tired idea that when the Federal Reserve prints money for the government to spend on economic recovery, the result will be inflation as ‘too few goods are being chased by too much money.’ This is based on a false assumption that the output of the country will not increase when government lets contracts to businesses to produce more goods and services that will improve the productivity and health of our country. If there is significant unemployment and idle capacity in the private sector (and who can deny that there is?), then this deficit spending will not cause inflation. Rather, the ‘printed’ money spent on a recovery plan creates profit opportunities that induce private enterprise to hire and produce more goods. Then there will be many more goods available for this money to chase and no inflation need occur.”
It is now more than three and a half years since Ryan predicted inflation. The Federal Reserve not only “printed money” to finance the Obama stimulus plan, but since Ryan’s op-ed piece, the Fed also pursued its policy of “quantitative easing” which pumped even more money into our economy while we are suffering high unemployment.
We may ask Mr. Ryan, where is the high inflation that he saw coming? Obviously, Ryan is using a false economic theory to make predictions that have nothing to do with the world of experience in which we live.
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