Financial FAQs

Republican Paul Ryan’s 2011 budget plan is being trotted out by House Republicans once again. In spite of the sequester cuts and a declining budget deficit, Ryan wants to create even more economic austerity. Representative Ryan and House Republicans have to still be living in rural America of the 19th century to believe this budget plan would work.

Its purpose is obvious—to cut government spending by abolishing Obamacare, or the Affordable Care Act, as well as downsizing Medicare to a private voucher program, and cutting taxes for the wealthiest even further by simplifying tax brackets to 10 and 25 percent. And he maintains this will balance the budget in 10 years!

Yet balancing the budget isn’t the problem, as many economists have pointed out, including Paul Krugman. The annual deficit that is the source of federal debt is in fact dropping too quickly, thanks to the sequester agreement, 2011 spending cuts, and the year-end income and payroll tax increases. Any further cuts will cost tens of thousands of public and private sector jobs that depend on government contracts. This will in turn strangle government revenues that would further increase the deficits and so overall debt.

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Graph: CBPP

It is a vicious circle that those who still espouse 18th Century economics do not want to recognize. It is being tried in Europe and has precipitated a second, and third recession in the case of Great Britain. As so many, including the Center For Budget and Policy Priorities (CBPP) have pointed out, most of the debt was accumulated by wars and the Bush tax cuts. Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for nearly $6 trillion in deficits in 2009 through 2019 (including associated debt-service costs of $1.4 trillion).  By 2019, CBPP estimates that these two policies will account for almost half — over $8 trillion — of the $17 trillion in debt that will be owed under current policies.

Rather the focus needs to be on creating more demand, and Ryan doesn’t give us a plan to do that. Instead he maintains that downsizing government at a time when the private sector has been holding back on job creation will magically cause the private sector to create more jobs.

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Graph: Calculated Risk

The problem is really a lack of demand, due to fallen household incomes, as the graph makes clear. If the private sector saw a greater demand for its products and services, they would be hiring more. Most of the benefits of the huge increase in labor productivity since the 1970s has either gone to Wall Street, record high corporate profits, or its wealthiest executives.

Money has to be returned to those who produce it, not those who manage its profits if we want to create the demand that causes economic growth. The Ryan Plan sets us back to a 19th century regulatory environment, with its huge wealth disparities, dependence on fossil fuel use, and a less safe safety net for the rest of us.

Harlan Green © 2013

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