Tuesday, 25 October 2011

Bill Mitchell - a Modern Money Theory guy - on Ron Paul's "Plan to Restore America"

The full, and loooong blogpost is here.

When an Excel spreadsheet runs wild

US Presidential candidate Ron Paul released his – Plan to Restore America – yesterday, saying that it will deliver a balanced budget within three years – cutting public spending by $1 trillion in year one, slash “regulations” and “reign in the Federal Reserve and get inflation under control”.

The 11 -page document has lots of tables and graphs and says that “America is the greatest nation in human history” (plaudits) but if you search for some theoretical framework or some evidential-basis for the numbers presented you will be very disappointed.

You will read that Americans have a “respect for individual liberty, free markets, and limited constitutional government” and that returning (public) spending (mostly) to 2006 (nominal) levels is somehow good. Cutting federal employment by 10 per cent is also good. Cutting all regulations is also good.

But that is about as far as the textual rendition goes before you hit the tables and graphs. When I read the document I couldn’t help thinking that someone had run wild with an Excel spreadsheet.

The Bloomberg Editorial yesterday (October 19, 2011) – Hidden Utility of Ron Paul’s Balanced-Budget Plan – saw some benefit in Ron Paul’s plan.

They said that “American voters … enthusiastically embrace the need to cut, cut, cut. But they baulk when asked to name specific programs to downsize or lop off” and so Paul’s proposal:
… performed a valuable public service this week when he unveiled a budget plan that shows exactly what balancing the $3.8 trillion budget through spending cuts would look like.
The fact is that the proposal doesn’t show “exactly” anything other than that someone can manage a spreadsheet with some formulas. The Plan to Restore America is devoid of economics which renders it a useless piece of rhetoric – strong on ideology but weak (tragically so) on analytical clout.

The Bloomberg Editorial says that:

In broad terms, Paul … [would be] … slicing $1 trillion from the budget in his first year in office … He would pare back most other programs to 2006 spending levels … would also starve the revenue side of the ledger. Corporations would see tax rates drop to 15 percent from 35 percent. He would extend all the Bush-era tax cuts, abolish taxes on estates and investment income. He wouldn’t end Social Security, but he would let young people opt out of the retirement program. As for that $1 trillion sitting in the overseas bank accounts of U.S. corporations, Paul would allow the money to come home tax-free …

True to his libertarian principles, Paul takes care of that problem by trimming the federal workforce by 10 percent …

And, it goes on.

The Bloomberg Editorial provides some local knowledge to tease out some of the practical implications – for example, “there would be no agency to oversee national parks, federal lands and offshore drilling. Land would have to be auctioned off to the highest bidders, most likely oil-and-gas, coal and timber companies”.

Further, “(e)ach state would have to become the regulator of its financial, manufacturing and health-care industries. A patchwork of rules would result. States might soon engage in a dangerous game of regulatory competition” and some “25 million elderly households … [who] … now depend entirely on Social Security for income … [would be left] … unable to buy food or pay heating bills”.

They also say that “(l)ow-income families would be hit the hardest” by the changes to Medicaid and food stamp programs – effectively culling them of all value.

Even on its own terms (that is, if the spreadsheet doodling was a reasonable representation of what can be achieved) the plan is drastic and likely to be chaotic and damaging to the ordinary citizen. The irony of US politics at present is that the grass roots support for the conservative austerity push is coming from working class Tea Partiers who will be the most damaged by the very policies they in their moments of frenzy seem to be supporting.

But, of-course, the Ron Paul exercise stands in denial of the underlying macroeconomics. It is one thing to make up some numbers and relate them to specific government departments that would have to close to get those numbers etc. But if you do not understand how these aggregates relate over time then the exercise become futile and a gross misrepresentation of what is possible and what is likely.
The Proposal reads as if Ron Paul thinks the net government outlays do nothing. Even if we agreed that a lot of government spending was not desirable in terms of the way in which the real resources were deployed (so we might say wasteful with better uses indicated) from a macroeconomic perspective the spending still creates income which multiplies throughout the rest of the economy. There is no getting away from that.

What do the 10 per cent of federal employees do each day with the incomes they earn? They go into shops and spend it which creates output and further employment. What does all these other outlays do? They create economic activity (however desirable in substance) throughout the US economy.

The overwhelming evidence is that private spending is subdued because households are in fear of unemployment and business firms already have enough productive capacity to meet the current level of spending and have no incentive to invest in further productive capacity.

Rising unemployment and falling demand (from the near $US1 trillion cuts in 2013) would further undermine private confidence.

The Plan to Restore America considers that the spending cuts will be replaced by the private sector. But that hope is not supported by any credible evidence. The evidence points to the exact opposite conclusion.

It is all very well to preach to the Americans about how great their nation is and to swathe your narrative in terms of patriotism but the market system doesn’t respond to that level or type of discussion. If people are losing their jobs they won’t increase their consumption. Firms will not invest if sales are falling.

And if the private sector further contracts, it is also unlikely that the government’s budget will be able to achieve the sort of outcomes that Ron Paul has in the later columns of his spreadsheet (2014 and on).

Clearly, Ron Paul thinks that by scrapping a swathe of regulations this will create growth.

I recently considered that view this blog – Some further thoughts on the OWS movement. I examined the evidential validity of the claim that growth is being stifled in the US at present by government regulations and intervention. This is the constant Republican (and Ron Paul) narrative and stands in total denial of the lack of spending explanation for the stagnant growth and persistently high unemployment.

The evidence provided by the US Bureau of Labor Statistics – their Extended Mass Layoffs data – overwhelmingly supports the claim that American firms have been sacking workers because there is a shortage of demand (spending). The firms that volunteered “government regulations/intervention” as the reason for laying off their workers constituted a minuscule proportion of the total.

No-one who was familiar with this data would conclude that business regulation is choking the American labour market or was in any way responsible for the substantial drop in labour demand and the rise in unemployment.

The tax debate is similarly compromised. Why would a firm employ more workers if they cannot sell the product even if they can lower the price somewhat if costs fall? I will consider that topic in another blog.

Ron Paul’s plan is in denial of these macroeconomic linkages and will fail before year one is over.


The Bloomberg editorial says that the Plan to Restore America is not a sound approach. They claim their is an “egalitarian way for Americans to share in the burden of achieving fiscal responsibility, but there’s no reason for entire Cabinet departments, the social safety net and the economy to be crushed in the process”.

It is interesting that they hold their “egalitarian” austerity plan out as being reasonable. In fact it also involves drastic and likely to be damaging cuts in net public spending. That they present this as the “reasonable” approach tells you how extreme the public debate in the US about fiscal policy has swung to the conservative (and uninformed) right.

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