La meg hente pensumboka i innføring i makroøkonomi. Noen som kan adressen til kongressmann Paul Ryan?
I’VE just gotten back from a breakfast event this morning sponsored by the American Council for Capital Formation. The guest of honour was Paul Ryan, chairman of the House budget committee and leading Republican policy wonk. Mr Ryan has received a great deal of attention for his ambitious plans to address America’s long-term budget and health system difficulties, and he is now a central figure in ongoing debates over the debt ceiling. But less well known are his views on current macroeconomic policy. And that’s unfortunate, because they’re terrible.
Mr Ryan began his remarks this morning by saying that a growing body of evidence supported the idea that America’s recovery has been weak primarily because of activist government policy. He repeated this assertion about the growing body of evidence toward the end of his comments, this time providing an actual citation: this piece of commentary by former Fed Chairman Alan Greenspan. His paper, Mr Ryan noted, contained an ‘impressive regression’. And that was it; as far as we were made aware, the growing body of evidence consisted primarily of a short, lazy piece of analysis by a Fed chairman who’s most famous previous involvement in the regulatory system was his failure to rein in a dangerous explosion in irresponsible mortgage lending.
Mr Ryan then proceeded to lay out his four pillars for a strong recovery. First up were spending cuts. Government spending is generating uncertainty among investors, as are increases in the debt, he argued, and this problem must be tackled immediately. And indeed, Republicans have pushed for cuts to discretionary spending in the current fiscal year, and larger ones still in 2012. Pillar number two is regulatory reform. Big companies and banks are being choked by new regulations, many of which were put in places by new pieces of legislation some of which contained an alarming number of pages. The EPA wants to regulate carbon emissions. This all must be stopped. Regulations must be rolled back.
A third pillar is tax reform. Not a bad idea, that, but Mr Ryan added that any tax reform must include a reduction in rates. Tax increases are entirely off the table; Mr Ryan was clear about that. Not because tax increases don’t pay for themselves—he acknowledged that eliminating the Bush tax cuts would raise revenue levels. But Mr Ryan seemed to suggest that current tax rates make American businesses uncompetitive, and that because not all of the fiscal gap could be closed with tax hikes, none of it should be. A sweeping tax reform is therefore the order of the day.
And then finally, Mr Ryan said, America needs sound money. He told stories of traveling around Wisconsin and being handed pieces of currency from Weimar Germany and Zimbabwe, he remarked on how nothing was more insidious than inflation, and he declared that the Fed was making a critical mistake by keeping monetary policy loose.
I was struck hearing all this, explained in this way. Adopting these policies would be nothing short of disastrous.
The spending cuts Republicans seek for this year and next would not doom the American economy to disaster, but they would place a meaningful drag on a recovery that continues to chug along at or just under trend growth, and that’s risky. The literature suggesting that austerity can be expansionary has faced a great deal of criticism, and that literature itself suggests that expansionary austerity is most likely when interest rates are high—which they aren’t—and when the currency is allowed to depreciate considerably—which Mr Ryan opposes. Short-term spending cuts are unambiguously contractionary, and Mr Ryan wants them in spades.
I could get behind a sweeping regulatory and tax reform, provided it was done well, with an eye toward improving efficiency rather than simply trimming things back for trimming’s sake. It seems clear that that’s not what Mr Ryan is after. All the same, sweeping reforms seem like an odd short-term prescription from a guy who says that uncertainty is constraining recovery. Another attendee asked Mr Ryan about this seeming tension, and his response was essentially that a sweeping reform won’t happen because Democrats still hold the Senate and the presidency. In other words, if Republicans had their druthers, they’d be free to enact a potentially destabilising—according to Mr Ryan’s view of the economic situation—set of reforms. Only Democratic reluctance is sparing the economy this horror.
And then there’s the money issue. It wasn’t so long ago that both parties supported countercyclical monetary policy. Top economists from across the ideological spectrum—from Milton Friedman to Christina Romer—point to tight monetary policy as a major factor exacerbating and prolonging the Great Depression. Mr Ryan claims he’s worried about inflation. But based on what markets are saying, 10-year expected inflation is just 1.94%. That is, according to the Cleveland Fed, ‘the public currently expects the inflation rate to be less than 2 percent on average over the next decade’. Mr Ryan said that he wished the Fed would drop its mandate for full employment and focus on price stability. Well, current inflation expectations indicate that tighter policy would maintain inflation below the Fed’s implicit target of around 2%, which is the level of inflation most rich-country central banks have decided is conducive to stable prices and growth. Moreover, Mr Ryan’s suggestion that high inflation is imminent cuts directly against the prevailing market view. That’s a fine belief to have, provided you aren’t spending your time arguing that markets know best and need to be free to guide the economy.
Mr Ryan’s views are at odds with economic history and at odds with prevailing views of economic policy. They’re untethered from economic reality. And no matter how charmingly he delivers them—and he is an engaging, funny speaker—they’re a path to disaster. Ryanomics is a recipe for the return of recession.
(Via Free exchange.)