Friday, August 17, 2012

"A slick salesman..."

Economist Mark Thoma @ NY Daily News:
When Mitt Romney introduced Representative Paul Ryan of Wisconsin as his running mate in the presidential election, he emphasized that Ryan “has become an intellectual leader of the Republican Party” on economic policy. But a close examination of Ryan’s monetary and fiscal policy proposals makes it hard to understand why he is held in such high regard.
Ryan’s views on monetary policy are, by his own admission, heavily influenced by Ayn Rand’s Atlas Shrugged. Concerns about inflation – currency debasement – are prominent in Rand’s novel, and those concerns drive Ryan’s monetary policy proposals. For example, Ryan introduced legislation in 2008 to replace the Fed’s dual mandate to stabilize both inflation and employment with a single mandate to stabilize inflation. Under Ryan’s proposal, the Fed would ignore employment when making policy decisions.
Ryan’s lack of concern over employment is disconcerting, but it’s at least possible to find economists who support a single inflation mandate for the Fed. It’s much harder to find anyone who will support another inflation prevention policy Ryan has proposed, a policy similar to a gold standard.
Despite decades of stable inflation, and criticism from many people that the Fed is too worried about inflation and not worried enough about unemployment, Ryan does not trust the Fed to keep inflation under control. Instead, he has proposed tying the value of the dollar to a basket of commodities. The Fed’s only job under this policy is to keep the value of the dollar in line with the value of the commodities in the basket. The pursuit of any other goal, such as stable employment, would interfere with this mission.
But this is not a recipe for price stability as Ryan claims. Every time the price of oil, corn, or other commodities in the basket change due to ordinary fluctuations in supply and demand, which is often, the value of the dollar would change as well. This would make the value of the dollar even more unstable and uncertain than it is now, and we’d also lose an important tool in the fight against unemployment.
And that’s not even his worst proposal for monetary policy. That title goes to his call to raise interest rates to cure the recession because “there’s a lot of capital parked out there, and we need to coax it out into the markets.” This shows a serious misunderstanding of what’s holding the economy back. If interest rates are increased, the higher return on financial assets will cause more people to provide funds to financial markets, but the supply of funds isn’t the problem. As the vast amount of “parked capital” highlights, there’s ample supply already. The problem is insufficient demand, and Ryan’s policy of raising interest rates makes it more expensive for firms to invest, and more expensive for consumers to purchase durables like cars and houses. The result would be a further decline in demand, a fall in output and employment, and even more parked capital than before.
Okay, so Ryan is no genius when it comes to monetary policy. But what about fiscal policy and the budget? Isn’t that where he shines? Not really. The individual elements in his budget proposal are attractive to various constituencies, and telling people what they want to hear is a sure way to get anointed as a budget wizard. But when all the individual pieces are put together, the proposal simply doesn’t add up. As an analysis by the non-partisan Tax Policy Center shows, revenues would be far lower than Ryan claims, and that would lead to large deficits. The problem is that Ryan relies upon unrealistic assumptions about the revenue that can be gained from closing tax loopholes, and about the degree to which tax cuts pay for themselves. To give you some idea of just how outlandish his assumptions are, his original projections assumed that the unemployment rate would fall to 2.8 percent under his policies. When challenged on this assumption, it was dropped, but amazingly none of the other numbers changed. And to top it off, the policies that he proposes aren’t even novel. For example, his proposal for Medicare vouchers, a centerpiece of his budget policy, was made by Newt Gingrich in 1995.
This is not a serious, well thought out, creative proposal from someone thoroughly familiar with the numbers. This is what you’d expect from a flimflam man who hopes you don’t ask too many questions.
Paul Ryan is a slick salesman, no doubt about that, but his reputation as a policy wonk is undeserved.

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