This is not an endorsement of Mr. Ryans plan, as it has many problems which I believe are insurmountable -- the least of which is that $15,000 for private insurance for a person or couple aged 65 is not enough by far. I should also add that I fully advocate 100% public health care. The US is one of only three OECD countries that does not have fully funded public health care. At the same time, we pay far more than other countries, yet have a higher infant mortality and lower life expectancy. In short, we are clearly not getting what we are paying for.Now we have more detail about the underlying assumptions of his plan. Professor Krugman has already chimed in with this analysis:
Except briefly during the Korean War, the United States has never achieved unemployment as low as Ryan and co. are claiming. The Fed believes that the lowest unemployment rate compatible with price stability is between 5 and 6 percent — that is, twice what Ryan is claiming he will achieve.What Krugman notes is the Heritage Foundation is projecting an unemployment rate of of 2.8% in 2021 (they are also arguing for an unemployment rate of, 6.4% next year, which is also highly doubtful, as I will argue later today). This is, well, laughable. But more to the point is how their analysis gets there. Their analysis assumes the following order of events: tax cuts lead to more investment, which expands the need to labor which increases hiring. Because workers face lower taxes, they have higher incomes, which increase spending (see page 3 in the report linked above). For those of you who are unfamiliar with this chain of thought, it's based on and around Say's Law. Say was a French economist who basically argued that supply creates its own demand. When business in operating, it has to pay labor (wages), lenders (interest) and producers of raw materials (which are converted into other products). All of this money going out from producers creates the income to purchase goods. However, notice one thing missing? Demand is never discussed.
The theory assumes that business is simply stimulated to produce a good out of thin air. While it is important to talk about supply and the factors the effect supply, demand is just as important; if there is no demand for a good, there is no reason to produce it. By focusing their analysis on one side of the demand/side equation, the Heritage Foundation completely misses the economic boat.
In the current environment, there is little reason to think a tax cut will lead to an increase in investment. First, capacity utilization is still very low, indicating there is currently excess capacity that business can access before adding more. Second, although consumers are spending, they are also saving more as well, indicating the demand side of the equation will be weaker. Third, China has been aggressively raising rates in hopes of slowing their economy. As China has been one of the primary drivers of the latest expansion, this does not bode well for the possibility of boosted US production.
As I previously mentioned, Ryan does deserve credit for actually talking about the real problem facing the government: medical expenses. However, the more the details of his plan emerge, the more it becomes obvious he and his backers have engaged in pure economic magical thinking rather than a serious policy debate. For more, see this from Rex Nutting at Marketwatch.
4 comments:
I don't know if Ryan can be commended at all. The idiocy of Ryan can be summarized just as easily by Marx -- no, not that one; the other one: "Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies." He saw a legitimate problem, but anyone can see that HC costs are high. He didn't make it past step 2 before royally botching it.
Remember the 90s? Things were much better then and they were using the existence of a surplus to push tax cuts. Then the recession hit, and what was their solution? Tax cuts! Health care costs too high? Tax cuts! Not that I like paying taxes, but I wouldn't trust my life to a doctor that prescribed beer for everything from sniffles to cancer. It transcends stupid, goes way beyond insulting and is still accelerating as it screams past "downright creepy" towards "this idiot needs whatever is growing between his ears surgically removed".
You mean conservatives are pushing an economic approach purely based on supply? I'm shocked! Shocked I tell you!
The theory all of these guys hold is that cutting taxes necessarily stimulates economic growth. This is provably false. Yes, at certain extremes of taxation, cutting taxes creates incentives, but we're nowhere near there. We've not been anywhere near there in three decades at least.
Ironically, low taxes DISCOURAGE investment. If you own a company and you make a profit, if that profit is taxed at a high rate, your incentive is to reinvest, not take the profit. Instead with such low rates, your incentive is to suck every last dime out of your company and take advantage of the low rates while you can.
Ultimately though if you look at rates of taxation and rates of economic growth throughout the world, there is ZERO correlation. There are countries with high taxes and high growth as well as low taxes with low growth. What matters isn't so much how high the tax rate is, it's what you do with the money you collect. If you build infrastructure, educate children, maintain health of your work force, etc, you get more value than if you spend it on blowing crap up.
The economic benefits of Ryan's plan are based on economic projections prepared by the Heritage Foundation? Are we talking the same Heritage Foundation that prepared the economic projections that were used to justify the Bush Tax Cuts? We know how well that worked out. Why is anyone even discussing Ryan's plan as if it were serious.
Roy we discuss them because that's how our political system now works. There are two sides, neither is right or wrong, there are just two of them. Anything one side says is treated with equal weight and merit to the other side no matter how batshit insane it is.
Post a Comment