Will America Become Detroit, Part 3: Paul Ryan, Rambo, and J. Alfred Prufrock

"We fail far more often by timidity than by over-daring."
- Ray Stannard Baker

"Do I dare eat a peach?"
- From "The Love Song of J. Alfred Prufrock" by T. S. Eliot

The most controversial deficit reduction plan was put forward by Wisconsin Representative and Vice Presidential candidate Paul Ryan. In 2008, he introduced H. R. 6110, entitled "Roadmap for America's Future Act of 2008", as a plan to balance the budget and create jobs. This proposal has garnered both high praise and scathing condemnation.

• Democratic co-chair of President Obama's National Commission on Fiscal Responsibility and Reform called the Ryan plan “sensible, serious . . , and honest”.
• In April at an Associated Press Luncheon, President Obama denounced Ryan's plan as "nothing but thinly-veiled Social Darwinism."
• New York Times columnist David Brooks wrote "Today, Paul Ryan, the Republican chairman of the House Budget Committee, is scheduled to release the most comprehensive and most courageous budget reform proposal any of us have seen in our lifetimes"
• Even the U.S. Conference of Catholic Bishops have blasted the Ryan plan, writing that it fails to meet a basic moral test.

As is often the case, the truth lies between the extremes. Paul Ryan's plan would not produce a future ripped from the pages of Oliver Twist. On the other hand, the plan would also not succeed in its primary mission of eliminating the deficit. The reason why the Ryan proposal would fail is that, contrary to what both his supporters and critics contend, this plan is actually too timid to be effective. Contrary to popular rhetoric, the senator who is likened to Rambo is much closer to J. Alfred Prufrock. 

Bill Clinton, Social Darwinist?

One of the more popular attacks on the Ryan plan is that it would cut spending much too quickly, threatening our fragile economic recovery. President Obama even went so far as to call the plan a "prescription for decline". Everyone agrees that spending cuts are inevitable, but Obama asserts that these cuts must be done more gradually to preserve both the safety net for the poor and this nation's greatness.

This argument focuses its line of attack on the notion that Ryan's plan spends considerably less than recent federal budgets, a major talking point for the plan's proponents. So how does the Ryan plan compare to federal spending levels, or for that matter, how does it compare to Obama's proposal? An analysis of the numbers shows how Washington's definition of a cut differs from the rest of the nation: the only sense in which Ryan's budget for the next 10 years can be considered a "cut" is in the sense that spending will not increase a fast as politicians originally planned:

• Even after adjusting for inflation, Ryan's plan for the each of the next ten years would be 46% higher than Bill Clinton's last budget; and
• In this 10 year period Ryan plan spends only 5% less than Obama's proposed budget.

If Paul Ryan is a Social Darwinist, wouldn't that make Bill Clinton one as well? And if we are to believe that the Ryan plan would put us on the path to decline, why should we have any confidence in a plan that only differs from the Ryan by only 5%?

Voting for the Party That Will Throw Granny Off a Cliff

The most contentious issue with the Ryan Plan is the entitlement program reforms. As an alternative to the current defined benefit program, Ryan proposed block granting the program, and an opt-out for younger people who wish to vest in private retirement plans instead of Social Security and Medicare.

The imminent debt crisis has finally forced a senator to touch the "third rail" of American politics. And predictably, his opponents have played upon the public's fear of changes in these popular programs. The Agenda Project produced an infamous ad depicting Paul Ryan throwing an old woman off a cliff. The Romney campaign responded by producing its own ad, attacking Obama's plans to divert Medicare "savings" to pay for Obamacare. So which party will really preserve Medicare as we know it?

The honest answer is neither party: no matter who wins the elections here and in the next few decades, our entitlement programs as we know them will come to an end, period. These programs are completely and utterly unsustainable. As early as 2008, the trustees reports for Social Security and Medicare place their unfunded liability (that is, what they are obligated to pay out minus anticipated revenue) at $101 trillion. Given that our annual GDP is around $14 trillion, this is a hole that even a 100% tax rate cannot fill. A health care economist put the Medicare situation in far stronger language (warning: possibly NSFW) here.

Ryan's plan is probably insufficient to fix the entitlement crisis, but it is better than the current administrations' non-plan. In reality, the most likely outcome for the entitlement programs is that they will become means tested. But saying that is not politically popular (ask Ron Paul and Gary Johnson), so the two major party candidates will continue to argue over which one will push granny off the cliff.

Watching the Glaciers Speed By

For all the hoopla about the rapidity of the Paul Ryan's cuts, what is amazing is how agonizingly slow this plan is in terms of solving the debt crisis. CBO projections show that the plan won't even produce a balanced budget until 2040. Even this is based on optimistic assumptions, such as that no other national crises will arise in the next 28 years, and that congress will remain committed to this plan for nearly three decades. Part of the problem is that Senator Ryan has his own sacred cows: he leaves the budgets for defense and the war on terror untouched. Given the severity of the debt problem, everything should be on the table. The Pentagon and the Office of Homeland Security both have a lot of waste that could be eliminated.

To really fix the debt crisis, what is needed is a plan far more bold than the Ryan plan. But since Washington views this plan as reckless, what will actually be implemented is something weaker, and therefore even more inadequate, than the Ryan plan. This is the strongest evidence yet that no serious remedy will be attempted until it is too late, i.e. in financial terms, America will become Detroit.

What we are facing is nothing short of default of our nation. Granted, the consequences of this will be terrible: treasury bonds are frequently purchased because of their reputation for stability. Many who are depending on these bonds, including some who were dependent on them for their retirement, will be devastated. But there will be a few upsides to this crisis, as will be detailed in the next installments.

Will America Become Detroit, Part 2: Popular Solutions That Are Bound to Fail

"For every complex problem there is an answer that is clear, simple, and wrong."
- H. L. Mencken

"In the book of life, the answers aren't in the back."
- Charlie Brown, from Peanuts by Charles M. Schulz

The U.S. government debt crisis has garnered enough attention that pundits from across the political spectrum have weighed in on the issue by proposed solutions that are pleasing to their core constituencies. As we look at these proposals, it is easy to see why they are crowd pleasers, but they all have one serious defect: they won't solve the problem.

Don't Worry, Be Happy: S&P Says We're OK

One popular solution to America's debt crisis is to contend that the problem does not really exist. CNN anchor Fareed Zakaria summarized this point of view as "America is not Greece". Debt crisis skeptics content that America is prosperous, competitive, and has a high bond rating, hence she should have no problem borrowing money at reasonable rates for the foreseeable future.

The problem with debt crisis denial should have become clear with the financial crisis of  4 years ago: bond ratings, along with other measures of credit worthiness, can change blindingly fast. Standard & Poor's rated Lehman Brothers AAA 72 hours before they filed for bankruptcy. And as late as December of 2009, Moody's rated Greek bonds a high A, only to drop that rating to Junk level in the following months. So three years ago, we could have argued that "Greece is not Greece"!

The ratings from firms such Moody's, Fitch, and S&P are merely numerical measures of human trust in the institutions being rated, hence they can change just as quickly as our emotions change. If creditors change their opinion of American credit worthiness, the ratings may change even faster than they did for Lehman Brothers and Greece, due to one disquieting fact in the back of investors' minds: the U.S. government is too big to be bailed out by anyone.

Denial of the debt problem is a temporarily comforting, but ultimately dangerous, solution. One needs to look at the Motor City to see how it plays out. America may not be Greece, but it may very well be Detroit.

Eat the Rich!

Michael Moore, among others, want us to balance the budget by raising taxes on the rich. This method has tremendous appeal, for everyone assumes that "rich" means "people who make more money than me". Wouldn't it be great if the debt could be paid off purely by stereotypical Thurston Howell III millionaires who need only sacrifice a few yachts and mansions?

Michael Moore's "Eat the Rich" solution plays well, but would it actually fix the problem? Michael Moore doesn't run the numbers, but Veronique De Rugy at George Mason university has. Her study of historical U.S. revenue data, from 1930 to 2010, shows that the government has generally has been unable to raise more than 19% of the GDP in taxes. The few times we have been able to raise 20% of the GDP in taxes has been a few years at the peaks of boom cycles. This data include the Halcyon days of the 1950's, when the highest federal tax bracket was over 90%. In short, our government is already raising close to the maximal amount of money it can raise, no matter what we do with rates.

Upping the tax rates on the highest earners can have some rather nasty negative consequences. The rich are not all Thurston Howell III clones; they also include some of the world's best developers and entrepreneurs. Excessive taxes might encourage these people to move elsewhere, and the economic activity that they would generate will move with them. This happened in 1960's Britain, where 95% tax rates caused the "brain drain", where the best British minds went overseas to protect their wealth. The "brain drain" phenomenon even inspired a Beatles song.

Well, desperate times call for desperate measures. Maybe we need to be even tougher on the rich than America was in the 1950's or Britain was in the 1960's in order to raise the money we need. Again, this scenario does not hold up once you run the numbers. Fellow blogger iowahawk computes what we could raise by the most extreme "Eat the Rich" tax schemes, including taxing 100% of all income above $250K, confiscation all the wealth of America's richest families, and all the profits of our largest companies; he finds that even these most extreme measures will just barely cover this year's budget, with no hope of covering next year's.
When you do the math, it turns out that the only way we could possibly maintain our current level of spending would be to tax the middle class so much that they would be forced to lower their standard of living. Don't hold your breath waiting for a politician to tell you that.

Next Time

In the next FatherBrain post, we look at the controversial Paul Ryan plan (I think Sen. Ryan had his first name legally changed to "controversial"). The usual complaint is that this plan cuts spending too sharply. This post will make the case that the real problem with the Ryan plan is that it does not cut enough.