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Republicans Hope, but Don't Change

Politics / US Politics Aug 18, 2012 - 10:55 AM GMT

By: Peter_Schiff

Politics For much of the past few generations, the debate over balancing the federal budget has been a central feature of every presidential campaign. But over time, the goalposts have moved. As the amount of red ink has grown steadily larger, the suggested time frames to restore balance have gotten increasingly longer, while the suggested cuts in government spending have gotten increasingly shallower. In recent years, talk of balancing the budget gave way to vague promises such as "cutting the deficit in half in five years." In the current campaign, however, it appears as if the goalposts have been moved so far that they are no longer in the field of play. I would argue that they are completely out of the stadium.



It says a great deal about where we are that the symbolic budget plan proposed last year by Congressman Paul Ryan, the newly minted vice presidential nominee, has created such outrage among democrats and caution among republicans. The Obama campaign warns that the Ryan budget is a recipe for national disaster that will pad the coffers of the wealthy while damning the majority of Americans to perpetual poverty. The plan is apparently so radical that even the Romney campaign, while embracing the messenger, is distancing itself from the message (it appears that Romney wants to bathe himself in the aura of fresh thinking without actually offering any fresh thoughts). In interview after interview, both Romney and Ryan refuse to discuss the details of Ryan's budget while slamming Obama for his callous "cuts" in Medicare spending.

(It is extremely disheartening that the top point of contention in the campaign this week is each candidate's assertion that their presidency could be the most trusted not to cut Medicare. Mindful of vulnerabilities among swing state retirees, Republicans have also taken Social Security cuts off the table as well. What hope do we have of reigning in government spending when even supposedly conservative Republicans refuse to consider cuts in the largest and fastest growing federal programs?)

So what was the Ryan Budget's radical departure from the status quo that has caused such uproar? If enacted today, the Ryan budget would so drastically upend the fiscal picture that the U.S. federal budget would come into balance in just... wait for it.... 27 years! This is because the Ryan budget doesn't actually cut anything. At no point in Ryan's decades long budget timeline does he ever suggest that the government spend less than it had the year before. He doesn't touch a penny in current Social Security or Medicare outlays, nor in the bloated defense budget. His apocalypse inducing departure comes from trying to limit the rate of increase in federal spending to "just" 3.1% annually. This is below the 4.3% rate of increase that is currently baked into the budget, and farther below what we would likely see if Obama's priorities were adopted.

Because there are no actual cuts in his budget, Ryan hopes that fiscal balance can be restored by 2040 only because he assumes that we achieve returns to the annual economic growth that are equal to levels averaged for much of the last century. In other words, he sees slow growth of the last four years as the aberration, not the new normal. As with all other government projections, this is on the extreme optimistic end of the spectrum. In truth, there is nothing on the horizon that should make anyone think these growth figures will be achieved. America's crushing debt, burdensome regulations, political paralysis, and nagging demographic problems bode poorly for the return to trend line growth anytime soon. More likely, based on the speed towhich republicans will shrink from popular backlash, is that the "cuts" that Ryan proposes will be abandoned as soon as they prove to be politically unpopular.

In fact, among his other overly-optimistic assumptions are that the unemployment rate falls to 4% by 2015 and an unprecedented 2.8% by 2021, another real estate boom begins almost immediately, and there is an average inflation and ten-year treasury rate for the next ten years of 2.04 and 4.15 respectively. These are assumptions that would make even the most rabid economic cheerleaders sit on their pompoms. Despite these pollyannish economic growth and record low unemployment projections, Ryan still assumes interest rates will remain near historic lows and that none of the cheap money showered onto the economy will ever find its way into the CPI. In other words, it's the economic equivalent of winning the lottery twice in a row while failing to account for the higher taxes that accompany such good fortune.

Like all other government forecasters, Ryan never considers how rising interest costs on the many trillions of dollars of outstanding government debt holdthe potential to completely upend budget projections. For more on this, see my recent commentary "The Real Fiscal Cliff."

More likely, the continued accumulation of unsustainable levels of debt under the Ryan plan will eventually cause our creditors to lose confidence in our ability to repay. It will cause interest to spike, the economy to tank, unemployment to soar, spending to rise, revenues to decline, and the budget deficit to spiral out of control. Rising interest rates hold the potential to spark a sovereign debt and currency crisis that willrender the entire plan irrelevant anyway.

While I appreciate that Ryan has the courage to take a position at the vanguard of his party in the campaign for fiscal responsibility, the modesty of his plan is just the latest reminder of how utterly divorced from reality Washington politicians remain. Like all of his brethren, Ryan is pinning his budget battling plans on the pain free "grow your way out of it plan." But as long the government consumes so much of the nation's productivity, the conditions to create that growth will never occur. Hope is not a strategy.

Peter Schiff

Euro Pacific Capital
http://www.europac.net/

Peter Schiff, CEO of Euro Pacific Capital and host of the nationally syndicated Peter Schiff Show, broadcasting live from 10am to noon ET every weekday, and streaming at www.schiffradio.com. Please feel free to excerpt or repost with the proper attribution and all links included. 

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rudy-Avizius
19 Aug 12, 16:10
treating SYMPTOMS, not ROOT CAUSES

Picture this scenario:

You are experiencing severe abdominal pains so you visit with your doctor. Your doctor announces that he will write you a prescription for a pain killer. Of course you quickly recognize that the doctor is treating the symptom of your problem, but not the problem itself. Unfortunately because the doctor is treating the symptoms, not the root cause your pains continue.

Unfortunately those who try to treat the budget deficit, are also only treating the symptom, not the root cause of the problem. The root cause is the TRADE DEFICIT!

As the trade deficit grows, capital is flowing out of the country. Unemployment is increasing which raises government spending, while decreasing tax revenues. Food stamps and other assistance increase also raising government spending. Fix the causes of the trade deficit and the budget deficit will start to correct itself.

Austerity will not fix the problems. It didn't work in Europe and it will not work here either.


stevehudson
20 Aug 12, 14:24
not public sector, but rather financial sector

Experts like Phd economists Steve Keen in the book Economics Debunked and M. Hudson in The Bubble and Beyond would disagree completely with Nadeem's analysis. Politicians print debt? The Fed does it in the U.S., and it is owned by the banks, and unsurprisingly all the money goes to the banks! Very little if any trickles down to "voters" to buy crap from China. The voters ain't doin so good, with 20%+ real unemployment, and not much sense callin em "voters" since they don't really have any choice, in the US anyway. The public sector is in fact not unproductive, providing as it does much essential infrastructure. The sector that is truly unproductive, and worse -- parasitic on the economy -- is the FIRE sector -- finance, insurance, real estate -- the rentier, something-for-nothing sector. Retaxing the FIRE sector, rebooting the nation to pre-1980 tax-wise, plus definancializing and reindustrializing is the ticket, not your economic downward death-spiral of austerity.


Nadeem_Walayat
20 Aug 12, 23:08
The Banking Sector is Public

Hi

The banking sector is functioning as the public sector with unlimited tax payer funds being thrown at it, if it were private then these banks would have gone bust.

The politicians print debt aka budget deficit, the central bank prints money to buy the debt.

The public sector is unproductive because of lack of market competition for services as a consquence of tax payer subsidy.

Printing debt causes inflation, which is why we are in an exponential inflation mega-trend.

I agree the financial sector should be rebooted, where bankrupt banks actually do go bankrupt instead of beign bailed out by corrupt politiicans. However you are not going to get reindustrialisation via the public sector, for that to be achieved you need to reduce the public sector so that the private sector is able to prosper without being taxed to death. THAT IS THE ONLY ANSWER, To become more capitalist not more socialist.

Best

NW


stevehudson
25 Aug 12, 08:57
mere ideological assertions

Because the fascist government pays for the fraud-based losses of the private banks does not make them public. What we have is something far worse than private ownership or public ownership, namely private ownership that controls and uses the government, stealing its funds,devastating the economy,and enslaving the population with debt.

Beyond that everything in the above "the banking sector is public" comment, is, like the title,completely wrong -- not corresponding to reality and mere ideological assertions.


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