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 is CEO
of Euro Pacific
Precious Metals, a
gold and silver dealer selling reputable, well-known bullion coins and bars
at competitive prices.
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