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Paul Ryan's 'Path to Prosperity' Is Really a Bad Trip on the Road to Economic Ruin

Your guide to Ryan’s irresponsible budget fantasies and the lessons of economic history he missed.
 
 
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Photo Credit: AFP

 

Vice-presidential hopeful Paul Ryan has a giant liability for someone hailed for his economic vision: He knows next to nothing about the facts of economic history.

Ryan is celebrated by Republicans as a “super-wonk” who "masterfully and forcefully presents his free market, fiscal-policy beliefs" and brings "serious economic firepower" to the Republican ticket. Yet in truth, his vision of America’s economic future has already been proven wrong. Ryan’s claim that he has outlined what he calls a “path to prosperity” is ridiculous. What he has concocted is a bad trip on the road to ruin.

Ryan’s “Concurrent Resolution On The Budget, Fiscal Year 2013” was submitted to the House of Representatives on March 23, 2012. In this resolution, Ryan argued that unless Congress reins in government spending and thereby reduces the federal debt-to-GDP ratio, the country is doomed. Accordingly, his budget resolution calls for an 8 percent reduction in on-budget federal spending in 2013 and a 13 percent reduction in 2014  (both figures relative to appropriate federal budget these expenditures for  2012). This Ryan claims will shrink the federal deficit from approximately 7.8 percent of GDP to 4 percent in 2014 and simultaneously shrink the size of the federal government from 23 percent of GDP to a projected 20 percent by the beginning  of 2015.

Since military spending is not reduced, these cuts must be made in other federal spending programs such as transportation, funding for scientific research and development, education, environmental protection and Interior Department diligence regarding offshore drilling in the Gulf of Mexico (remember the BP spill!), and so on. Ryan expects his proposed cuts to equal $700 billion over the next decade.

A sage has noted that “Those who cannot remember the past are doomed to repeat its errors.” So it is with Paul Ryan and his misguided slashing proposals. Ryan should have remembered how 1) the USA slid back into the great Depression in 1937-'38, after four years of slow but significant progress in reviving the American economy from the greatest depth of the Great Depression in 1931-1932; and 2) how the Reagan administration cut the unemployment rate almost in half.

The Great Depression Lesson

During his first term (1932-1936), President Franklin Roosevelt ran large annual deficits of  between 2 and 5 percent of GDP. In 1932, the federal debt-to-GDP ratio was approximately 20 percent. By 1936, the national debt had increased or approximately 40 percent of GDP, while the real GDP (adjusted for price level changes) was once again approaching the peak level it had reached in 1929. Unemployment declined from approximately 25 percent in 1932 to 16 percent officially in 1936. (Keep in mind that at the time, workers employed on public works projects financed by the federal government were listed officially as ”unemployed” thereby swelling the official unemployment rate.  If these employed public work laborers are removed from the unemployment list, it is estimated that only 10 percent were unemployed in 1936.)

Despite the improvement in the economy, many, including people in Roosevelt’s administration, wrongly feared that if the government debt-to-GDP ratio increased much further, the federal government would have to declare bankruptcy. (Shades of Greece today.) Accordingly, in 1937 Roosevelt yielded to pressure to reduce the size of the deficit as well as the debt-to-GDP ratio. Roosevelt sent a budget to Congress that slashed spending in 1937 by over 13 percent and  another 11 percent in 1938. The result was a catastrophe. From the fall of 1937 to the summer of 1938, the economy collapsed, with industrial production declining by 33 percent, GDP falling by 13 percent and unemployment rising by approximately 5 percentage points.