Paul Ryan Explains Conservative Economic Theory To Ezra Klein

When I saw that Paul Ryan was doing an interview with far left-winger Ezra Klein at the WAPO, I wasn’t wild about the idea because Klein is a diehard partisan. However, I think Ryan did an excellent job of explaining conservative ideas about the economy in the interview.

Ezra Klein: It’s clear now that there’ll be no more deficit-financed stimulus coming out of Congress. And Republicans, of course, could well take the House in the next election. So with unemployment still near 10 percent, what does the GOP want to do? If stimulus isn’t the solution, what is?

Paul Ryan: I know uncertainty is a new economic buzzword, but for good reason: If we can reduce it, we’ll unlock capital. I’d revisit some of the major issues over the last year. Health care, energy, taxes, financial regulation. I’m not saying these aren’t important issues. We need to reform the health-care system. But these are the wrong solutions. I would advance different solutions with an eye toward international competitiveness and encouraging saving and investing and encouraging certainty.

Then there’s our borrowing. If you look at the deficit, the problem is spending, not taxes. Revenues will come back up. At the end of the day, I’m not a Keynesian, but even Keynesians would agree that raising taxes in this economy is a bad idea. So if it’s helpful for me to concede to that section of Keynesian doctrine, fine. Let’s do that. I really do believe that locking in budget reforms and spending control will help us in the short run by taking pressure off interest rates and monetary policy. Spending control is pro-growth in this age of sovereign debt crises.

The “uncertainty” angle is one Klein obviously doesn’t agree with, because he kept going back to it, but you’ve got to look at it from the perspective of a business owner.

When you have a government that is hostile to small business, wants to expand regulation, wants to expand government, and has raised taxes, it makes you nervous. Combine that with the fact that Obama lies constantly about what he intends to do and has, on multiple occasions, looked for ways to get around Congress and simply enact things like Cap and Trade.

Now, as a small business, these things scare the living hell out of you. You don’t know how health care reform is going to affect you, you’re afraid your taxes may be going up, and new regulations could dramatically affect your bottom line at any time. So, do you hire new employees, invest in new equipment, and expand or do you hunker down and wait for the storm to pass? A lot of them are choosing the hunker down and it’s hurting the economy.

Paul Ryan even mentioned an example,

The people who have capital are sitting on their hands: I just talked to a guy who builds nurseries and canceled three construction projects next year because he just doesn’t know what’s happening. People are just too nervous, they don’t know what the economy will be, what the regulations will be, what the taxes will be, and to the extent you can increase certainty, you can unlock some of that credit.

This is probably the rule, not the exception in our economy today and it’s probably having a much bigger negative impact on the economy than any relatively small positive impact caused by the stimulus and other government spending.

Now, Ezra argues that if Republicans were in charge and were to say, kill the health care bill, that would result in uncertainty, too. Truthfully? Not so much because businesses know Republicans are free marketers who are generally opposed to new taxes, new regulations, and expanding government (I wish that last one had been more true in the Bush years). It’s an attitude difference between the two parties and businesses are well aware of it.

Here’s more from Ryan:

Temporary stuff doesn’t work. These short-term stimulative things like rebates don’t work. They’ll pump up some money in the quarter where they occur. You go right back where you were. These short-term stimuli, which Bush and Obama did, don’t change aggregate demand. And that’s why I think we need more of an investment-led recovery. At this point, given the borrowing costs, stimulus is counterproductive.

In the real world, this has been proven again and again. These short term bills have EVERYTHING to do with politicians wanting to say, “Look what I did to help!” and nothing to do with actually improving the economy.

This comment about taxes from Ryan is also an important one for conservatives to see,

I wouldn’t say that every tax cut pays for itself. It depends on the tax. I would say that you cannot reduce the deficit with a sinking economy. The better way, in my mind, is to grow the economy as quickly as possible and control and slow spending. So keep taxes low, maximize growth and cut spending.

Do tax cuts tend to encourage economic growth? Yes. Now, liberals, are you listening? Good. Do tax revenues often GO UP, not down, after tax cuts? Yes, they do. Now, here’s one for the conservatives: Even if tax revenues go up after a tax cut, is it entirely possible they would have gone up even more had taxes not been reduced? Yes, it is. How can that be? Here’s an overly simple example to help explain it.

Imagine the economy consists of 10 people who make $10 a year and pay $1 each in taxes. That’s $10 worth of revenue per year for the government. Then, the government increases the tax burden to $2 per person. As a result, 3 people stop working/cheat on their taxes/find a way to shelter it, etc. Those people pay no taxes. Well, you still have 7 people paying $2 worth of taxes per year. That’s $14 in revenue for the government.

Again, the example is a bit too simple, but it’s worth pointing: Yes, this is a complex topic that can’t be summed up by the Laffer Curve alone.

Now here’s more on bailing out the states:

Do you worry that even if you got your spending cuts, the American economy will suffer? A report released by the National League of Cities, the National Association of Counties and United States Conference of Mayors said they’ll have to lay off 500,000 people in the next few years if they don’t get some fiscal relief. That’s 500,000 people on the unemployment rolls.

I’ve always believed we need automatic stabilizers. We need a safety net. But I think it’s becoming equally important to show we’re not going to borrow endlessly. I also think it’s a bad idea to bail out states from making the necessary decisions they need to make to increase and fix their structural deficit problems. All you’re doing then is putting their liabilities on the federal books. And I assume those jobs are mostly public sector jobs. If you focus on those, that money comes from the private sector. The money isn’t free. It’s being taken out of the private economy and pumped through the private sector. The right path is to keep the money in the private sector and so they have money to invest. We should focus on growth in the private sector, not growth in the public sector.

Exactly right. In the overwhelming majority of cases, a public sector employee losing his job and not being replaced is a blessing for the country, not a curse. The federal government also needs to be EXTREMELY reluctant to protect state governments from the consequences of their poor governance. When you reward states like California that refuse to engage in responsible fiscal behavior, not only is it unfair to the people from other states that have to pay their bills, it encourages them to continue behaving irresponsibly. States, like people and businesses, should be allowed to take their lumps.

Last but not least, let me close by going back to my favorite sentence in that entire interview from Ryan,

I just don’t see government spending as a key to growth.

Despite the fact that’s absolutely true and damn near unrefutable if you look at the economic history of this country, liberals HATE to hear it because 90% of their agenda is taking money from the American people, spending it, and then demanding that they be praised for it. Liberals will spend this country into oblivion if we let them, because their whole identity is tied up in expanding the government, taxing as much as possible, and getting as much control as they can over other people’s lives.

Long story short, Ryan is recommending that we control spending, move away from bailouts, cut taxes, repeal Obamacare, and give businesses a predictable environment again. Had Obama been doing those things, it’s likely that our economy would already be thriving again instead of still staggering along.

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