I just read an editorial from August 13 by Stephen Moore called "The Kempian Roots of Ryanomics". As I made obvious in a previous article on Stephen Moore , "Stephen Moore is Obnoxious", I am not a fan. The editorial basically is trying to apply a "litmus test" to whether Ryan is a "real Republican" ala Kemp/Reagan. About Mr. Ryan, Mr. Moore wrote, "More than anyone else in Washington in recent years, Mr. Ryan has adopted the Reagan-Kemp message."
Stephen Moore wrote:
Mr. Ryan has made clear in his budget and has educated his congressional colleagues that with a growth rate of less than 2% you can never cut government spending or raise taxes enough to balance the budget. At what is now the explicit Romney-Ryan target of 4% annual growth, deficit reduction and fiscal stability would be achievable, and with much less pain and suffering. When I recently asked Mr. Ryan whether 4% growth was reasonable, he responded: "It should be easy. Under Reagan we had growth rates of 7% and even 8%."
The first part is, of course true. The government would have a very hard time balancing the budget as long as the economy remains mired in a Lesser Depression (as we currently are), but Ryan's statement about growth rates under Reagan are misleading. Were growth rates of 7 or 8 percent sustained during the period in question? Real Gross Domestic Product grew above 7 percent in 3 quarters on a year-on-year basis. This is evident in the following graph:
Yes, there was a brief period where growth was above 7%, but what was going on? It was the recovery from a policy-induced recession!!! The Volcker Federal Reserve intentionally pushed the U.S. economy off a cliff by raising interest rates. Frankly, the results were not absolutely awful, although it did result in a nasty recession. Look below for graphs that illustrate the recession and the interest rate cuts that resulted in recovery:
Frankly, in the current state of the U.S. economy, we badly need a recovery to this Lesser Depression. Back in the 1980s, it came from the Fed expanding the money supply and dropping interest rates. Today, it's a bit complicated (with a large overhang of private sector debt and an anemic, at best, housing recovery), but looser monetary policy could help. As many have pointed out, including Milton Friedman, interest rates are an unreliable measure of the "tightness" of monetary policy. Right now we have interest rates near zero, but it simply isn't enough. That being said, Paul Ryan's great answer to the U.S. economy's troubles in 2009 were to raise interest rates (as I pointed out in a previous post), for which Mark Thoma labels him a "policy idiot".
Stephen Moore tries to do a little sleight-of-hand in the article (as usual), by saying that "faster growth will improve the outlook immeasurably and quickly—as we learned in the 1980s and '90s". What is he trying to get away with? Look at the following graph and try to figure it out:
Stephen Moore is trying to confuse us... because the budget deficits as a percent of GDP were large and persistent in the 1980s under Reagan and Bush. Yes, it went down to about 3% in 1987-1989, but that's as low as it went since the beginning of the Reagan years. Let's look at the details of how those deficits came to be in expenditures and revenues as a percent of GDP:
Clearly this measure of spending and the deficit above do not line up, but what we see is a big increase in spending as a percent of GDP in the first 2 years of the Reagan Administration, then a decrease to about where it was at the end of the first year almost until the end of his term in office. Further, we see that revenues fell as a percent of GDP in the first 2 years and stayed at roughly that level of revenue/GDP until his last few years in office. Where is the revenue boom from the tax cuts? Nevermind that... Paul Ryan touts his desire to bring spending to just 20% of GDP, but that wasn't done in the Reagan years, so how far does he really want us to turn back the clock? Paul Krugman says Ryan wants us to go back to the times of "Silent Cal" Coolidge.
Once more (no pun intended), I am annoyed by an editorial from the Wall Street Journal by a staggeringly awful writer (and even worse economic thinker). Paul Ryan: learn something about monetary policy and, until you do, take the nickname of President Coolidge to heart.