Paul Ryan’s “Roadmap” to save America from its looming fiscal collapse.
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Investors look at the ratio between debt and gross domestic product as a key indicator of a nation’s solvency, because it gives them an idea of how much tax revenue a country could conceivably raise to pay off its debt. In 2009, Greece’s debt-to-GDP ratio stood at 113.4 percent. According to CBO projections, the U.S. is on a trajectory to eclipse that mark in 2026, just 16 years from now. In the decades that follow, that ratio is expected to rocket to 223 percent by 2040, 433 percent by 2060, and 716 percent by 2080. But just as a reckless spender with a $40,000 salary would max out his credit cards long before running up $300,000 in credit card bills, the U.S. financial crisis would occur a lot sooner.
“You don’t get there,” explains John Cochrane, a professor of finance at the University of Chicago’s Booth School of Business. “Long before you reach debt that’s hundreds of percent of GDP…bond markets say, ‘No, we’re not doing that, we’re not lending you anymore,’ and then you have a huge crisis on your hands. Witness Greece.”
As Cochrane describes it, “You should really think of 30-year debt as stock in the U.S. government.” Investors who buy Treasury bonds are making a judgment about the government’s ability to pay them back over a 30-year time frame. For now, the U.S. still enjoys low borrowing costs because investors still believe that American leaders will eventually figure out a way to deal with the fiscal crisis. But all it would take would be for a major investor, such as China, to lose faith in the American government, and the crisis can ensue quite suddenly. There’s no “magic number” of debt-to-GDP ratio at which point investors lose confidence, Cochrane emphasizes. In 1945, for instance, the U.S. government’s ratio peaked at 121.7 percent.
“The U.S. can raise enormous amounts of money if people are convinced that there’s a plan for paying it off,” Cochrane says. “At the end of World War II, we had huge debt. Why was that okay? Well, people understood the war was temporary. They understood when the war was over we would stop spending money like crazy and there was a sense that there was a way for the U.S. to pay off that debt.”
A key difference between the U.S. and Greece, Cochrane notes, is that the U.S. can print dollars and Greece can’t print euros. What this means is that America would likely attempt to inflate its way out of a debt crisis by manufacturing money and using it to pay off the outstanding bonds. The problem is that this would produce a massive inflation that could occur on top of a stagnant economy. Furthermore, paying off lenders with devalued currency would effectively be the same as default.
“Really bad inflation actually happens when the economy is not booming, and that certainly happened in the late 1970s,” Cochrane says. “And the kind of inflation to worry about is the inflation that springs up seemingly on its own while the economy is still in trouble because people are running away from U.S. government debt.”
The only way to avert such awful alternatives is to act preemptively to reassure investors. “The important thing is convincing the markets that you have a plan, and you’re going to figure this out sooner or later,” Cochrane says.
A NATIVE OF JANESVILLE, Wisconsin, Paul Ryan developed his political philosophy reading the works of free market authors including Milton Friedman, F. A. Hayek, and Ayn Rand. After graduating with a degree in economics and political science from Miami University in Ohio, Ryan worked as a speechwriter for Jack Kemp and William Bennett at the think tank Empower America (a predecessor to FreedomWorks) and served as a legislative aide to Sen. Sam Brownback. Since winning his congressional seat in 1998, Ryan has pushed for tax reform and garnered attention as one of the leaders of the fight for Social Security personal accounts, which he tirelessly campaigned for during President Bush’s failed reform effort in 2005.
On several occasions, Ryan has drawn fire from limited-government advocates, most notably when he voted for President Bush’s Medicare prescription drug plan and for the $700 billion financial bailout. In both cases, he helped provide cover for other Republicans to vote for massive expansions of government, and opened himself up to charges of hypocrisy. But Ryan insists that viewed in context of the alternatives with which he was presented, his “reasoning at the time was sound.”
“You don’t get to take the vote you want in Congress,” Ryan laments. “Sometimes you have to take votes that you don’t want to take, but they’re the best of the two choices.”
In the case of the Medicare expansion, which by some measures added $15.6 trillion to the long-term entitlement deficit, Ryan recalled that “President (Bush) was really clear to me at the time, and I talked to his chief of staff and others as well, that he was either going to sign the House-passed bill, which had my health savings accounts amendment and real free market choice and competition like Medicare Advantage in it, or the Senate bill, which was just a big government-run program.” In the end, he voted for the bill with some free market elements. “That was the choice he gave us,” he says. “It was not a choice I liked.”
As for the Wall Street bailout, Ryan said he was convinced that it was necessary to avert a complete economic collapse, and argues that if a full-fledged depression ensued, it would have made it a lot easier for Democrats to pass their agenda and thus more devastating to the free market in the long run. “I think, more people, if we were in a depression, would be susceptible to their worldview just like much of the New Deal programs came in,” he said.
After Republicans lost control of Congress in 2006, Ryan emerged as the ranking minority member of the House Budget Committee, a position that gave him more staff to work with and the ability to ask the CBO to evaluate his proposals on a higher-priority basis.
“I had all along in my career in Congress been watching our fiscal and economic situation steadily deteriorate, and I noticed that nobody was proposing solutions for fear of political demagoguery,” Ryan says. “If that continues, it’s very clear to me that we are sleepwalking toward a fiscal crisis in which the alternatives would be ugly and we would become more of a social welfare state.”
Taking advantage of his new position, Ryan set out to find a comprehensive approach to the looming fiscal crisis. After a year of writing and running the numbers, he introduced his first version of the “Roadmap” in May of 2008, which formed the basis for his updated proposal released this year. In the intervening time period, the task became even more daunting.
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