Forget the Politics, the Numbers Don't Add Up

Late Friday night, a budget compromise was finally reached between the White House, Senate Democrats and the GOP-held House of Representatives.  The result was more than $38 billion in cuts for fiscal 2011, and the political brinksmanship involved in hammering out this agreement just barely avoided a shutdown of the government.  While federal workers and military personnel breathed a sigh of relief - and hardcore right wing policy riders targeting abortion and environmental regulation were left out of the deal - the real fight is just about to start: the budget for 2012.

The Republican plan has been assembled by the Chairman of the House Budget Committee, Representative Paul Ryan of Wisconsin. The GOP budget, tagged The Path to Prosperity, is unquestionably radical - it's author has said of it, "This isn't a budget. This is a cause." - but it is also a deeply flawed and reckless delusion spawned directly from the works of Mr. Ryan's hero, Ayn Rand.  This is perhaps unsurprising, as Rand's philosophy of Objectivism, embodied in her novel Atlas Shrugged, can probably be best described as follows:

There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.

Despite all manner of effort to bolster Paul Ryan's credentials - Charles Krauthammer recently praised him as "super wonky" and David Brooks effused that The Path to Prosperity is the "standard for seriousness" - there are a host of very big and very obvious problems with the Republican 2012 budget plan.  Worse, for Mr. Ryan and the GOP, they aren't even philosophical, they're quantitative, and that's pretty troubling for a document that its author has repeatedly claimed is fact-based and doesn't rely on accounting tricks or gimmicks.

First and foremost, Mr. Ryan's plan calls for cutting taxes - surprise! - for the wealthiest Americans, dropping the top marginal tax rate from 35% to 25%.  The last time the top marginal rate was that low was 1931, before the advent of Social Security, Medicare, or Medicaid.  What is more troubling however, is that somehow, with this rate cut in place and no reductions in defense spending, Mr. Ryan claims that public revenues will be held steady, while offering no specifics for how such a thing can be accomplished.  The immediate answer from conservatives of course, is that more money in the hands of the "job creators" will cause them to hire more people, growing the economy, but that simply takes us back to the fallacy that lowering taxes will somehow increase federal revenues.

The problem with this idea - besides that obvious flaw - is that the unemployment figures used in Mr. Ryan's plan to illustrate the effects of all this hypothetical hiring are, flatly, ridiculous. Rather than rely on the non-partisan Congressional Budget Office (CBO) for his assumptions and modeling, The Path to Prosperity instead rests on numbers from the ultra-conservative Heritage Foundation, and the Heritage Foundation claimes that the result of the Republican budget would be 2.8% unemployment by 2021!  (Interestingly, this data was recently scrubbed from their website, as can be seen here.  H/T Paul Krugman.)  For perspective, unemployment in the United States at the end of the Clinton Administration's 8-year expansion was around 4%, and any downward trend wasn't starting from  a point nearly as high we're experiencing today.  More broadly, jobless rates haven't been under three percent since the post-war boom of the 1950s.

MIT economist Jonathan Gruber has called the Heritage Foundation numbers "insane", and using Congressman Ryan's Heritage data, projections for unemployment would take this extremely-hard-to-credit shape:

But what if the Heritage Foundation is right?  Do they have a solid track record we should take into consideration?  Indeed, they are tremendously consistent - just not in a good way.  In 2001, they analyzed what they believed the effects of the Bush tax cuts would be, and came up with an incremental 1.6 billion jobs over a decade.  What actually happened was the worst jobs creation record of any president in the last 60 years, with employment growth below even what was claimed would occur if no tax cuts took place:

As tranparently wrong as these assumptions are, however, the capper comes with regard to health care.  Under the Republican plan, Americans currently younger than 55 would not be eligible for traditional Medicare benefits, receiving government insurance vouchers instead.  The Congressional Budget Office reviewed The Path to Prosperity's  health care provisions, however, and found that "Under the proposal, most elderly people would pay more for their health care than they would  pay  under  the  current  Medicare system."  Worse, the effects would go far beyond just what senior citizens pay in health care costs.  The Economic Policy Institute's analysis of the GOP budget found that the side-effects of its changes to Medicare would actually cost the country 2.9 million jobs:

Over the next five years (during which time CBO projects that the economy will still be below potential), Chairman Ryan's Medicaid proposal would cut the program by $207 billion, which includes both eliminating the Medicaid expansion under the Affordable Care Act and even deeper cuts to the Medicaid program. Using a standard macroeconomic model that is consistent with private- and public-sector forecasters, we find that a $207 billion cut would result in a loss of 2.1 million jobs over the next five years, or 2.9 million full-time equivalent jobs... These figures are in job-years, which refer to a job held for a single year, meaning that five jobs lost in a single year is the equivalent to one job lost over five years.

Furthermore, the job loss would overwhelmingly be in the private economy. Medicaid has very low overhead, as about 96% of the program’s funds go toward benefits which are spent in the private sector. Assuming the 96% ratio is relatively constant across states (or at least not systematically biased in one direction), Medicaid cuts of this magnitude would result in the loss of just under 2 million private-sector jobs, or 2.8 million full-time equivalent jobs.

This estimate is conservative for two reasons. First, because Medicaid is a program that generally benefits low-income households - who out of necessity are much more likely to consume rather than save - a larger-than-normal share of these cuts will undermine demand in the private sector. This suggests that the cut to Medicaid would have an even larger impact on the economy than we estimate here. Second, it is likely that an even larger share of the job loss would fall on the private sector because overhead includes not only labor but equipment and supplies as well, which are provided by private companies.

In other words, if 2.8% unemployment looked comically optimistic before, contemplate for a moment how ludicrous it is if 2.9 million net jobs are sacrificed while trying to get there.

Depsite media-political bubble claims of "bravery," "seriousness" and a lack of gimmickry, Paul Ryan's 2012 Republican budget proposal is - politics aside - a mathematical joke.  The assumptions it uses and the conclusions it reaches are clearly untethered from reality, it is bereft of specifics on spending cuts and revenue increases, and - worryingly for the Chairman of the House Budget Committee - the numbers simply do not add up.