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Ron Paul’s economic plan

at 08:30 AM ET, 10/18/2011

Ever wonder what Ron Paul’s America would look like? Then read the budget outline that Paul released as part of his 2012 presidential bid. It promises to cut $1 trillion during his first year in office, balance the budget by 2015, withdraw us from all foreign wars and eliminate five Cabinet-level agencies in the process. Economists across the political spectrum say the impact of such drastic government spending cuts would be majorly disruptive and harmful to the economy in the short term.


(AP)
“At the scale he’s talking about, it’s unlikely you could have an immediate reduction in government without hurtling the economy into recession,” says Kevin Hassett, economic policy director for the American Enterprise Institute and chief economic adviser to John McCain’s 2000 presidential campaign. Hassett maintains that Paul’s plan for a limited government “would be really positive” in the long run. But he also believes that there would be better means to achieving that end. “I think that you could achieve his long-run objectives with less short-run disruptions,” he concludes.

By reducing the deficit from more than $1 trillion to $300 billion in just a year, Paul’s plan would upend the economy at a time when it’s already fragile, says Gus Faucher, director of macroeconomics for Moody’s Analytics. “That much deficit reduction in one year is going to be a huge drag on the economy . . . the reduction in spending is much greater than cuts in taxes,” says Faucher. “We’re seeing that impact in Europe right now, where severe fiscal austerity has caused big problems for the European economy.” While long-term deficit reduction is important, legislators need to make sure that the economy is strong before major cuts take effect, he adds, calling Paul’s plan “much more ambitious” than other Republican proposals to date. By comparison, the Congressional supercommittee is required to cut $1.5 trillion over a ten-year period—a feat Paul wants to accomplish in a little more than one year.

Liberal economists were even more dire in their assessments of the Paul budget. “This is almost having the economy fall off a cliff,” says Dean Baker, co-director of the Center for Economic and Policy Research, estimating that cutting $1 trillion in 2013 would prompt the unemployment rate to jump by 3 percentage points. Even if the $1 trillion in cuts were done over two or three years’ time, there would still be double-digit employment, Baker concludes. “This will make it extremely hard to balance the budget, since if the unemployment rate goes to 11 or 12 percent, then the budget picture will look much worse. If his response is still more cuts, then who knows how high he can get the unemployment rate.”

Michael Ettlinger, vice president for economic policy at the Center for American Progress, said Paul’s cuts would destroy the social safety net, as the plan would turn Medicaid and other low-income entitlement programs into block-granted programs that would depend on discretionary appropriations. “Your kids would be out of school, working or begging,” he concludes.

The Paul campaign rejected such claims as “exactly the opposite” of what would come to pass—“an example of the old Keynesian thinking that got us into our current mess,” according to Jesse Benton, a campaign spokesman. “Deficit spending and debt that are crushing our economy and will destroy our country if we do not take bold action.” Benton added that block-granting entitlement programs would actually save them, not shred them. “We face a bankruptcy and a major financial crisis that will destroy the entire social safety net unless we take action.”

The program would also turn Social Security, veterans’ benefits and Medicare into voluntary programs that would allow younger workers to opt out of the entitlements, while fulfilling promises to present-day seniors and veterans. Both liberals and conservatives such as Baker say such changes could destabilize Social Security. “We will likely see a substantial number of young people take that option, especially if he scares them enough that it won’t be there,” says Baker. What’s more, “you will have high-income earners who opt out, and the people you have left are going to be low-income, which could cause problems” in terms of financing, explains Faucher, of Moody’s. All this could complicate Social Security’s long-term fiscal health, as it could end up losing a lot of revenue.

An opt-out option for Medicare would present similar problems, AEI’s Hassett says. He agrees that Medicare reform is critical to achieving long-term deficit reduction but thinks that an opt-out would destabilize the program. “The system taxes young people to pay for benefits for old people.  If young people opt out, who will pay for the benefits?” Hassett says. The Paul campaign insists, however, that the plan provides Medicare with a secure future without harming present-day beneficiaries. “This budget is about priorities, and we have to honor our promises to our seniors. Our goal is to fix our debt crisis to preserve our system and make Medicare work better in the future,” Benton says.

On the whole, though, economists say they aren’t surprised to see the Texas congressman  come out with such a plan. “Ron Paul’s role in the campaign so far has been the ideologically pure libertarian, and his proposal meets expectations, I would say,” Hassett says.

Related Links:

More details on Ron Paul’s budget plan

Ron Paul: the blogosphere’s front-runner

Ron Paul’s Republican problem

 
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