I used this term to describe Paul Ryan back in my post about Romney’s selection of Paul Ryan for his running mate and it seemed to create some confusion among my more politically oriented friends. After all, Ryan has drawn up a budget that has a plan to do nearly everything the Republican base been asking the party to deliver for decades; there certainly couldn’t be anything wrong with it or anything wrong with Ryan. Or could there be?

Yes. I see some problems with both Ryan and his budget and I will get to them point by point from the most serious to the lesser.

The main problem with Paul Ryan and Republicans like him

The main problem with Ryan is that he is wrong, either genuinely or not so genuinely, on the cause of the lack of economic recovery and has politicized the lack thereof along with most of the others in the Republican Party. The basic point is that the debt doesn’t really matter in terms of economic performance except to the point that it is driven by the spending as a percent of GDP on an annual basis that impacts the economy from an efficiency point of view to the extent that it creates distortions in markets, social behavior, and so on. But it is not the main problem we face today. Monetary policy is the main problem and there is no amount of budget cutting, deregulation or tax code optimization that can fix it.

How do I know this? Well, it shows on nearly every graph that compares trend and actual NGDP over the last decade or so to present. There is a huge gap between the trend and current growth of NGDP that starts in 2008 and since the Fed has direct control over NGDP, and very little direct control over other aggregates like inflation or unemployment, it means that the Fed has capped nominal income below the trend and won’t let it expand or recover in order to influence inflation, and that has huge negative consequences for demand and employment. The Fed failed its price stability mandate in 2008 and capped nominal income at the lower level. The relation of this point to economic suffering is just as true now as when this happened in the Great Depression, a point that Milton Freidman wrapped a large portion of his scholarship around.

I am shocked at how willing Republicans have been to throw Milton Friedman’s life work and the legacy of Ronald Reagan under the bus for political points while millions are suffering financially. I don’t like the plans of the Democrats either, but it isn’t right to misdirect the public outcry because it isn’t politically expedient to be intellectually honest about the cause while millions are losing everything they’ve worked for all their lives and end up having to turn to government assistance as a matter of survival. Yes, Obama is wrong and made the problem worse. I see absolutely no reason to be dishonest about why he is wrong, but I see every reason why someone would do that if they have an agenda to advance that has some superficially plausible connection to economic suffering. If I happen to agree with some of the agenda, it is still wrong to allow the perpetuation of what seems to me to be economic civil warfare to get there; bad monetary policy has done to these people what only standing armies could do otherwise.

If you want to sample the kind of suffering that has been taking place, check out my post about Bernanke’s legacy and you can see just the tip of the iceberg. The last time we saw such dramatic suffering was back in the Great Depression, and it is at the most breathtaking level that can only be caused by monetary policy failure. Government spending and debt did not do that and it is quite a stretch to make that assumption considering that government spending wasn’t brought to such historic levels until after the damage from the nominal shock in 2008 had been done as most of these videos were made in the March and April 2009 timeframe. If government spending and debt is responsible for it, then it happened under the Bush Administration and Republicans themselves are complicit with Ryan being in the middle of it, a point that seems to be lost to the majority of the base. They can’t have their cake and eat it too.

If you’re wondering how this maps back to Paul Ryan, or to the possible new version of Paul Ryan who has learned the lesson of big government and spending, he has been one of the more vocal members of Congress against QE, going so far as to threaten Bernanke with stripping the Fed of its full employment mandate while advancing his agenda budget that has taken him from political obscurity to being a Republican standard bearer. He is wrong on the full employment mandate and QE; not that it would matter because the Fed is presently ignoring it anyway, but removing that mandate would basically dump the pro-growth meaning of the entirety of the Humphrey-Hawkins amendment to the Federal Reserve Act, locking in this misery of strangulated growth in nominal income as a priority. It is the very same liquidationist point of view that perpetuated the suffering in the 1930s. And if there is disagreement with this, then there is disagreement with Ronald Reagan and Milton Friedman who forced Paul Volker’s hand in engineering the recovery from the 1981-2 recession. Reagan had to go so far as to threaten to run monetary policy out of the Treasury to get the Fed to engineer a recovery – and a spectacular recovery it was. Yet Ryan, a protégé of Jack Kemp, whom I am sure knows better, has achieved dramatic political gain and personal advancement for being wrong or worse.

Problems with the budget itself

It likely is not politically feasible to drop the political problems the social programs pose onto the states. Sure, states should be taking care of their own problems, but these programs have always been Federal programs, funded with Federal money that cause political problems, the kind that allow visions of throwing Granny over a cliff that state politicians are in large part shielded from. And there is nothing changing the basic nature of the programs from being funded in large portion by the Federal government which does not remove implicit control. What can be done with them can be undone with a flick of the wrist by, say, a radical leftist President and a supermajority of Congress.

The focus on social programs as being the main economic problem taking us down the path to being Greece and the supposition that the Ryan plan will help solve this problem is intellectually dishonest because it denies the role of monetary policy errors and subsequent economic morass in the insolvency equation while the basic mechanics of Federal taxation for the purpose to fund them as well as the unintended negative impacts to habits of personal saving will still be there. Even after the Ryan budget becomes law, if it does, monetary policy will still have serious issues, the Federal government will still be taking the money from individuals who have capped income growth in the form a payroll tax and will still have access to the funds for whatever purpose.  The basic problem is that growth in the social programs assumes a certain level of growth in incomes in order to fund it even at a rational level of growth in outlays. With no cooperation from monetary policy in allowing that growth to materialize, the programs become unsustainable and insolvent much like the rest of the balance sheets of those who transact in dollars. There is very little material change to the nature of the contributing factors of insolvency of the programs and their negative effects on economic performance under his plan, with the best outcome being shifting a portion of the cost off the Federal budget to another government entity, the states, which to the tax payer makes only a difference in where he/she has to send a portion of payment and this outcome is largely being played out in the form of unfunded mandates already.

To me, the basic question of philosophy that is hiding in the political turmoil is this:

Do we want to cap government spending by capping the income growth necessary to fund it, meanwhile capping income growth that also funds our individual standard of living and our aspirations? This is what is currently happening and Paul Ryan’s machinations toward the Federal Reserve support this.

Or, do we want to cap government by winning the political debate and then winning the vote in order to legally cap government instead while leaving the society of opportunity and self sufficiency that we get from properly managed monetary policy intact? Ronald Reagan favored this approach by supporting the Balanced Budget Amendment after helping the Fed to acquire appropriate growth priorities.

Are the sacrifices you have been making over the last few years and the economic hell we’ve all been living through worth making a political point? Even if those political points are worth making, what happens to our hopes and aspirations, and those of our kids once the powers that be achieve their goals? The way we run monetary policy has a dramatic effect on the world as we know it, and we should be aware of how that impacts which political arguments win out because this is likely only the first act in a long process of trying to get the kind of economic happiness we used to have. If there is any truth to what I have said, there is a possibility that after winning the election and not being able to deliver real improvement to our current economic situation, Democrats will come back and that experience will be even more unpleasant to those who hold a generally free market and economic freedom philosophy. In short, if you think you’ve been ticked off lately, just wait until 2016.

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