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Roadmap to Nowhere

I weighed in a little bit on Twitter today on Paul Krugman’s critique of Paul Ryan’s “Roadmap to America’s Future” plan. It was probably a mistake do that 140 characters at a time, and so here is a (much) longer exposition.

Krugman comes to the conclusion that “The Ryan plan is a fraud that makes no useful contribution to the debate over America’s fiscal future.” Some writers, including Ted Gayer at the Tax Policy Center, a thinktank whose work Krugman cited, take issue with the use of the term “fraud”. Fraud can mean different things, but usually implies some intentionality: deception on purpose, rather than on accident. I don’t know if Ryan’s budget plan is deliberately intended to be deceitful: people in Ryan’s circle seem to vouch for his seriousness, and there’s much to be said for that. With that said, it has had the effect of deceiving some people, and I don’t see how it has improved the quality of the budget discussion.

Ryan’s budget consists of a series of proposals that would cut spending on entitlement programs in a very serious way, coupled with an equally serious restructuring of the tax code that would have the effect of lowering taxes on most individuals and businesses. On the spending side, one can debate whether or not the cuts that Ryan proposes would be (a) wise and (b) politically tenable, but they would certainly reduce the debt in a very substantial way; nobody really doubts that.

The problem is on the government revenues side, which Ryan’s tax cuts would reduce, thereby counteracting the effect of his ambitious spending cuts. I’m not going to spend 200 words qualifying this: yes, tax increases have deleterious effects on productivity, which means that you’re giving back some number of pennies on the dollar — and tax cuts have beneficial ones, thereby making the opposite true. But, given that current levels of taxation are low-ish by modern standards, and that Ryan’s budget would make them lower, we are nowhere near the point on the Laffer Curve where tax cuts would have a net positive effect on government revenues. (In the long run, at least: tax cuts are more beneficial during a recession when a multiplier may be in play.)

Where the deceptiveness comes in is in the CBO’s scoring of Ryan’s proposal, which makes it appear as though Ryan’s plan would substantially reduce the debt over current projections. The problem, as a separate Krugman blog post points out, is that the CBO actually only scored half the bill: they gave Ryan credit for the spending cuts, but did not deduct any points for the revenue reductions resulting from his changes to the tax code.

This is for a somewhat peculiar reason. The CBO does not like to model the impacts of tax policy, which is usually in the purview of another agency, the Joint Committee on Taxation (JCT). Ryan’s office has said that they asked the CBO to score the revenue side of the bill and were rebuffed; I have no reason to doubt this. The problem is in what happened next.

Ryan’s office had several options. They could have said: “Screw you, CBO, you work for us.” (This is literally true; the CBO is the Congressional Budget Office.) “Score the damned tax cuts.” I know nowhere near enough about intra-agency politics to know whether any amount of cajoling, threatening, or persuasion would have made the difference here, nor how much of it Ryan’s office attempted.

The second and most obvious alternative would have been ask the JCT for an estimate instead. Ryan’s office says that “JCT, however, does not have the capability at this time to provide longer-term revenue estimates”. I don’t know whether that means that JCT was too busy right at that moment, in which case Ryan was irresponsible not to wait for its workload to lighten up, or whether it means that very-long-term (beyond 10 years) budgetary estimates are not a current operational capability of the JCT.

If the latter, the third option would have been to utilize an estimate provided by nongovernmental agency, ideally one with a reputation for being de facto non-partisan (not just de jure non-partisan, like the Heritage Foundation). Something like the Tax Policy Center probably qualifies, as would a few other Beltway thinktanks.

But Ryan bypassed this option as well; instead, he decided to wing it. And he winged it by assuming that, in fact, his tax cuts would result in no net decrease in revenues: they’d magically be offset by improved economic growth. Ryan then instructed the CBO to score the bill with this dubious assumption, which it did.

The Tax Policy Center found that Ryan’s assumption had in fact been rather favorable to the cause: it had overestimated revenues by a mere 4 trillion dollars in revenues over 10 years — the equivalent of several health care bills.

This is all there in the CBO’s report if you read the fine print. But a lot of people, including Perry Bacon, a very fine reporter for the Washington Post, didn’t read the fine print, and instead wrote largely favorable pieces that took the CBO’s projections too much at face value and did not adequately notate that they’d really only scored half the bill.

Whether or not Ryan is to be blamed for this probably boils down to whether or not he was smart enough to know that this is how the story was liable to be conveyed. Ryan is smart: smart enough to know that if it the details of the budget slipped past Perry Bacon, they were probably going to slip past a lot of people. On the other hand, this would hardly be the first time that a politician used the idiosyncrasies of CBO scoring to his advantage.

What seems less ambiguous is the second clause of Krugman’s conclusion: that Ryan’s budget “makes no useful contribution to the debate over America’s fiscal future.” If Ryan’s goal were to inform the electorate, he could have done one of two things: found another way to get an independent estimate of the revenue effects, or explicitly declaimed that his goal was merely to perform a thought-experiment to see how much spending would have to be reduced before the budget were balanced (this could most easily have achieved by not proposing any changes to tax policy). He elected neither of those options.

Instead, his budget has had the effect of perpetuating the notion that tax cuts would tend to reduce the deficit. That’s wrong; they would tend to increase it. Peter Sunderman, in a piece defending Ryan, points out that “forecasting the vagaries of the economy five or 10 years in advance is incredibly difficult”; this is inarguably true, but it is all the more reason to stick to Ockham’s Razory assumptions rather than Ryan’s magic realism: you cut taxes, and all else being equal, and the government brings in less money, and the debt increases. (It’s also why there is no particular value-add from merely scoring the expenditures side, which is probably easier.) Of course, you theoretically could cut spending enough to afford a tax cut too, but you’d have to cut it more — a lot more — than Ryan has proposed: about $400 billion a year more.

To his credit, Ryan has conveyed a willingness to work with alternative assumptions about the revenue side of the bill. The proof, however, will be in the pudding: his spending cuts are already fairly draconian, and now it’s his burden to come up with $400 billion per year more.

Or he could admit the obvious: that a responsible long-term budget is one which proposes both to cut spending and to increase taxes. I’m kind of a stick-in-the-mud about this, but I really think it does need to be both as the starting point: it’s not like Congress is going to find in its heart to raise taxes more than suggested, or cut spending more than needed, in order to achieve long-run fiscal parity.

This particularly holds if a proposal is conveyed as a “roadmap” — that is, as a sort of thought-experiment deliberately ignorant of political contingencies — rather than as a a pragmatic “how-to” guide. Increasingly, I’m coming to the position that the latter is more likely to come from someone outside the two major political parties (perhaps a third-party contender for the Presidency at some point between 2012 and 2020). It certainly hasn’t come from Ryan. What service has he performed by proposing a number of haphazard (and politically difficult) cuts, and still leaving the budget imbalanced?

Nate Silver founded and was the editor in chief of FiveThirtyEight.