No Path to Prosperity: Ryan&#39;s Incredulous Budget-Balancing Proposal, Preposterous Unemployment Estimate

Many Republicans have embraced Paul Ryan's proposal to balance the budget. I can't embrace his plan because it will do no such thing.

I questioned the idea in Government Shutdown Battle to Be Followed by Bigger Fight; GOP wants $4 Trillion in Cuts Over Next Decade; Is that Enough?

The proposal is now up to $6 trillion in cuts. However, $6 trillion over a decade is still not enough.

Congressional Budget Office Reply to Paul Ryan's Proposal

Inquiring minds may wish to consider the Congressional Budget Office reply to to Paul Ryan's Proposal.

Long-Term Analysis of a Budget Proposal by Chairman Ryan

CBO has conducted a long-term analysis of the major provisions of the proposal as described by the Chairman?s staff. The specifications may differ in some ways from the plan released today by Chairman Ryan in The Path to Prosperity: Restoring America?s Promise.

The proposal specifies a path for all other spending (excluding interest) that would cause such spending to decline sharply as a share of GDP?from 12 percent in 2010 to 6 percent in 2022 and 3� percent by 2050; the proposal does not specify the changes to government programs that might be made in order to produce that path. Total spending under the proposal would be about 21 percent of GDP in 2030 and almost 15 percent in 2050. The proposal also specifies a path for revenues relative to GDP?rising from 15 percent in 2010 to 18� percent in 2022 and 19 percent in 2030 and beyond.

The resulting budget deficits under the proposal would be around 2 percent of GDP in the 2020s and would decline during the 2030s. The budget would be in surplus by 2040 and show growing surpluses in the following decade. Federal debt would equal about 48 percent of GDP by 2040 and 10 percent by 2050.

No Credible Proposal Can Ignore Interest On National Debt

The CBO reply is 28 pages long but quite frankly the above snip is pretty much all you need to see to understand Ryan's proposal will not balance the budget.

No credible proposal can ignore interest on the national debt. I counted 10 instances of the phrase "excluding interest" in the CBO reply.

To be fair, the alternative proposals "excluded interest" as well. However, that only makes Ryan's proposal better than the alternatives, it does not make it any good.

Surplus by 2040?!

The idea that anyone can estimate out to 2040 is preposterous. Heck it is hard enough to figure out what will happen three years from now.

Here is a set of questions for you: How many recessions will there be by 2020? Does Ryan's plan take any recessions into account? Does the CBO's analysis?

Forget 2040. To be remotely credible, any plan would need to balance the budget by 2020.

By that measure, Ryan's plan fails right up front.

What About Defense Spending?

Can we really be serious about tackling the deficit while doing nothing about defense spending? I think not, and Ryan wimps out big time by failing to address it.

The United States spends more on defense than the rest of the world combined. We have troops in 140 countries. Yet, the simple fact of the matter is the US can no longer afford to be the world's policeman.

If other countries want our troops, perhaps they should pay us. However, it would be better yet if we would simply leave on our own accord.

As long as we are packing our bags, we should pack up and leave Iraq and Afghanistan. It's time to declare the wars are won and leave.

If we do that, and pull some troops home, it should be an easy matter to cut $200 billion a year out of the defense budget. That would save $2 trillion over 10 years. Actually I think we should cut far more, but I am hoping to come up with a number that has a chance.

Sharing the Sacrifice

Where is the proposal to share the pain?
How about lowering wages and benefits of those in Congress?
How about reducing Congressional staff budgets?
How about making Congress immediately accept the same health-care plan it passed for the rest of the country?
If everything is on the table, where the hell is defense?

People are fed up Congressional hypocrites and actions by both Democrats and Republicans is why.

Ryan's Path to Prosperity

Inquiring minds are reading an Op-Ed in the Wall Street Journal by Paul Ryan. Please consider The GOP Path to Prosperity

The president's recent budget proposal would accelerate America's descent into a debt crisis. It doubles debt held by the public by the end of his first term and triples it by 2021. It imposes $1.5 trillion in new taxes, with spending that never falls below 23% of the economy. His budget permanently enlarges the size of government. It offers no reforms to save government health and retirement programs, and no leadership.

Our budget, which we call The Path to Prosperity, is very different. For starters, it cuts $6.2 trillion in spending from the president's budget over the next 10 years, reduces the debt as a percentage of the economy, and puts the nation on a path to actually pay off our national debt. Our proposal brings federal spending to below 20% of gross domestic product (GDP), consistent with the postwar average, and reduces deficits by $4.4 trillion.

A study just released by the Heritage Center for Data Analysis projects that The Path to Prosperity will help create nearly one million new private-sector jobs next year, bring the unemployment rate down to 4% by 2015, and result in 2.5 million additional private-sector jobs in the last year of the decade. It spurs economic growth, with $1.5 trillion in additional real GDP over the decade. According to Heritage's analysis, it would result in $1.1 trillion in higher wages and an average of $1,000 in additional family income each year.

Preposterous Unemployment Estimate

I have no idea what the normally sane Heritage Foundation is smoking at the moment, but the idea that Ryan's Path to Prosperity will lower the unemployment rate to 4% by 2015 is pure nonsense and I can prove it.

Let's start with a look at the April Employment Report (March Data). The unemployment rate is calculated from the Household Survey.

Household Data From Latest BLS Job Report

In the last year, the civilian population rose by 1,841,000. Yet the labor force dropped by 489,000. Those not in the labor force rose by 2,330,000. Were it not for people dropping out of the labor force, the unemployment rate would be over 11%.

Forget about what the unemployment rate really is, and let's do projections as if 8.8% is realistic.

Parameters

The civilian labor force is currently 153.406 million (from the above BLS report)
The current number of employed is 139.864 million (from the above BLS report)
According to the Census Bureau Population Estimates the US will add about 2.5 million working age (16 years old and up) citizens a year from now until 2020.
Population numbers vary slightly year to year. I used an estimate of the average summing up the buckets from 16 to 100+ for the years in question and rounding the result.
Let's give the Heritage Foundation some leeway with its "by 2015" projection, say until March of 2015.

Unemployment Math

Now that we have our starting parameters, let's see what it takes to get the unemployment rate to drop to 4% in four years.

Four years from now the labor pool will be larger by 10 million (2.5 million x 4).
10 million + 153.406 million = 163.406 million.

4% of 163.406 million is 6.536 million unemployed.

163.406 million in the labor pool - 6.536 million unemployed = 156.870 million employed.

Thus we need 156.870 million employed by March of 2015 to have the unemployment rate drop to 4%.

Required Employment (156.870 million) - Current Employment (139.864) = 17.006 million new jobs.

Additional Math

17.006 million jobs (354,000 jobs a month for 48 consecutive months) is the straight up math it would take to get the unemployment rate to 4% by March of 2015.

Unfortunately it is an understatement.

In the past year alone, those "not in the labor force" (from the above BLS report) rose by 2.330 million. Those are people who want a job but are not counted in the labor force because they stopped looking for work.

According to the April 2008 BLS Employment Report (March data) , there were 79.211 million "not in the labor force". Currently there are 85.594 million "not in the labor force".

Thus 6.383 million people dropped out of the labor force in the last 3 years.

Should jobs become available, many of those "not in the labor force" would start looking for a job, and the act of looking for a job would add them back in the labor pool.

That would put upward pressure on the unemployment rate and add to the number of jobs the economy would have to create to get the unemployment rate to drop to 4%.

For the sake of argument, let's assume only those who dropped out in the last year would look. Let's be real generous and assume there will not be an additional huge influx of those hiding out in college.

The labor pool would be 163.406 million + an additional 2.330 million "now looking for work". The revised labor pool is therefore 165.736 million.

Let's crunch the numbers again.

4% of 165.736 million is 6.629 million unemployed.
165.736 million in the labor pool - 6.629 million unemployed = 159.107 million jobs.
159.107 million jobs - 139.864 million current jobs = 19.243 million jobs.

An additional 19.243 million jobs is a very realistic estimate of what it would take to get the unemployment rate to 4% by March of 1015.

19.243 million jobs in 4 years is 4.811 million jobs a year, or 401,000 jobs a month for 48 consecutive months.

Note the absurdity of the Heritage Foundation statement "Path to Prosperity will help create nearly one million new private-sector jobs next year" as if that would put a dent in the unemployment rate.

Monthly Job Growth 1999-2009

The above table shows monthly job growth from 1999 through 2009. I put that table together in November of 2009.

Notice that in the height of the housing boom in 2005-2006, the highest average monthly job total was 212,000 jobs a month. At the height of the internet boom in 1999 with Greenspan stepping on the gas over absurd Y2K fears, the economy added 264,000 jobs a month.

At the peak of the commercial real estate boom in 2006-2007, the economy added somewhere between 96,000 jobs a month and 178,000 jobs a month.

Let's be realistic. The housing boom is not going to come roaring back. Nor is the commercial real estate boom, nor is another internet boom.

Quite frankly it is preposterous to suggest that by cutting spending the economy will add 400,000 jobs a month for 48 straight months. Heck, even the straight up number of 354,000 jobs a month is preposterous.

No Path to Prosperity

Flat out, Ryan's proposal is no path to prosperity. It is a step in the right direction but the best we can say about it is that it delays bankrupting the nation.

Republicans need to take another look at Ryan's assumptions on growth, on jobs, on interest on the national debt, on military spending, on shared sacrifice, and on the idea that budget projections 30 years from now make any sense .

Ryan's plan may be far better than Obama's but neither plan is a "Path to Prosperity".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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