Ryan budget plan relies on discredited supply side economics

supply side economics

The Bush tax cuts were the last foray into supply side economics, which led to wage deflation, job stagnation and astronomical deficits. Image: CC fotopedia

Rep. Paul Ryan, R-Wis., submitted a budget proposal known as the “Path to Prosperity” this week. It relies heavily on supply side economics that insist lower corporate taxes translate to more jobs and higher government revenues. Supply side economics were the principle behind the Bush tax cuts of 2001, which gave record profits to corporations while producing the weakest job growth since the Great Depression.

Supply side economics versus reality

Paul Ryan says cutting spending and taxes will generate an extra $100 billion in tax revenues, spark a new housing boom and bring unemployment down to 2.8 percent by 2021. Ryan wrote “Path to Prosperity” with the help of the Heritage Foundation, a conservative Washington think tank formed to advance supply side economics. Heritage Foundation analysis in Ryan’s plan predicts that by reducing the corporate tax rate from 35 percent to 25 percent, unemployment will fall from the current 8.8 percent to 6.4 percent within a year, down to 4 percent in 2015 and 2.8 percent in 2021. However, reaching 4 percent unemployment in the next four years would require the economy to overheat and cause runaway inflation. The Federal Reserve would respond by raising interest rates to cool things down long before that magic number is reached.

The job-killing Path to Prosperity

The “Path to Prosperity” predicts that the tax cuts will create a huge influx of jobs and set off a new housing boom, which in turn will create even more jobs. Ryan’s plan says next year it will attract an additional $89 billion in housing market investment. However, falling home prices, a backlog of millions of foreclosures and a glut of unsold homes will drag on the housing market for years to come. When it comes to jobs and Republican policies in the the near-term, Fed chairman Ben Bernanke said the GOP goal of 61 billion in spending cuts would cause a net loss of 200,000 jobs by 2012. Goldman Sachs predicted such cuts in spending and revenue would reduce GDP up to 2 percent. The Ryan “Path to Prosperity” offers only tax and spending cuts that primarily effect the poor, elderly and disabled. It doesn’t say why U.S. corporations sitting on billions in cash that aren’t hiring need more money to do so.

Exhibit A: the Bush tax cuts

The best predictions for the future of the “Path to Prosperity” lie in the past. When George W. Bush signed the 2001 and 2003 tax cuts into law, he boasted that he had launched a new era of sustained economic growth and prosperity. In reality, from 2001 to 2007 U.S. millionaires and billionaires got richer while average household income fell for the first time in history, jobs grew at the weakest pace in more than 60 years, the federal deficit rose to record levels, and the financial industry careened to the brink of collapse. In the middle of that period of job and wage stagnation, a Republican jobs package included a one-year tax holiday for companies that added up to $362 billion. Instead of hiring more workers, most of the money went to pay shareholders.



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