Ron Paul’s Budget Proposals: Fiscally Irresponsible

By Simon Johnson, co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters To You, available from April 3rd.

Representative Ron Paul sees himself as an independent thinker – not afraid to confront the conventional wisdom, whether in the form of Federal Reserve Chairman Ben Bernanke or mainstream views within the Republican Party.  As I have written elsewhere recently, we should take Mr. Paul seriously – and not simply dismiss his proposals out of hand.

However, Mr. Paul’s current proposals for the federal budget can only be described as fiscally irresponsible.  This is completely at odds with his more general stated principles (including in the hearing with Mr. Bernanke this morning), including his well-articulated concern about inflation.

According to the Committee for a Responsible Federal Budget (CRFB), Ron Paul’s proposals would – even under the most optimistic scenario – leave federal debt roughly where it is now, i.e., at an elevated and dangerous level relative to the size of our economy (see pp. 19-24 of the CRFB report).   More realistically, however, we should use the CRFB’s high-debt scenario to evaluate all politicians – reflecting the fact that not everything in the world economy will prove smooth sailing over the next decade.

Under this scenario, Mr. Paul’s proposals would increase debt to over 90 percent of GDP – roughly the same level currently seen in Italy and other troubled European countries.

I understand that other Republican presidential candidates are even more irresponsible than Mr. Paul (including, most spectacularly, Newt Gingrich).  I will have more to say about this tomorrow.

But why does Mr. Paul – an iconoclast of the right and a person who sees himself as a “fiscal conservative” – feels comfortable putting forward proposals that would likely boost our national debt by so much?

16 thoughts on “Ron Paul’s Budget Proposals: Fiscally Irresponsible

  1. The non-partisan US Budget Watch project came to a different conclusion, claiming that among all candidates, Paul’s proposal is the only plan that would reduce national debt: (link).

    It’s a little frustrating that you pick and choose which non-partisan budget groups to cite and discuss based on whether they support the rejection of candidates you dislike. Could you address the US Budget Watch report and explain their conclusion that Paul would lower the debt? Why is the CRFB report supposed to be believed but not the USBW report?

  2. It really is just hilarious how you distort that report. Here is a quote from the CFRB report, page 19, when they discuss Rom Paul:

    “We estimate that, taken together, these proposals would reduce deficits by $2.2 trillion, resulting in 2021 debt levels at about 76 percent of GDP in our intermediate-debt scenario. Under our more optimistic “low-debt” scenario, we estimate Congressman Paul would reduce the debt by $4.3 trillion through 2021 and bring debt down to 67 percent of GDP – however a larger portion of this debt reduction is a result of Paul’s policy to cancel all federal debt held by the Federal Reserve System. Finally, under our more pessimistic “high-debt” scenario, Paul’s policies would increase debt by $1.9 trillion (up to 93 percent of GDP) through 2021. [28]”

    You assert that the pessimistic scenario is the most realistic one. Can you please back that up? Why shouldn’t we think this is a function of (your) biased reporting? If the blog post above is supposed to be a fair summary of the paragraph I just quoted, you’ve got to be kidding.

  3. NEWSFLASH: if the ratio of US sovereign debt to GDP were ‘only’ 90% that would be an improvement since we’re now at or above 100%. unless you want to include everything swept under the rug … then its worse.

  4. @bobthebayesian Actually the frustrating part is that somebody who supposedly graduated college and is in the finance industry would do the following:

    – equate federal budget with economy
    – see a drastically smaller federal budget and say that the debt to GDP ratio will be the same as Italy and we will automatically be in trouble

    Paul’s plan is to drastically reduce waste and let money do productive things. Yes when he drastically reduces spending, the debt as a percentage of federal budget will be higher than it is now. As we stop wasting money and start paying down the debt rather than letting it increase to ridiculous levels, that percentage will go down.

    This article was not even worth reading. I hope editors start reading the material before being posted.

  5. Ron Paul statement was more directed toward what you are missing. If his real inflation rate is 9% and Ben’s is @ 2%, and they agree to a 5% number. Then all the money being lent by the Fed and treasury at 0% to .25% is losing tax payer money to fill the pockets of anyone who has access to fed window [which are not many people].

    Now if the debt [ which piles up each and every day from multiple sources, NY Fed is now buying commercial real estate] is not reduced, then the debt/gdp ratio sky rockets exponentially. If the tax cuts are allowed to expire, then the ratio can be brought down quickly and significantly. If not, and R.P. is right about the 9% real inflation rate. The middle and lower classes are screwed as they absorb the difference between the 0%-.25% Fed rate and [X] the real inflation rate, which is derived by anyone willing to participate in the talks.

    By involving Mexico’s citizens desire to save silver and avoid the real inflation rate, he ties the weakness of the dollar, to other stronger currency’s, and their ability to influence today’s dollar. Sort o easy aint it?

  6. I recommend everyone – Democrats, Republicans and Big and Little “L/l” – libertarians – hunt down and listen to the recent Diane Rehm show podcast interview with David Rothkopf – he addresses a few of the “blind spots” present in much of the political discourse over ideological approaches to fiscal policy and economics in general. I found myself agreeing with ~ 99% of his opinions; especially his comment about the US being as corrupt as any 3rd world country (a theme both Simon and James will recognize!).

    [Aside: I know Ron Paul also addresses monetary policy so please refrain from the “you omitted the corruption of the fed” – I agree with Ron Paul’s, Bernie Sanders’ and Alan Greyson’s prior attempt to audit the fed.

    And I know the fed is not independent. Mr. Wood from the Von Mises Institute made this abundantly clear with his congressional testimony several years back – testimony that no one in D.C. seemed interested in despite its validity!

    But I also know that a requirement that lenders have 100% reserves to back their loans has been tried before in history and it resulted in liquidity crises each time – A fact I relumined for an Austrian School disciple/friend of mine and he quickly retracted his insistence on such a reserve requirement acknowledging his oversight of this inconvenient empiric fact. I’m in favor of a central bank… just not the corrupt one that we have now.]

    That aside – listen to that podcast and ask yourself – how come the Republican candidates – including Ron Paul – keep portraying themselves as “small government” conservatives (i.e. wanting to “down-regulate” the size of government – which I, too, favor) but do not want to “down-regulate” the size of enormously large corporations?

    Both big governments AND big corporations are dangerous – so why do the Republicans and Libertarians only reserve their scorn for big government and not big corporations?

    I know Ron Paul talks about “corporate fascism” – but there is a disconnect between his rhetoric and meaningful mitigation of corporate dominance! He, like all the other Republicans and most Democrats, fails to acknowledge that the “size” of the corporations are the problem. Why? Because Ron Paul is wed to this ideological notion of “laissez faire” and it has blinded him to the dangers imposed by such an ideology. He recognizes the “disease”(i.e. corporate fascism) but Dr. Paul does not understand its “etiology” (i.e. the large unregulated or unprosecuted – same result – corporations who buy political influence). As such, Dr. Paul’s ideology will not allow him to effectively treat it.

    History has shown that large corporations are toxic for governments – this is illustrated nicely in the podcast at the very onset!

    I think a similar “conservative” argument can be made about regulating the private sector given the grave dangers these large corporations portend if history is any guide; if big governments are bad and regulation of governmental size is important then a similar paradigm should be adopted towards large corporations!!!! This should be obvious to any true conservative.

    Too big to fail is not only too big to exist… but is too dangerous to democracy. Historically, corporations were allowed to exist because they served a public function and augmented the public good. Now they are destroying the public good by wrecking its welfare and pillaging its treasures.

    This reluctance to regulate businesses is just one of many chinks in the Austrian School’s armor. (Here’s another – each company issuing its own currency? What was Hayek smoking? This idea is a black market/counterfeiter’s wet dream!).

    Mr. Rothkopf’s podcast discussion obliquely illustrates the shortcomings of “indoctrinations” demonstrated by adherents to the various “schools of economics.”

    The problem is that one must be “true to their school of thought” if one is a worthy disciple… such blind ideologues, while finding both emotional and intellectual security in the collective valence of their ideas, close their minds to substantive criticisms.

    But perhaps more insidious, such ideologues limit their intellects by refusing to see other perspectives… such anti-eclectic/close-minded practices has never succeeded! Just study Galileo and the Catholic Church’s opposition to scientific discovery! In fact, such attitudes recapitulates the dark ages in its approach… and who wants that form of tyranny?

    Lastly, why don’t Ron Paul supporters, whom I admire so much in many respects, talk about the tyranny of such ideological thinking? True academic “freedom” extends to questioning authority…. including the authority of economic schools of thought! I see that particular freedom as suppressed or incredibly latent in every Ron Paul supporter I have encountered.

    The Ron Paul supporters I know feel compelled to defend the Austrian school… instead of acknowledging its deficiencies – even when the facts are clearly not in their favor. They, like many Keynesians and Monetarists, behave as if their “schools” are like sports teams (e.g. Tarheels vs. Blue Devils, Buckeyes vs. Wolverines, Crimson Tide vs War Eagle/Tigers). Such “emotional attachments” are unhealthy when a discipline requires emotional detachment in order to mitigate the corrupting influence of bias. Given that so much of politics is demagoguery and given to the “my team vs. your team” mentality, it is sad that an academic subject matter – economics – finds itself corrupted by the exact same political tactics.

  7. You just lost me as a fan of this blog. I’ve been a faithful supporter and read 13 Bankers, and thought it was an incredible overview of all the factors that brought on the financial crisis… but this seems to be a post without much thought with a headline that is very biased. Lately you and James have been slacking.

  8. Thank you for this helpful response. I look forward to your analysis of President Obama’s budget proposals. It would be useful to have a clearer view of the baseline scenario (no pun intended).

  9. I won’t address the issue of the budget and can’t say I agree or disagree with Johnson’s analysis. I will say, however, that I would be leery of following “Dr” Paul on anything economic from what I know of his personal investments. Anybody who puts all his financial eggs into the gold basket, in short a gold bug, can’t be very sensible with regard to finance and I doubt he would be sensible about the national economy either.

  10. @Chris,

    Do you not read what he has wrote? Do you not see the price of gold rising every year? For you to say those comments shows your lack of understanding of economics, probably because you aren’t aware of Austrian Economics.

    Lastly, you completely miss Dr. (why do you put in quotations like he isn’t some sort of Doctor) Paul’s assessment, he doesn’t want our money, he wants to prevent government from having to invest at all, instead he wants YOU to invest. Read a book for crying out loud.

  11. He must have an incentive to keep towing the line that is today’s gvt. In trying to keep the money straight, he probably blew a gasket and had to disagree.

  12. Gold, historically, has not been a reliable or even great investment for the vast majority; too many periods where the price remained low while other assets rose.

    An investor has a different objective than a gold bug. Having gold as a part of a diversified portfolio is not a stupid move but to over-weight one’s portfolio with gold in anticipation of a German hyperinflation wrought by the Fed is a bet I would not make.

    While not exactly tulips, gold may be bubble-worthy. Any huge run up in a commodity is suspect. Gold certain meets this criteria.

    The historical importance of gold as a currency standard is probably as responsible for its recent run up in the face of political instability as its hedge against future inflation. Gold bugs will not be dissuaded so I will not try. But I do not see the incredible monetary base we have and have had for several years now trickling into the market place anytime soon – so I would view gold speculation as just that – speculation!

    Gold and guns may be the possessions of those with apocalyptic leanings but I do not see such dire circumstances quite yet. Let things evolve a few more years and I – and others – will be able to opine with more clarity. Until then, I view gold as speculative and bubble-worthy.

  13. “Having gold as a part of a diversified portfolio is not a stupid move but to over-weight one’s portfolio with gold in anticipation of a German hyperinflation wrought by the Fed is a bet I would not make.”

    OK in principal Logic, but if you were ever going to do it, why not now?

    Inflating away the problem faced by banks and the Fed is the only ‘easy” option available to them. The alternatives all require difficult political responses.

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