Ron Paul and his plan for America's fiscal affairs

In the last issue of the Cluster, I bored the majority of this newspaper’s readers with a lengthy overview of Ron Paul’s monetary policies. I am pleased to announce that this final article of the series will be less mundane when examining his plans for America’s fiscal affairs.

When I speak of fiscal affairs, I am referring to Paul’s deficit reduction platform. I’m going to focus on entitlement reform because that is where the problem lies.

To start, I want to clear up some common misconceptions about America’s deficit. First, the deficit is not an immediate problem. Deficits only directly restrict an economy’s growth under two circumstances: when the “crowding-out effect” manifests and when investor fear drastically increases the size of the deficit.

Obviously, one may make a separate argument that government spending is less efficient than private sector spending, however that issue is not catastrophically urgent.

The “crowding-out effect” occurs when oversized government debt increases interest rates, therefore crowding out private-sector investment. There are two reasons why this effect has yet to occur in the United States. First, interest rates are currently at or below real zero due to expansionary monetary policy.

Second, our deficit isn’t a high enough proportion of our GDP. The Economist, a conservative British publication, estimates that the we have until around the end of the decade before we have to worry about the deficit’s direct effects on private investment.

The other reason why America’s deficit is not a catastrophically urgent issue is that investor fear will most likely not attack the United States in the short or medium-terms.

Treasury bonds are perceived to be the safest investments, and this status is unlikely to change in the short-term, mostly due to the absence of any serious competitors.

Look around—there aren’t any other large economies with ample political and financial stability to take our place.

A second common misconception regarding America’s deficit is that discretionary spending, such as funding for infrastructure, is the main culprit. The numbers are clear: Medicare, Medicaid, Social Security are the most problematic liabilities because their expenses are projected to grow exponentially over the next 50 years. While defense spending is significant, it is not growing and currently has no reason to grow at a rate similar to that of the entitlements.

The good news is that we can fix this problem without hurting economic growth. Increasing the eligibility ages of benefits eliminates much of the fiscal problem, while shifting the incentive structure of healthcare away from services and towards quality of care greatly reduces inefficiency.

So why haven’t we done anything? The answer is purely democratic—the current entitlement system is supported by the vast majority of voters. There isn’t enough political courage in Washington to make the tough choices. However, Ron Paul seems genuinely angry enough to shake up the system.

In short, Paul’s policies would gut the current entitlement system and privatize the majority of it. He would also greatly reduce discretionary spending and would close or defund various federal agencies.

I could write many thousands of words on Paul’s specific entitlement reforms, but I won’t for two reasons. First, I need to sleep. Second, I’d frequently make mistakes—I’m an undergraduate political science student untrained in public policy analysis. I don’t want to comment on subjects I don’t fully understand.

Instead, I want to offer some general advice based upon three considerations. First, as I pointed out, the deficit is not an immediate problem. When it becomes a problem, the negative effects will not instantaneously tank the economy. They will gradually erode private sector growth.

Second, one should note that because Paul is a fringe politician, his policies are typically based upon ideological rather than pragmatic rationales. As I demonstrated in my last article, he is often revises history to align with libertarianism.

He also tends to ignore the results of his actions as long as narrowly and arbitrarily-defined liberties are preserved. Ideological purism makes me uncomfortable—not much good comes from those who base their entire decision-making framework on black-and-white terms.

For example, in the case of healthcare policy, he would not require immunizations, even though government immunization programs have saved or improved many millions of lives since their implementation. (Behavioral research demonstrates that people typically refuse catastrophic insurance because human psychology makes the investment seem irrational when it is, in fact, a smart move.)

Finally, one should remember that historically, economic institutions override political ones. In other words, when the time of crisis arrives, politicians typically enact any necessary fiscal reforms. With history as my guide, if bond yields begin shooting upwards, we will see some pretty quick reform from our government, barring further political polarization.

Will this be a painless crisis? No. But it’s better than needlessly gutting discretionary spending.

Let’s add these considerations up. Is the support of an fringe candidate justified by the current fiscal situation in America?

While I wouldn’t mind solving fiscal dilemmas ahead of a crisis, I’m not sure such a benefit would outweigh the deleterious effects of Paul’s foreign, monetary, and discretionary spending policies (or at least the ones Congress and the courts would allow).

It’s hard to have patience when every year the punditry proclaim imminent political and economic collapse.

But I’ve got a feeling that America can wait for a better solution to her problems. I know I’m sidestepping the question of his fiscal policy’s efficacy, but
I’m asserting that it doesn’t really matter in the light of his personal and political flaws. America seems to agree at the polls.

I fully realize there is a chance I am making a mistake by not endorsing the quick fix. The future is uncertain.

But I think I can reduce collateral damage by waiting. That’s why these are the opinion pages, not the horoscopes, right?

 

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