In my latest US News & World Report post, I reprise CBPP analysis showing that House Budget Committee Chairman Paul Ryan’s “Path to Prosperity” budget is, in fact, as CBPP President Robert Greenstein described it, a path to adversity for tens of millions of Americans. I then discuss why it also could be a path to adversity for the economy as a whole.
Ryan can balance his budget within ten years with help from an analysis he requested from the Congressional Budget Office (CBO), which shows that the aggressive deficit-reduction path he outlines in his budget — while it would initially slow economic growth and reduce the actual deficit reduction achieved — would eventually encourage somewhat more growth and additional deficit reduction.
CBO’s analysis reflects mainstream economic thinking about deficit reduction’s effects on the economy: it hurts by further reducing demand for goods and services when the economy is weak, but it helps by increasing national saving and investment when the economy is strong. As I point out, CBO includes important caveats about the limitations of this analysis,
…stating, “The projections do not represent a cost estimate for legislation or an analysis of the effects of any specific policies.” Nor, did the budget office consider “whether the specified paths are consistent with the policy proposals or budget numbers that Chairman Ryan released.” And, finally, CBO emphasized that such estimates of budgetary and economic projections “are highly uncertain.”
In my post, I add a further consideration:
But what if the short-run negative effects of budget austerity are larger than CBO assumes, the economy’s underlying ability to sustain an ongoing recovery is weaker than CBO projects, and the economic effects from further delaying the recovery (such as suppressed business investment and worse long-term unemployment) have persistent adverse effects on the economy’s longer-term growth potential?
Former Treasury Secretary Lawrence Summers made a compelling case for each of these propositions at a recent CBPP conference on “The Path to Full Employment.” As Summers argues, “lack of demand creates, over time, lack of supply.” That effect is not in reflected in CBO’s analysis of the Ryan plan — and it’s not yet broadly embraced among economists. But if Summers is right, Ryan’s aggressive deficit-reduction plan would not only weaken the economy in the short term but also sap its longer-term growth potential and revenue-generating capacity.
That would defeat the whole purpose of Ryan’s exercise in austerity.
Click here to read the full US News post.