The selection of a running mate is the first truly "presidential" decision a candidate makes and Mitt Romney's decision demonstrated that he is a sincere and thoughtful candidate who really doesn't like political games. Ryan is not a huge electoral asset, but he demonstrates that Romney's key criterion for selecting a VP was whom he trusted to govern like he would if anything should happen to him as President. This demonstrates true Presidential thinking in a way that echoes young moderate southern Bill Clinton selecting young moderate southern Al Gore in 1992. It is the antitheses of John McCain's selection of Sarah Palin four years ago. However, while I commend Romney for his earnest selection, Ryan does bring with him some significant political liabilities and baggage.
Before enumerating the troubles with Ryan, it is worth noting the assets he brings to the Romney campaign against President Obama and Vice President Biden. The most obvious asset is youthfulness. Ryan is young, charismatic and attractive, not unlike the President. Ryan also carries with him a good chunk of Tea Party support that Romney has been lacking. Finally, as a seven term Congressman, Ryan does bring some Washington insider know-how.
Unfortunately for Mitt Romney, Ryan also has several shortcomings. Like Romney, Ryan has no significant foreign policy experience. In truth, it would be a serious challenge to find a ticket that could compete with the President who killed Osama Bin Laden and a Vice President who had been Chair of the Senate Foreign Relations Committee, so Romney may have conceded this before beginning his VP search. That said, Ryan also does not bring Romney a state. He brings Wisconsin within reach, but it is not a lock and that gain is just not as electorally significant as Portman carrying Ohio, McDonnell carrying Virginia, or Rubio carrying Florida.
More important than Ryan's shortcomings is his baggage. While Ryan is a prolific fundraiser, Romney was already excelling at that and Ryan being on the ticket hands the Democrats a talking point about Wall Street and insurance companies buying the Presidency. Still, far more important than any of the preceding points, the Ryan budget is a potentially huge problem for the Romney campaign and for the economy.
The Ryan Budget
Paul Ryan's budget plan known as "The Path to Prosperity" represents an earnest and thoughtful effort to make government spending sustainable in the long run. Unfortunately, the budget has long term policy flaws and creates significant political problems.
The central tenet of the plan is to reduce government costs on the non-discretionary side of the budget. This makes sense since entitlement spending has ballooned and is expected to keep growing, however Ryan's plan presents harsh solutions that will leave millions without healthcare coverage, including the highest voter turnout demographic, the elderly. In particular, the plan calls for the Medicare system to ultimately be replaced with vouchers covering a set value in healthcare costs for seniors. The plan also converts Medicaid to a block grant program and ultimately seeks to extract the federal government from supporting healthcare coverage for the poor.
While these cuts represent huge budgetary savings, coupled with Ryan's plan to repeal the Affordable Care Act, they will also result in millions of uninsured Americans resorting to emergency room visits for normal healthcare (emergency rooms are not allowed to turn patients away). This will raise insurance costs by billions as insured Americans will need to cover uninsured free-riders.
Aside from cuts to Medicare and Medicaid, another highlight of the plan is the call for massive cuts to discretionary spending. To get cuts to discretionary spending at the level Ryan suggests would require repeal or dramatic reductions to intractable policies that subsidize farming, oil exploration and infrastructure spending, or massive cuts to the military budget. Needless to say, none of those things will be popular with Congress.
The final major component of the Ryan budget is a tax reform policy designed to simplify the U.S. tax code by creating just two tax brackets and eliminating most deductions. These brackets will be 10% for families earning under $100,000/year and 25% for those earning over $100,000/year. Aside from the obvious inefficiencies around the $100,000 barrier (if you make $99,999 you pay $15,000 less in taxes than if you make $100,000), this oversimplification of the tax code represents the opposite of what the U.S. needs. If anything, American's should be asking themselves why it is acceptable that a family earning $250,000/year is taxed at the same rate as an individual making $250,000,000/year or more. Ryan's plan exacerbates this problem by lowering the boundary to $100,000/year, meaning that 20% of Americans will be paying into the top tax bracket when we know that capital gains taxes allow billionaires to be taxed at a lower rate.
On the bright side, the Ryan budget does highlight the need for major change to the corporate tax code, but another simplified policy of reducing the rate from 35% to 25% treats all businesses as equals, which makes little sense in the modern economy. A more sophisticated restructuring of the corporate tax code is necessary to promote U.S. business growth in sectors that innovate and create jobs in the U.S., but getting Congress involved in picking winners and losers in sectors of the economy would also be horribly inefficient and possibly even corrupt.
Ryan's proposal to eliminate most deductions is grounded in reasonable economic theory, but it is a political red herring. These tax deductions are extremely politically popular with the middle class and they tend to promote values Americans care about, like home ownership (through the mortgage interest deduction) and self-sufficient agriculture policy (through agriculture subsidies). This is not to say that these programs are necessarily efficient, just that it is unlikely to get Congress on board to eliminate them and functionally raise taxes on the middle class.
Perhaps the most confusing aspect of the Ryan budget is that assumes these new tax policies will raise revenue above the 30-year moving average of 18.2% of GDP, from roughly 15% where it presently sits. Since the elimination of deductions is politically unlikely and does not account for this rise in revenue, the plan presupposes massive economic growth causing more taxable income from the populous. As Republican budget expert Bruce Bartlett explains, tax cuts (like Ryan's) have a poor track record for stimulating the economy in the long term, so depending on that economic growth for tax revenue is a risky bet.
In many important ways, the austerity aspects of the Ryan budget mirror similar cuts made in 2010 by the Cameron administration in Britain. These austerity measures resulted in a wave of unemployment and social discontent. Even with the help of the Bank of England implementing hugely stimulative policy measures, Britain now faces an economic contraction. Details on the British policy and how it parallels to the U.S. can be found in this article from FedPlaybook.com.
While I applaud Governor Romney for selecting the like-minded Congressman as his running mate, and appreciate the fact that both men consider themselves economic policy wonks, neither has impressed me with their grasp of economic realities that require a balanced plan of spending cuts and tax increases. Without a recognition of these balanced principles (as put forward in the bipartisan Simpson-Bowles Plan), I fear that, if implemented, a Romney-Ryan budget would result in continuing budget shortfalls that create a lack of confidence in the U.S. fiscal policy. This fiscal shortcoming coupled with Romney's pledge to not reappoint Ben Bernanke could result in complete macroeconomic policy uncertainty when a Romney budget would be first implemented in 2014. So, in the near term, if Romney and Ryan close the gap on Obama and Biden, expect even more market uncertainty about economic policy, and if Romney and Ryan are victorious, be prepared for another "fiscal cliff" type of situation in 2014.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.