Paul Ryan vs. the Middle Class

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use.
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I'm a little depressed having to write about Representative Paul Ryan's budget proposal because there is so little merit to it. Matt Yglesias provides the best summary, but the gist of the budget is to cut taxes on the rich and offset that by raising taxes on the middle class and deeply cutting programs that the poor and middle class depend on, such as Medicaid, Pell grants and (eventually) Medicare. It is a document that would make life more difficult for non-rich Americans and widen income inequality in America.

(I can already hear the wounded Republicans shouting that I'm lying because Ryan's plan is too vague to be called a middle-class tax increase. Call me out on it. I dare you.)

The big question I have about this budget is this: Why? Why would this be a desirable set of policies for the U.S. to pursue? Ryan opens his proposal by arguing that his plan is necessary to avoid a debt crisis, but this is of course nonsense for two reasons. The first is that there is no impending debt crisis; the bond markets remain calm, with interest rates extremely low, and what additional fiscal adjustment is needed can come in the medium term. The second is that even if we do need to shrink the deficit, we do not need to do it in this specific way that hurts the middle class.

The problem with this budget is its premise: the quasi-religious view that lower spending and lower taxes will enrich everyone. I think Republicans genuinely believe this, which is why Ryan frames a more-than-40-percent cut in Medicaid as an effort to create more "opportunity."

The argument is that a rising tide lifts all boats. But there is no reason to believe that these policies will raise the tide. Even if they did, they would not lift all boats, as over the past four decades, income inequality has widened, the labor share of GDP has declined, and returns to capital have risen relative to returns to labor. If the economy does expand, the benefits are likely to accrue disproportionately to those who are already rich.

This is a question that most conservatives seem not to have thought about at all. Why do conservatives think inequality has risen over the last four decades? What caused middle-class wage stagnation? Is it that the government is too big and tax rates are too high? If so, why was inequality lower and wage growth stronger back when tax rates were higher?

Middle class wages seem to be stagnating for reasons that the government cannot fix by cutting spending. Republicans' failure to grapple with this truth has led them to advance a budget proposal that only makes the problem worse.

Democrats, meanwhile, have an agenda to deal with widening inequality: a stronger safety net (actually stronger, not "stronger" in the Orwellian sense that Ryan uses the word) financed by higher taxes on people with high incomes.

Soul-searching Republicans have identified lots of problems with the party: "tone," an inability to relate to minorities, actual and perceived retrograde positions on social issues, a loss of credibility on foreign policy. These are all very real problems. But they pale in comparison to the fact that the party's economic agenda, as embodied in the latest Ryan budget, is simply terrible for the vast majority of Americans.

It's like the 1930s all over again: Republicans will be a minority party until they realize they must change their economic agenda to better serve more Americans.

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