Allan Blinder is Incorrect

Professor Blinder wrote an editorial going after the Ryan budget today in the Wall Street Journal. Most of it was littered with emotional appeals and attacks.  But there were a couple of numbers that he hinged on that makes the budget debate crystal clear.

First, if you don’t know, Blinder is a Keynesian economist.   Their view is that government can spend money to stimulate the economy, and government led programs will lead to private prosperity.  In theory, it’s elegant and easily understood.  In actual practice with humans, it’s a disaster.   Keynesians whole approach is based on the multiplier effect of government spending being greater than a factor of one.  It never is.  It’s closer to zero.

Let’s toss out the emotional hyperbole of the Blinder argument and get right to the numbers.  They are the only thing that matter.  The Democrats only want to cut $4 trillion from the budget.  Treasury Secy Geithner nuanced that number into his interview on CNBC this morning.  It looks like $4 trillion is the Democratic line in the sand.

Ryan’s budget claims to cut almost $6 trillion.  Blinder disputes those claims, and here is how he does it.  First, he says the budget is incorrect, because it displays a loss of $4.2 trillion in tax revenue.  This is classic Keynesian thinking.  Keynesians look at the budget numbers through the lens of accounting and not economics.  Classical economist Gary Becker wondered why the corporate tax cuts were not deeper.  Becker has received a Nobel Prize, he is not a shallow thinker.  In Blinder’s world, corporate taxes get cut and behavior never changes.  That is a totally unrealistic assumption when it comes to human and corporate behavior.

Blinder also decries the changes in Medicare from a government run, centrally planned system to a voucher system.  Blinder’s biggest objection is that with the past increase in health care costs, the amount of the vouchers will be over run by a continuing upward spiral in costs.  Guess what else Ryan’s budget gets rid of, Obamacare.  Creating competition and less central planning in health care will decrease costs.  I cite Gary Becker again, but any classical economist would say the same, “There are several advantages to these proposals for Medicare compared to the present system. Competition among insurance companies will increase efficiency in the delivery of medical care, and thereby keep costs down. The subsidies will help lower-income seniors afford decent medical coverage, but higher income seniors would have to pay more of their own money for insurance rather than taxpayers’ money. In addition, individuals and families could buy more expensive coverage beyond the basic plans financed by the proposed Medicare grants, but they have to pay for that additional coverage themselves. A major weakness of the American health care system is that out of pocket expenses are such a small percent of total medical spending.”

The entire medical apparatus as we know it will be transformed into a competitive, price sensitive market.  Instead of insurance being tied to your employer, and having a totally opaque price system for medicine, you will have a transparent price system.  Figuring out your medical bills will be as easy as going to a restaurant and ordering a meal.   That’s much more efficient than what we have today.

The other points that Blinder brings up are quibbling.  One is the amount of interest being paid.  Mr. Blinder says Ryan over estimates the savings by 200 billion.  In federal dollars we call that a rounding error.  In the last continuing resolution that was passed, they cut 352 billion.  I think even a Democrat could find 200 billion in cuts somewhere in the federal budget.

The second has to do with the wind down to the wars in Afghanistan and Iraq.  This is 1.5 trillion in phantom savings according to Blinder, but Obama has also done the same thing with his budgets, only accelerated the numbers faster since by his account we are pulling out even sooner.  If experience is a guide, we will be in both places longer than anyone expects, and it will cost more than anyone expects.  Neither Obama’s budget nor Ryan’s budget is correct in there estimates.  For argument’s sake, call it a push and move on.

The other hole that Blinder tries to make is more philosophical.  He is perturbed that debt/GDP ratios of spending drop to their lowest levels since 1951.  A Keynesian would be alarmed at that.  Because GDP is directly derived from the amount of government spending injected into an economy, they would tell you that American GDP will precipitiously drop off a cliff if we go back to a 1951 debt/GDP ratio.    Tea Partiers and many classical economists would tell you it doesn’t go far enough.  Might be better if we had a debt/GDP ratio of pre-WW2!  That would mean privatizing a lot of government services, ending a lot of governmental departments and bureaucracies, and increasing the growth of private sector jobs.

The debate will not end until the election in 2012, which is why S+P correctly downgraded US debt yesterday.  Americans will get a choice.  Free markets and less government, or European style socialism and its crony capitalism.

Hmm, ending government bureaucracies, increasing growth. That sounds like the right prescription to me.

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