Ron Paul's Economic Plan

Economics Economics Questions
1

I recently read Tom Woods’ article talking abour Ron Paul’s economic plan, and I asked a question on his facebook page, but I’m not sure he’ll have the tme to respond so i’m posting here.

I completely understand and agree that we need to drastically cut spending I think Paul’s budget tackles many significant problems, like war spending, ect. I think that the cabinets he wants to cut have no constutional right to exist and need to be dismantled. Not only do they not produce anything useful, they force business to squander wealth and are actually detrimental to the economy on net.

However, with real unemployment already at 20%, or 9+% if you listen to our washington czars, wouldn’t throwing all these people, something like 200,000, into the labor market all at the same time cause a problem? Wouldn’t an increase in workers like that cause a decrease in real wages abruptly due to the law of marginal utility? Even if federal wages had been artificially high, without ensuing deflation I think a decrease in real wages in the short term would cause more problems in an already troubled economy.
That being said, I was much more in favor to Rand’s plan this summer, a 500 billion dollar cut and balances in 8 years, allowing a transition to be less bitter.

Someone on Tom’s facebook page responded by comparing it to WWII. This was my response.

Clint, things were certainly different post world war ii. Amongst other things, we had created a permanent military industrial complex (ike had warned us about this in his farewell address). That’s not to forget there was real manufacturing capacity that had remained from the pre-depression era that was mostly idle, and with an upswing in population (seeing as how most of the soldiers were not actually even in the US) demand rose for consumer goods that they produced, and jobs were necessary.
This contrasts rather differently with today; anyone who is laid off is dumped into the pool of workers already unemployed, but they are not shipped off to Europe or the pacific ocean. They still need food and clothing and consumer goods. Now, that’s not to say that getting 200,000 unproductive (maybe even negatively-productive) workers off of the government “teet” is a bad thing, because it is quite good. But if they are going to just collect unemployment anyway, there isn’t a serious benefit to the financial soundness of the country. At least not until they get hired at a REAL job.
Now certainly lowering the corporate tax and removing burdensome regulations will help INCREASE the demand for workers, the problem is will it do so in sync with the influx in the unemployed workforce. This is also assuming that most workers who DO have jobs aren’t looking for better better ones at the same time..
And Clint, that is what RP said and I’m sure he genuinely intends for t to happen through attrition but what percentage of those departments have people at retirement age? Further, what do we do about those who are younger, say 30s, 40s, 50s? Throwing them elsewhere in the system isn’t going to help cut back the bureacracy.

So my question is, in short, will his plan do short term damage to fix our long term problem?

2

I’m sure I’ll get flack about this but the simple answer is yes because

  1. There will be a great deal of uncertainty surrounding the new regulationary/fiscal environment

  2. The increase in unemployed and the decrease in demand will, in the short term, lead to some problems (many of these problems would go away if there were also a tax cut but then that defeats about half the point)

  3. Ron Pauls monetary/fiscal policy is a huge shift from the norm that will cause disruption for at very least a year or two

So yes, it will cause some problems, not everything in the free market is going to be rainbows and roses as many free market advocates seem to like to make it seem, but it will certainly be better than the continuing crisis forever.

3

$1 trillion dollars cut.

Say 1% of that would have been bought up by private US investors. That means that the private sector now gets to keep $10 billion more. Let’s see … $10 billion / 200,000 employees = $50,000 per employee.

This is a gross oversimplification, but it might act as a good guideline. It’s not just 200,000 “losing” jobs, it’s at least $10 billion more in the economy to create new jobs.

Please correct me if I’m way off.

4

That is assuming that

a) That $10 billion would be used entirely to expand enterprise

b) Whatever productivity those empoyees can contribute is worth at least 50,000

c) That congress adopts his entire proposal and is rolled out in a timely and organized fashion

d) that money is being taken from tax dollars, and not through inflation or borrowing

5

You’re asking the wrong question. That’s like asking “will stopping the drugs I’m doing and going to detox do short term damage to fix my long term problem?”

The answer is “no”. With there be short term pain, yes. Short term hardship, withdrawals, restructuring, correction…yes. But to call that “damage” is disingenuous and misleading. It’s basically demagoguing.

Plus, Wheylous is on the right track. This is like a huge parasite off the economy’s back. There will be much more opportunity for businesses to create jobs. And while in a perfect world, it may be a slightly less painful transition in a slower plan like Rand’s…but in reality Ron understands how it works. The only budget that matters is this year’s. A future Congress is not beholden to a past one’s plans. When you talk about 8 year plans, and 10 year plans…it’s all hot air. There’s no way that’s even feasible with at least one (possibly two) Presidential elections, up to four Congressional elections over that time frame. Not only that, but they can’t even project into next quarter accurately.

The notion of 5% growth rates every year for the next 8 years is just asinine. It’s basically outright lying. I’m not familiar with the specifics of Rand’s plan or how exactly he calculates the budget would be “balanced”, as in, what kind of assumptions in tax outlays he’s making, but I would have to guess their at least someone more realistic that anyone else in that body. But even still, the only way to make any change that has a chance of any sort of lasting effect is to get it done (and eliminate departments) within one term.

6

That $10 billion would be used entirely to expand enterprise

Where else would it go? It could result in jobs, it could be put into a bank (which loans it out), it could be hoarded (which causes deflation and an increase in buying power).

Whatever productivity those empoyees can contribute is worth at least 50,000

That was me being kind and giving them a high wage. It could very well be that they only cost $35,000. Either way, you allow the market to become more efficient.

That congress adopts his entire proposal and is rolled out in a timely and organized fashion

Irrelevant point. Your argument also relies on this assumption.

that money is being taken from tax dollars, and not through inflation or borrowing

I specifically said “Say 1% of that would have been bought up by private US investors.” Plus, remember - if the money is taken from tax dollars, it’s not debt (in the common sense of the word).

7

Say you have a pet elephant in your house that is eating the food and even the furniture, as well as shaking the very foundations of the house with his mighty stomping, which will lead to the ultimate collapse of the house. Someone suggests moving him out of the house into the backyard.

“But the poor elephant won’t have anything to eat out there,” comes the reply.

The idea is that there are two kinds of jobs, productive jobs and parasitic jobs. A productive job is one where a person is being given money because his work is so coveted and valuable that there is an employer out there actually willing to pay him good hard cash to work.

A parasitic job is one that nobody is willing to pay for unless forced to by violence or the threat of violence. This includes all govt jobs, which are all grossly overpaid, as well as jobs negotiated by unions that are protected by laws, aka featherbedding.

A man at a productive job benefits someone [the employer] more than the salary the worker takes home. In other words, a productive job increases the wealth of everyone concerned.

A parasitic job, on the other hand, is like a giant black hole, where one persons hard earned money [the taxpayer] is stolen from him and consumed [eaten up and destroyed] by someone else.

The mess we are in is caused by our resources being consumed without being replenished. The elephant, meaning all those govt workers, are stomping around literally consuming the house to total destruction.

Now granted that if we fired them all it would be taking us out of the fire and into the frying pan, meaning we would still have a problem of what to do with all those fat cats who don’t know what it means to work for a living. But that problem has a solution. They can all get jobs eventually.

All economists from all schools, including Keynes himself, recognize that the solution to unemployment is lowering wages enough to make hiring someone profitable. Only very recently has someone come up with an alternate method, forcing the taxpayer to pay people to do nothing, be it through unemployment benefits or parasitic jobs. We see the results of this grand experiment today.

The elephant wil learn to eat grass, and we will have our house.

8

Furthermore, millions of people lost their jobs in the recent recession, but wages have not taken much of a dip:

http://www.wolframalpha.com/input/?i=average+salary

So many new people in the market, no change in salary. How come?

9

So many new people in the market, no change in salary. How come?

First of all, salaries are lowered in terms of purchasing power due to inflation, exactly what Keynes prescribed.

Second, many workers are being asked to do more work, meaning longer hours, for the same salary, or else lose their jobs. There are articles about that somewhere on the internet. After all, where else would I see it?

Third, a question. Have benefits stayed the same?

Fourth, are people being hired at the old salaries, or do they find themselves unemployed?

10

salaries are lowered in terms of purchasing power due to inflation

Inflation has not been very high (at least as measured by CPI).

many workers are being asked to do more work, meaning longer hours, for the same salary

Fair point.

Have benefits stayed the same?

Idk. I am guessing they have decreased, but I’m not sure I’ve seen statistics on this.

are people being hired at the old salaries, or do they find themselves unemployed

Either way, the salaries aren’t being driven down before the old levels with 8 million (or whatever the number was) jobs lost, so a mere 200,000 would not change the market much.

11

Inflation has not been very high (at least as measured by CPI).

The CPI is well known to be a farce, as a search on google will show

12

Alright, I will not continue that line of reasoning, as JJ will correctly reprimand me for not yet having read his links (sorry!)