There is a Way Out of the Swamp!

What would Republicans do for the economy? An interview with Rep. Paul Ryan.

Paul Ryan is the ranking Republican on the House Budget Committee, and one of the party's most influential voices on the economy. And with Republicans likely to pick up a lot of seats -- and maybe even the House -- in the upcoming election, he's soon to be one of the nation's most influential voices on economic policy. So I called him to ask what, exactly, he'd like to see done. This transcript is edited for length and clarity. For the Democratic perspective, see theinterview I did last week with Sen. Kent Conrad.

Ezra Klein: It’s clear now that there’ll be no more deficit-financed stimulus coming out of Congress. And Republicans, of course, could well take the House in the next election. So with unemployment still near 10 percent, what does the GOP want to do? If stimulus isn’t the solution, what is?

Paul Ryan: I know uncertainty is a new economic buzzword, but for good reason: If we can reduce it, we’ll unlock capital. I’d revisit some of the major issues over the last year. Health care, energy, taxes, financial regulation. I’m not saying these aren’t important issues. We need to reform the health-care system. But these are the wrong solutions. I would advance different solutions with an eye toward international competitiveness and encouraging saving and investing and encouraging certainty.

Then there’s our borrowing. If you look at the deficit, the problem is spending, not taxes. Revenues will come back up. At the end of the day, I’m not a Keynesian, but even Keynesians would agree that raising taxes in this economy is a bad idea. So if it’s helpful for me to concede to that section of Keynesian doctrine, fine. Let’s do that. I really do believe that locking in budget reforms and spending control will help us in the short run by taking pressure off interest rates and monetary policy. Spending control is pro-growth in this age of sovereign debt crises.

But even putting aside the question of whether these are good or bad policies, starting over would take a long time. Repeal would be difficult. Passing something new would be difficult. Congress, as you know better than me, is a slow beast. So doesn’t that leave a lot of uncertainty in the interim? And what about the short term? What can be done now?

I understand that. But an announced policy shift is a quick thing that would change expectations. If you had regulatory forbearance in the credit markets, that would be a quick thing. If the Obama guys said there’ll be no tax increases for two years, it would make a big difference fast. Look at the original [Christina] Romer-[Paul] Romer paper. She’d agree this is not the time to raise taxes. I think a mistake Keynesians are making is they think this is demand-side and consumption-led. I think we need to focus on investment and jobs. There’s lots of money sitting on the sidelines.

Romer herself, however, thinks this is a problem of aggregate demand. The National Federation of Independent Business’s surveys have shown the main concern of their member businesses is that they’re not going to have customers for their products. So do Republicans have any demand-side solutions, even if they’re just tax cuts? Is there talk of a payroll tax holiday, or anything similar?

There are some who do. Where I come from, I think certainty and long-term solutions are better. Temporary stuff doesn’t work. These short-term stimulative things like rebates don’t work. They’ll pump up some money in the quarter where they occur. You go right back where you were. These short-term stimuli, which Bush and Obama did, don’t change aggregate demand. And that’s why I think we need more of an investment-led recovery. At this point, given the borrowing costs, stimulus is counterproductive.

But we do also have short-term problems. So let’s say that in a stunning performance, Republicans capture the House, the Senate and the presidency in 2010. The election is such a staggering repudiation of Democratic policies that Barack Obama and Joe Biden both resign. What’s the first move?

The move is get spending under control, actually pass a budget, prevent tax increases from hitting the economy, and set the conditions for growth in all these sectors. And I really do believe FinReg was a mistake. I think it’ll end up restricting credit. That’s bad. We need credit.

Then let’s talk about taxes. Republicans want an extension of the Bush tax cuts. And many don’t want to pay for it. But they also say our borrowing is a major problem. I know you’ve got your spending roadmap, but if you need to, how do you decide between those priorities?

I wouldn’t say that every tax cut pays for itself. It depends on the tax. I would say that you cannot reduce the deficit with a sinking economy. The better way, in my mind, is to grow the economy as quickly as possible and control and slow spending. So keep taxes low, maximize growth and cut spending. I just don’t see government spending as a key to growth. The budget I wrote last year cut $4.8 trillion of spending out of the baseline, so I cut spending by more than the tax cuts cost. So I’ve put my money where my mouth is.

But you aside, it doesn’t look like that’ll be the choice. So what if you have to choose between more tax cuts and lowering the debt?

You said we had the White House and Congress! If we get that, I’m cutting spending and keeping taxes low.

I’ll predict now that even if you get that, we’re not going to see Ryan-esque spending cuts coming from the Republican Party.

You’ll see a big fight. That’s for sure.

Do you worry that even if you got your spending cuts, the American economy will suffer? A report released by the National League of Cities, the National Association of Counties and United States Conference of Mayors said they’ll have to lay off 500,000 people in the next few years if they don’t get some fiscal relief. That’s 500,000 people on the unemployment rolls.

I’ve always believed we need automatic stabilizers. We need a safety net. But I think it’s becoming equally important to show we’re not going to borrow endlessly. I also think it’s a bad idea to bail out states from making the necessary decisions they need to make to increase and fix their structural deficit problems. All you’re doing then is putting their liabilities on the federal books. And I assume those jobs are mostly public sector jobs. If you focus on those, that money comes from the private sector. The money isn’t free. It’s being taken out of the private economy and pumped through the private sector. The right path is to keep the money in the private sector and so they have money to invest. We should focus on growth in the private sector, not growth in the public sector.

But part of the problem right now is that even when you put that money in private coffers, they’re not spending it. They’ve got a lot of capital on hand now, but they’re sitting on it. What gives you confidence that your path will work, when pretty good profits and stock prices right now aren’t working?

We need to do things to free up credit. We need regulatory forbearance there. Right now, the policymakers and regulators are doing opposite things. So you’re right that there’s a lot of capital parked out there, and we need to coax it out into the markets. I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.

And a lot of this is psychological. The people who have capital are sitting on their hands: I just talked to a guy who builds nurseries and canceled three construction projects next year because he just doesn’t know what’s happening. People are just too nervous, they don’t know what the economy will be, what the regulations will be, what the taxes will be, and to the extent you can increase certainty, you can unlock some of that credit.

To wrap this up, let me try and say this back to you so I’m sure I have it right: Your economic approach would be to repeal and replace the big legislation we’ve passed in the last year, make a long-term commitment to keep taxes low and cut federal spending, get regulators to ease up on the credit market, and generally focus on pulling the government back, as you believe that’ll leave space for private businesses to step forward.

That’s right, but let me clarify one thing: You said repeal and replace. You can say I’m offering more uncertainty by redoing these laws. I’m saying it’s the quality of these laws that’s the problem. Better solutions could’ve been passed. On FinReg, I’d do the Luigi Zingales stuff. On health care, you know what I’d do.

But to just push you on this one more time, even under the best circumstances, that will take a long time. What Congress produces won’t be what’s in your white papers. So best-case scenario: Replacing them takes awhile, and there’s going to be natural uncertainty as banks, for instance, now have to wait to see what the new rules will be on them. And so what do you do in the interim to unlock this capital?

If Nancy Pelosi came to me and said I’ve been wrong, you’re right, what do you want to do immediately, we could put caps on spending, maybe make a good dent on future spending through the [fiscal] commission, and extend the tax cuts two years. That, in and of itself, would really help the economy.

Update: There's been some criticism of Ryan's suggestion that we should increase the federal funds rate to push capital out into the private sector, so I asked Ryan if he'd like to expand on the point. Here's his reply:

“Of course I do not think increasing the federal funds rate is what one does to spur immediate economic growth. But I do think we need to understand that the extremely accommodative monetary policy we have had for the past two years is not risk free. Observers like Kansas City Fed President Tom Hoening have made the case for a modest increase in the federal funds rate to send signals of monetary credibility, get back to normalcy and ward off speculative behavior (i.e., the next bubble). (More fromHoening [pdf]).

Also – I’m not convinced – but intrigued – with the debate over the carry trade that is going on right now. What I mean by that is banks can borrow at essentially no cost from the Fed, plow the money back into no-risk Treasury securities, and earn that modest spread. This dynamic, while obviously helping banks recapitalize, could be curbing capital deployment in the private sector.

I'm intrigued – but not convinced – by this argument. I appreciate the opportunity to fully explain my point.”