Paul Ryan

20th August 2012

Acting as Chair of the House Budget Committee, Ryan has developed a reputation for bold economic proposals. Perhaps his most striking proposal was contained in one of the first iterations of his plan – termed a “Roadmap to America’s Future” – which “zeroed-out” all taxes on investment and capital gains. This proposal has been at the root of criticisms that affluent Americans, who derive most of their income from investments, would pay essentially no taxes under the Ryan plan. Indeed, Mitt Romney himself advanced this charge during the primary campaign, responding to Newt Gingrich’s calls for such “zeroing out” of taxes on investment income.

To be sure, since the introduction of this specific idea, Ryan has apparently backed away from an explicit call to eliminate taxes on unearned income. In this light – despite the praise he has received for his ostensible rigor – his proposals have become considerably more opaque.

Nevertheless, wherever he winds up on the precise level of capital gains taxes, the philosophy guiding each version of the Ryan has remained constant: investment is the driving force of economic growth, and lower taxes on investment stand to increase growth.

As the most recent version of his plan puts it: “Raising taxes on capital is another idea that purports to affect the wealthy but actually hurts all participants in the economy. Mainstream economics, not to mention common sense, teaches that raising taxes on any activity generally results in less of it … Tax reform should promote savings and investment because more savings and more investment mean a larger stock of capital available for job creation. That means more jobs, more productivity, and higher wages for all American workers.”

It is at this deeper philosophical level where he may be most vulnerable – as these sorts of ideas led directly to the global financial crisis.

Rather than get bogged down in political mudslinging over what Ryan’s plan means for Romney’s individual obligations, it may be more useful to raise the level of discourse by pointing out that the logic and evidence for Ryan’s policy claim are each open to question.

To this end, it is first worth noting that two broad theories of investment and growth exist. One holds, in accord with Ryan’s view, that investors make efficient use of information in seeking out opportunities. John Maynard Keynes famously characterised this view as casting investment as “enterprise”. This holds that investors put their money where it is most likely to benefit themselves — a move which has the added virtue of benefitting the economy as a whole. To be sure, this view is at times a useful guide to trends. Certainly, large-scale investors like Warren Buffett, who have the ability to “sit out” market swings, invest carefully, in ways likely to benefit themselves and the wider economy.

However, a cursory review of asset market trends over the past two decades suggests that market trends have neither been efficient not useful. Since the early 1990s, the global economy has been through a variety of emerging-market booms, the Long Term Capital Management crisis, the dot-com bubble, and the subprime and derivatives manias that led to the global financial crisis. These experiences have led to a renewed interest among economists on the irrationality of investors and the ways in which their choices may reflect not a sense of economic fundamentals, but rather collective psychology.

Reflecting such concerns, Keynes famously also argued for a second way of explaining investment trends: From this perspective, investment may not, as Ryan suggests, be akin to productive enterprise. Instead, it may be driven by speculation. As Keynes drew the contrast, he argued that:

“If I may be allowed to appropriate the term speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise.“

And for Keynes, as has been the case over the past two decades: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street… cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.”

In sum, the biggest problem with the Romney-Ryan vision may be less that it is unfair, than that it is inefficient. Increasing investment which flies off into the speculative atmosphere – which is particularly likely where demand is so anaemic – is unlikely to restore growth. It would be better to reduce taxes on earned income, to enable demand – and so give investors a real outlet for their resources.

By Wesley Widmaier, Griffith University

Wesley Widmaier receives funding from the Australian Research Council.

The Conversation

This article was originally published at The Conversation. Read the original article.

16 thoughts on “Paul Ryan”

  1. JW says:

    Hi Shaun
    Clearly the UK/EZ/EU needs a bit of strong management to get out of this.
    I understand a ‘young’ man from Govan with a decent track record is now available for a new challenge….

    1. Grumpy Old Paul says:

      As someone with a legendary lack of interest in the ‘beautiful game’, you had me baffled until I resorted to well-known encyclopedia!

      Perhaps member of the Magic Circle could help.

    2. Anonymous says:

      Hi JW

      You have to give it to his track record which is vastly superior to any current politician but I suspect the retirement is to do with a health issue. It was also an example of never believe anything until it is officially denied as he had denied it only at the weekend.

      As to the Man Utd share price I was surprised it only dropped by 1.76% today as there is still a lot of debt which has relied on the (out)performance Fergie has provided to be financed.

      1. JW says:

        Ah, posted before the end of tonights game, so you must be a Gunner eh?
        At least the debt is slowly being brought down, and there is no problem with a ‘deficit’ with fast growing revenues; more than you can say for most governments.

        1. Anonymous says:

          Hi JW
          Nice try! But as in so many things correlation does not necessarily prove causation….

  2. max says:

    I think everybody (who isn’t earning huge sums working for the EU) agrees that the Euro is doomed in it’s current format.

  3. Pavlaki says:

    Very interesting! It surprises me that the normally conservative Dutch were involved in silly mortgages.

    It is not only the bond and equity markets that might puzzle our Martian friend but the Euro exchange rate as well! In the last few months I have become fascinated in the gyrations of the Euro in the forex markets and in particular how it appears to shrug off an endless stream of bad news and rally strongly on the vaguest hints of good news ( or news that is not as bad as expected!). The exact opposite of the sentiment surrounding the Pound where a rise occurs only grudgingly after a lot of good news and the slightest hint of a ‘not as good as expected’ statistic sends it into free fall. If our Martian works on fundamentals he will be a very confused alien indeed and probably puts it down to silly human sentiment and lack of common sense. As for myself – I have lost any hope of trying to make sense of it. Just as well I’m not a trader as I would have lost a fortune by now!

    1. Anonymous says:

      The euro exchange rate can be affected by several breakup scenarios.

      What is a sensible rate for a euro that excluded the PIIGS,Cyprus, Belgium & maybe France ?

      What is a sensible exchange rate for a euro that excludes Germany (and probably other Northern countries ) ?

      I’m saying that a break up is possible, not that it will definitely happen. Depending on which countries may exit, the currency has very different values ….

    2. Anonymous says:

      Hi Pavlaki

      I find myself continually returning to the view that the Euro is an ersatz or proxy Deutschmark. It did little on the poor Netherlands news but rallied on the later German industrial production numbers (which as they showed a 2.5% year on year fall were not that good…).

      Although whilst it feels strong it is in fact in trade weighted terms at 100.64 so virtually where it began!

      1. pavlaki says:

        Yes is does look as if the markets are viewing the Euro as an ersatz DM however I still would have expected it (and it’s trade weighted index) to have fallen by now given the unending stream of negative news from Europe. It also puzzles me that Sterling has failed to perk up significantly on a reasonable amount of good news and that it’s weighted index appears stuck around 80%. I would have thought that traders would recognise that Sterling is well under it’s long term value and be looking for any bit of good news to buy. It doesn’t seem to be working like that though!

  4. Andy Zarse says:

    Hi Shaun, we have some Dutch friends coming over in two weeks, one in HR and one an accountant. I’ll see what their take is and let you know. But, having spoken to several Cloggies recently, the downturn means things are certainly making for a consistently bleaker picture.

    On the other hand, the Dutch are nothing if not pragmatic grafters. I think they’ll come through it but they need to sort out their banks, and quickly… erm, where have I heard that one before??

  5. james says:

    Hi Shaun, Very interesting as ever.
    Just what is it with banks? Who on earth could think that it would be remotely intelligent to offer mortgages:
    1. Over more than 100% of value; or
    2. Interest-only.
    Let alone both!
    When you think of the hoops businesses go through to get any sort of lending from banks, it seems that money was being thrown at:
    1. Derivatives trading and other non-lending but sexy activities
    2. Bonkers mortgages
    Why exactly do these people get paid so much?

    1. Anonymous says:

      Hi James

      It is an example of bull market economics,regulation,accountancy and in the end their influence on politics. Everyone wants their share of the supposed spoils/profits and there is plenty to go around. Meanwhile the balance sheets and risk profile of the banks gets ever more exposed and under Too Big To Fail the taxpayer is taking large implicit risks so that some people can boast how clever they are and pay themselves large amounts! It is not very edifying is it?

      Or we could just say that greed overwhelms fear…

  6. Paul C says:

    Hi Shaun,
    I am frankly amazed, perhaps I’m ignorant but I had no idea that greater than home value mortgages were still being offered in Holland, even just recently, add to that interest only. With a northern European country starting to financially suffocate I can imagine it’s not something any Eurocrat would want highlighted. Well done for continuing to bring reality to light. I heard a bizarre suggestion last week that UK banks were on the hook for “mis-selling” interest only mortgages in the UK (a bit like the PPI scandal). I don’ rate any bank to have ethics but the public also has to take some responsibility…

    1. Anonymous says:

      Hi Paul

      Here is a guide to the new regime which began this January.

      “Changes to the tax system:

      • Tax deductibility on mortgage interest payments is expected to be conditional on amortising mortgage loans from January 2013.

      • All mortgages originated prior to this will benefit from old tax regime of full tax deductibility.

      • Transaction tax on purchases of existing homes has been lowered from 6% to 2%, first temporarily, now permanently.

      Stricter Mortgage Code of Conduct:

      • Maximum LTV of 104% + transaction tax (2%)

      • Future LTV-limit of 100% (at the moment of writing unclear when)

      • Interest-only mortgage loans maximum 50% LTV

      • Stricter regulations for non-compliance (on a compliance or explain


      Changes in NHG mortgage guarantee:

      • Maximum purchase amount temporarily increased to EUR 350,000, scheduled to decrease in the future back to EUR 265,000”

      So even now the limit is either 104% or 106% in terms of loan to value depending on whether you allow for the mortgage indemnity premium..

      Along the way we spot that mortgage interest has been tax deductible in income tax terms…

      On and on it goes it what looks ever more like bubble territory…

      1. pavlaki says:

        This is surprising! I worked for a large Dutch multinational in the early 90’s and they were the most financially conservative organisation I have ever dealt with. During my frequent visits to Holland I got to know the Dutch quite well and this sort of thing really isn’t part of their character. Obviously the lure of large banking bonus’s works there as well!

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