In Crazy Company

Putting Congressman Paul Ryan in charge of the House Budget Committee is like putting Jenny McCarthy in charge of the American Medical Association, Tom Cruise in charge of the American Psychiatric Association, or Charlie Sheen in charge of the FBI.  What do they have in common?  Each is good looking and a fairly good public speaker.  They are passionate about their chosen topic area, and they sound like they know what they are talking about - unless of course you actually know something about the topic.  Then they sound crazy.  But they have the right to be crazy - or at least they have the right to their own opinion however misguided it may be.  However these folks should not be in a place where their crazy opinions greatly impact the general public - and that includes Rep. Ryan.

That may seem like a strong statement comparing Rep. Paul Ryan to a Playboy centerfold and a guy famous for drug fueled parties with porn stars.  But let me examine his case a bit a closer.   In each of the stars cases the person in question has a weird opinion.  McCarthy believes that vaccinations cause autism and therefore encourages kids not to be vaccinated.  Cruise believes that psychiatry is dangerous and that psychological problems are caused by...well it is too hard to explain, check this out.   Charlie Sheen is convinced that the Bush administration masterminded 9/11 as a pretext for the US to invade Iraq.  In each case the stars opinion stands in sharp contrast to the views of experts in their field.

Now could it be that the experts are incorrect?  Sure.  The "experts" in Galileo's time were wrong.  The Sun did not revolve around the Earth.  Copernicus, Redi, Darwin, Einstein.  There have been a number of times in history in which the "experts" were proven completely wrong.  But there have been many more cases in which the experts were correct or were nearly correct and people expounding controversial theories were just off their rocker.  In statistics we refer to it as Type I and Type II error.  Type I error being that the conventional belief (known in statistics as the null hypothesis) is correct and you reject it.  Type II error being that the conventional belief (null hypothesis) is not correct and you fail to reject it.  In the first case you are disagreeing with the crowd and you are wrong and they are right.  In the second case you agree with the crowd and you are both wrong.  I tend to think that the standard of proof for the first case should be higher.  If you are making a claim at odds with  the experts then it should be up to you to provide strong evidence of to reject their case and support your own (and no Xenu is not a strong case).

So what claims is Rep. Paul Ryan making?
      (1) That the US faces imminent inflation unless the Fed raises interest rates.   See here  October 2009 and here  October 2010  and here Feb 2011 and here Feb 2012 .
      (2) That taxes on the richest 1% greatly slow economic growth  See here  and there are a few good quotes here as well  And this discussion mentions him as well.  And here
      (3) That switching to a commodity based (aka Gold) standard would be stabilizing   See here and here
      (4) That the national debt is a significant cause of our current recession   See here
      (5) Fiscal stimulus does not work  See here

There are three ways that I could attempt to refute Rep. Ryan.  First on theoretical grounds, second on empirical grounds, and third the appeal to authority.  I know - appeal to authority is not really a proof - but if the experts all disagree with you (as with McCarthy, Cruise, Sheen) you are going to need strong defenses on the theoretical and empirical grounds to have any standing.  So let us ask the experts what they really think.

APPEAL TO AUTHORITY

The University of Chicago's Booth School of Business polls distinguished scholars in economics on a variety of topics.  Each poll has around 40 respondents.  Remember this is the University of Chicago home to free market economics - not exactly a left wing bastion.  Here are a few recent polls.

The Fiscal Cliff:  "If the fiscal changes that are planned under current US law take place next year — including Bush era tax cuts expiring, Medicare payment rates to doctors being cut, the AMT applying to many more taxpayers, and automatic cuts in defense and non-defense discretionary spending kicking in — then US real GDP growth in 2013 will be lower than it would be under the CBO's alternative fiscal scenario, in which the above changes do not occur."   The results?  30% strongly agree, 43% agree, 8% uncertain, 3% disagree (1 person out of 40), 3% no opinion.  So they disagree with Rep. Ryan on the US debt being the problem with the economy.  And they disagree with him on fiscal policy not having stimulative effects.

ARA:  "Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill."  The results?  29% strongly agree, 51% agree, 2% uncertain, 2% disagree, 2% strongly disagree, 0% no opinion.   Again they disagree with Rep. Ryan on the effects of fiscal policy

 Gold Standard:  "If the US replaced its discretionary monetary policy regime with a gold standard, defining a "dollar" as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American."  Now it is not 100% clear whether Rep. Ryan is in favor of a Gold standard.  At the cited conference he spoke in support of one but now says that he is actually in favor of a "commodity standard" which ties the dollar to a basket of commodities rather than to gold specifically.  A commodity standard has all of the same problems as a gold standard and then some.  Think about it.  If we were under a commodity standard which included food prices then as grain prices soared over the last three months due to drought across the country we would be forced to tighten the money supply.  Or if there is an oil crunch then we tighten the money supply.  And our monetary policy becomes dependent on China and India's demand for commodities.  That does not sound like a good idea.  I am certain that if the poll question were rephrased to "commodity standard" instead of "gold standard" the results would be exactly the same.  The results?  0% strongly agree, 0% agree, 0% uncertain, 40% disagree, 53% strongly disagree, 0% no opinion.  The Chicago panel strongly disagrees with Rep. Ryan's view that tying the money supply to commodity prices is a good idea  - as would anyone who actually looked at the destructive history of the Gold standard.  See here and here.

Taxes:   "All else equal, permanently raising the federal marginal tax rate on ordinary income by 1 percentage point for those in the top (i.e., currently 35%) tax bracket would increase federal tax revenue over the next 10 years."   Recall the Laffer curve is a concave shaped curve with marginal tax rate from labor income on the X axis and government tax revenue from labor income on the Y axis.  The argument is that at a 0% marginal tax rate we have no revenue and at 100% tax rate no one works so we have no revenue.  Somewhere in the middle there is a point with maximum tax revenue.  The question is which side of the peak we are on.  Laffer argued that we were on the right hand side of the curve so that lowering the marginal tax rate would increase government tax revenues.  The preponderance of evidence says we are on the left hand side of the peak although Laffer and the WSJ editorial page still argue the contrary.  The results?  44% strongly agree, 49% agree, 2% uncertain, 0% disagree, 0% strongly disagree, 0% no opinion.  So the Chicago panel disagree with Laffer, the WSJ editorial page, and Rep. Ryan. 

Interestingly they have another question labelled the Laffer Curve .  The first part asks a slightly different question.    Laffer Curve:   "A cut in federal income tax rates in the US right now would lead to higher GDP within five years than without the tax cut."    This is really just asking are tax cuts stimulative.  Old school Keynesians agree with that and I suspect many current economists agree as well - and 0% strongly agree, 35% agree, 35% uncertain,  5% disagree, 3% strongly disagree, 5% no opinion.   The second part explicitely asks if we are on the right hand side of the Laffer curve  "A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut. "  0% strongly agree, 0% agree, 8% uncertain,  33% disagree, 38% strongly disagree, 5% no opinion.  So again the Chicago panel disagrees with the Laffer, the WSJ, and Rep. Ryan.

Unfortunately there is no question asking the panelists if we risk huge inflation unless the Fed raises interest rates.  I think I know what the panelists would say.  They do ask the following question on Monetary Policy:  "All else equal, the Fed's new plan to increase the maturity of its Treasury holdings will boost expected real GDP growth for calendar year 2012 by at least one percentage point."   I would have gone with an uncertain here. Yes it would be stimulative but given where rates currently are 1% seems like a lot.  0% strongly agree, 0% agree, 33% uncertain,  36% disagree, 17% strongly disagree, 7% no opinion.   There are a lot of comments in the panel expressing the same opinion as mine.  

So my point is that on some major economic policy questions which have huge impact on the US public Rep. Ryan is way out in left field.  As with Tom Cruise and Jenny McCarthy and Charlie Sheen he absolutely has the right to his own opinions - regardless of how they differ with the opinions of people who actually study the subject.  However you probably do not want him anywhere near actually having any impact on US government policy. I have to believe that there are Congressmen on the right side of the aisle who understand what an awful idea a commodity standard really is.  Put one of them in charge.

LATE NOTE:  Funny I wrote most of this two weeks ago.  I was not quite finished when the New Yorker put out this article on Rep. Ryan.  Tonight there was a rumor Gov Romney would select Rep. Ryan as his running mate - so I figured I should get this out even if it was not yet quite ready for prime time.  If I just had not spent so much time watching  Mission Impossible  I would have had this out earlier.  Damn you Xenu!

LATE NOTE 2:  Apparently I am not the only one who has noticed the marked discrepancy between the common views of economists as expressed by the University of Chicago poll and the views of certain Republican policymakers.

LATE NOTE 3:  Mark Thoma agrees with me on Paul Ryan's crazy economic policy views.