Economic Club of Minnesota
Remarks by Congressman Paul Ryan
Thank you for your very kind words. It’s a pleasure to have this opportunity to talk to you. Clearly we are weathering some storms now, but I believe the best part of our economic history is still in the future!
Thomas Jefferson once described his idea of good government this way: “A wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, shall not take from the mouth of labor the bread it has earned. This,” Jefferson said, “is the sum of good government.”
Jefferson was speaking not just for his day but for all future time…making the case that free markets and limited government are a moral necessity for human happiness to flourish.
Frugal? Wise? Does this sound like the government we have today?
The federal government is spending $787 billion which it took out of the economy, to stimulate the economy. So far this year, the government has created 65,000 more federal government jobs, but since the Stimulus was enacted, unemployment has risen to 10.2% and the private sector has lost 2.7 million more jobs.
This government enacted a budget so huge that it will double the federal debt in five years, and triple it in ten.
Our government’s leaders are determined to make Congress enact a new energy tax in the name of “climate change.” The proposed “cap-and-trade” scheme will tax energy consumption from transportation to food and electricity, costing taxpayers an average $3,000 a year while raising over $840 billion in additional taxes.
The Fed is running the printing press around the clock, likely creating a new “carry trade” bubble at best or a vicious return of stagflation at worst.
And of course, the leaders of this government are trying to force all Americans to accept a government health care plan that will undermine the patient-doctor relationship and in the first decade add a trillion dollars or probably much more in federal entitlements.
Our current economy is sobering. The “unfunded liabilities” of our government are “under water” if you compare them to the total net value of Americans’ household assets. The Government Accountability Office tells us that the government‘s total unfunded liabilities stand at $62.9 trillion, while the total households’ net worth, says the Fed, is $10 trillion less, at $52.9 trillion. Americans are worth less than they owe.
Ten months after our new president was sworn in to end the recession, there are 4.2 million more people out of jobs. The leaders of government who pushed those trillions of dollars in new federal spending say they’ve achieved a lot by doing so. If that’s success, what is failure? The Administration openly admits that unemployment above 10 percent will stay high at least until the end of 2010. Economists like Alan Greenspan say that after a couple of quarters of modest growth, the economy will slow down again.
When did America sign on to life with millions out of work and only government “make-work” programs to employ them? Is this the best we can do? Our leaders plainly are looking to other countries where there is almost no job creation, for a new model of government. They hector Americans about all our faults while they enforce regulations that punish success, prevent growth, and limit freedom. In their propaganda, we are greedy, dishonest, materialist, wasteful social Darwinists. Only government keeps us from tearing each other to pieces, so we need more government to reign in our selfish tendencies.
Democratic capitalism is not just an economic system or a political system. It’s a culture – the way of life fit for free men and women. But I know the Congressional majority leaders. They are imitating other models: “Progressivism,” third way, corporatism, social welfare state, crony capitalism. Whatever the name, it is very different from the principles that made this country exceptional. European versions create bureaucracies intimately involved in the details of running their enterprises. They may dictate salary levels—think White House “pay czars.” They may govern businesses directly under nationalized ownership or management—think General Motors. They may do so indirectly by rewarding firms that cultivate bureaucratic connections instead of seeking consumers’ approval for innovations and other decisions. Markets that are truly free have wide-open doors of entry. Innovation overturns established firms, and bureaucrats don’t like unpredictability. Under these models, the doors of entry are closed to newcomers while government agents develop so-called “partnerships” with a few large entities.
We are moving swiftly toward a “tipping point,” where the majority of people pay little or no taxes but become dependents on government benefits. Tax cuts are virtually out of the question because more people have a stake in the welfare state than in entrepreneurism. Citizens who had once governed themselves become supplicants of a bureaucratic state, surrendering liberty in return for security. Whatever you call this, it isn’t free market democracy.
Jefferson and our Founders gave us guides as valid now as ever before: “the laws of Nature and of Nature’s God” – equality and God-given inalienable rights –constitutional self-government – free market democracy. America needs “change” as we move into the 21st century … but our founding principles help us know which “change” takes us forward toward freedom and prosperity, and which means falling backward toward a stagnant European-style welfare state.
In that light, I want to address four specific issues today.
The first, most urgent priority must be the federal budget and growing entitlements. No responsible person can defend the expansion of federal spending which began years ago but exploded in 2009.
In order to function, our federal government has historically taken about 20 cents on every dollar earned in America. This year the federal “take” rose to 27 percent of our GDP. If we do nothing to control this growth, within our generation, we’ll need to extract 40 cents of every dollar just to keep government afloat. At this rate, the “tipping point” will be reached in around five years. And, if Congress refuses to fix our fiscal situation, the bond markets will force us to act, and they will be cruel.
You can’t grow the economy by sucking private capital into the public treasury! It’s time to put limits on the insatiable appetite of government. Congress should impose a binding “cap” on federal spending. By restraining the overall budget including entitlements, we can rein in the cost of individual programs, return powers to the states where they belong, and let the people keep more of their own earnings for saving and investing in the nation’s future. To that end, I introduced a comprehensive reform of our entitlement programs called “A Roadmap fro America Future”, which brings 21st century spending down to sustainable levels.
The second issue is health care.
By 2-to-1, Americans want Congress to address the deficit first, then health care. The Congressional leadership’s answer is to forge on and create another costly open-ended entitlement. They are clueless about how to pay for this "reform," or anything else for that matter. House and Senate leaders, frankly, are fudging their cost estimates to meet the president's statement about not adding a dime to the deficit. Businessmen who cooked the books like this would be committing fraud.
For instance, the bill won't be fully implemented until 2013, but tax hikes will take effect immediately. This gimmick will produce 10 years of revenues but only seven years of expenditures. Once fully implemented, however, the plan will cost nearly $2 trillion over 10 years — double the $900 billion touted as a passing grade from the Congressional Budget Office.
These budget tricks are disingenuous. As the CBO told Congress: "If spending grew as projected and taxes were raised in tandem, tax rates would have to reach levels never seen in the U.S. High tax rates would slow the growth of the economy, making the spending burden harder to bear."
Congress' record in estimating long-term costs for government-run health programs is dismal. When Medicare was created, Congress assured us that it would cost $12 billion in 1990. The true price tag in 1990? $110 billion. Medicaid now costs 37 times what it did when Congress launched it in 1965. Medicare is 16 times higher – both adjusted for inflation.
By that yardstick, suppose the current reform bill outperforms Medicare and Medicaid and grows by a factor of only 10. That will cost $1.8 trillion every year. If it follows the path of Medicaid, it will cost $6.7 trillion every year.
The current health care bill does not meet the test of either real reform or fiscal responsibility. Nor does it represent the best of both parties. It represents the frustrated ideological ambitions of one party’s leaders who believe the way to save the welfare state from bankruptcy is to expand it.
We can fix what's broken in health care without breaking what's working, and without creating a huge new entitlement program that will accelerate the bankruptcy of this country. House Republicans have proposed a bill to do that. We believe the American people deserve a better answer than a European-style government-run health service.
Third is the issue of taxing foreign income. As you know, President Obama wants to eliminate the tax deferral on American entities doing business abroad. Without that ability to defer taxes, a U.S. based manufacturer with foreign sales would be taxed twice, for foreign taxes and U.S. taxes on its international income. By eliminating deferral, the U.S. would severely handicap some of its most successful job-creators with a new tax burden and disadvantage them compared to businesses in all other industrialized countries, none of which double tax.
President Obama actually believes you create jobs by paying more taxes! But in the end, those who will pay the price for this nonsensical tax change will be American workers. U.S. headquartered companies with international operations employ more than half of all U.S. manufacturing workers. They produce more than $2.5 trillion of U.S. GDP. Their workers tend to earn 10 to 15 percent more than their counterparts at U.S. companies without foreign operations. So this is a vital segment of the U.S. economy in the era of globalization. Our economic policies should boost their competitiveness, not destroy it.
For many of these businesses, the President’s proposed tax change would build a barrier too high for them to clear. A PricewaterhouseCoopers study estimates that under this new tax, U.S. companies doing business abroad would need to earn a 40 percent higher rate of return on their foreign operations – 40 percent! – just to reach parity with foreign-based competitors in terms of after-tax profitability. The practical result of such a tax change would very likely be a rise in foreign takeovers of U.S. based companies. A self-proclaimed “fellow citizen of the world” like our President might not think this matters. But I will vote against any plan to write an overseas profits tax into law.
And finally, I would like to talk about monetary policy. To end a declining economy and restore real economic growth, the federal government must address not only fiscal policy but monetary policy. These are separate and distinct functions…but they work in tandem.
We badly need to engage in a national conversation about our country’s currency and the role of the Federal Reserve.
In the last few months the dollar’s international value has fallen precipitously to new lows. Through all this, the silence of the Obama Administration and the Federal Reserve has been deafening. The silence can only mean they don’t see a problem when the dollar – the world’s reserve currency – loses value every day.
The dollar price of petroleum has nearly doubled in 2009. The price of gold – the most sensitive measure of real value – has gone up more than 50 percent since October last year. These measures, of course, are just another way of saying the dollar’s value has shrunk. It will take 150 or 200 dollars to buy what 100 dollars bought a year ago. The world sees the dollar marching toward inflation…even as they see our economy wallowing in joblessness.
Recently some central banks and governments have spoken openly about ending the dollar’s role as the reserve currency for the world and finding a more reliable monetary replacement. Nations heavily invested in the burgeoning US debt are growing restive about the future worth of their holdings. The dollar world reserve system may not be dumped soon, but the discussion itself should set off alarms. Right now, I am more troubled by the weak dollar policy in Washington than those conversations in other capitals.
When you fall deeper and deeper into a problem like this one, you should go back to basic ideas. So what is money anyway? Money is an artificial instrument that represents value. It serves two closely connected purposes: it’s a measure for exchange and a store of value. Money is a moral bond – a guarantor of honesty and trust. The faith of the people rests in the government’s word, when it guarantees the value of its currency.
Since 1971 when the gold standard was terminated, there has been no objective measure of the dollar’s value. The world has had to place its trust of paper dollars in the promises of the US government. In the end, the dollar’s continued strength rests on the integrity of the American idea. Confidence in our free market democracy has constituted our moral bond with the rest of the world. Without any objective dollar standard, that’s all there is left supporting our money.
Candidly, today’s political leadership have lost faith in the American idea. They think it is obsolete and must be replaced by something like the social welfare states of Europe. In that type of government, your rights don’t come from God and nature. Government’s mission is not to secure your rights. No, in the European social welfare model, your rights come from government itself. Every benefit citizens receive is a gift of government, and you better be grateful. It follows that the citizens’ rights and benefits can also be taken away on the government’s say-so. No objective moral standard measures what government does because we live in a post-modernist world where “change” is everything, truth is relative and flexible, and fixed principles of right or wrong don’t exist.
How can the world trust the word of a relativist government about the real value of our money? Words must be backed by action, but no action is being taken to support the falling dollar. In other words, this country cannot continue our borrowing binge abroad in order to support our leaders’ irresponsibility at home! If this keeps up, interest rates will rise so high that our already weak economy, struggling for breath now, will be smothered and return to recession.
It’s essential to understand that Congress itself put the Fed in an impossible situation and made “boom and bust” cycles inevitable. The Humphrey-Hawkins law, enacted soon after the gold standard was ended, imposes a “dual mandate” on the Fed. This means it has to steer monetary policy to (a) keep prices stable, and to (b) keep unemployment low and the economy growing. Day-to-day fixes cannot solve the Fed problem because it has to meet two mandates often in conflict. Congress should end the “dual mandate” and require the Fed to do one job: guarantee the long-term stability of the dollar.
My mentor the late Jack Kemp gave advice to the Fed that seems almost prophetic now. He said: “Until we restore a fixed gold dollar, and a stable international monetary system to match it, there is only one second-best option…[O]ne way to tell if money is too tight or too loose…is to monitor sensitive commodity prices… Gold should at least be included, since it is a forward-looking indicator of anticipated inflation which gives early warning of emerging tendencies toward inflation or deflation.” We still should heed his advice.
Yet today, the Fed uses what is known as an “output gap model”, which is notoriously slow at picking up inflation and recognizing bubbles. It’s like driving down the interstate by looking through the rear-view mirror. You see the off-ramp only after you’ve passed it.
If the current economic downturn has anything to teach us, it isn’t that Americans are sinners and government is our savior. The lesson is that we should put limits back on government and break the shackles of taxes, red tape, and public debt that cripple the entrepreneurial spirit. We need true fiscal responsibility, and sound money, if we are to unleash the American Dream of prosperity and freedom!
Free market democracy is the only system man has ever devised to fulfill human potential. Every other form of government and economy has proven to be reactionary, undermining prosperity, freedom, and the God-given natural rights to which every human being is entitled.
In today’s cultural attack on democratic capitalism, you have a critical role to play. Producers enrich life in countless immaterial as well as material ways. Entrepreneurs and investors, workers and savers, you risk your capital and labor to create a better future without knowing whether you will succeed. It isn’t simply about profit. Capitalism is the spirit of service meeting the community’s needs. It answers the call to take responsibility for your own life and those who depend on you. Freedom is one of the Creator’s noblest gifts to mankind, and not something to be apologetic or guilty about. Be proud of the honorable work you are doing! Stand up for the morality of market freedom! I am confident that we can withstand the assault on capitalism.
Why am I confident? Because Americans outside of Washington don’t believe our government’s role should be to equalize the results of people’s lives. They don’t believe we should be governed by an “enlightened” ruling class.
Americans outside of Washington still believe in the American idea. They believe “to their core” in the principles of liberty, freedom, self-determination and free enterprise. They believe in our system which is designed to encourage people to make the most of their lives – to work toward their true potential.
And that is why I believe Americans, by exercising their democratic franchise, will bring us back from the tipping point and get our free market democracy back on track.