If Rep. Paul Ryan’s newly unveiled 2012 budget is signed into law, this is what Ryan’s economic forecasters say will happen: The unemployment rate will plunge by 2.5 percentage points. The still-sinking housing market will roar back in a brand new boom. The federal government will collect $100 billion more in income tax revenues than it otherwise would have.
And that’s just in the first year. By 2015, the forecasters say, unemployment will fall to 4 percent. By 2021, it will be a nearly unprecedented 2.8 percent.
The tax and spending roadmap put forth Tuesday morning by Ryan, the Wisconsin Republican who heads the House Budget Committee, is backed by a set of extremely optimistic assumptions about how the budget would stimulate private investment, hiring, and broad economic growth.
Where would that spectacular growth come from? Based on an analysis provided to Ryan by the Heritage Foundation, a conservative think tank, it would come from the liberating effects of lower taxes and less government debt.
But the forecasted growth is so high that it falls on the outer edge of what most economists say is plausible—or even desirable—for the next decade.
Ryan’s commissioned forecasters say the budget will cut unemployment to 6.4 percent by 2012, down from the current 8.8 percent; the last time the rate fell that quickly was 1982-1983. The analysts say the rate would then fall so far below the level most economists consider "full employment"—about 5 percent—that employers would be desperate to find workers.
The forecasters say Ryan’s plan would result in the creation of nearly 1 million more jobs next year, above and beyond the jobs that would be created by normal growth. And that surge would continue, they say, adding 1.3 million jobs above business as usual for each of the next 10 years.
In the near term, many of those jobs appear to be the direct result of a new housing boom: The analysts project an additional $89 billion in residential investment in 2012 under the Ryan plan, and a total of more than $1 trillion in additional housing investment for the next decade. This would be despite the housing market's continuing litany of post-bubble woes: falling prices, a backlog of foreclosures, and a glut of unsold homes.
The assumptions come from an economic model developed at Ryan’s request by analysts at the Heritage Foundation, who analyzed the budget’s provisions and projected their economic impacts over the next decade using a macroeconomic model developed by the consulting firm IHS Global Insight. Heritage compared the economy under the Ryan plan with an alternate scenario developed by the nonpartisan Congressional Budget Office.
Heritage found that the Ryan plan, which reduces tax rates, would increase federal tax receipts compared to the alternative scenario. Analysts also concluded that its curbs on discretionary and entitlement spending would reduce the federal government’s debt burden and spur increased private investment.
Both those conclusions are bedrock principles of supply-side economics.
“The spending reductions have a positive effect on economic output,” said William Beach, the director of Heritage’s Center for Data Analysis, in an interview. Reducing the federal debt-to-GDP ratio, he added, will cut borrowing costs across the economy; tax cuts will give businesses more money to invest, and hiring will take off as a result.
But Heritage modelers have made similar predictions before—and they didn't pan out. In 2001, they incorrectly projected that tax cuts pushed by President George W. Bush would create millions of new jobs; in fact, the 2000s were the most anemic decade for U.S. job creation since the Great Depression. Heritage experts say they couldn’t have predicted the 2001 recession or the Bush administration’s government spending increases.
Liberal economists quickly attacked the Ryan plan's assumptions.
“They don’t have a strong track record of their projections matching reality when it comes to these kinds of scenarios,” said Heather Boushey, senior economist at the Center for American Progress. In particular, Boushey called the math behind projections of massively increased housing investment “fuzzy” given the realities of the market.
“I just don’t see how you spark a boom in housing,” she added. “Would that be good for the U.S. economy? Would that be at all likely? I think the answer to both questions is no.”
Beach, who led the Heritage modeling team, said the projected boom in housing “surprised us as well" and said that it "may be an artifact of historical data.” But Beach said it could also be a response to a projected increase in household formation due to improved economic conditions—quite literally, adult children finding jobs and moving out of their parents’ basements.
He also defended the projected 2.8 percent unemployment rate in 2021. Typically, unemployment rates near the so-called “natural rate”—somewhere around 5 percent—spur the Federal Reserve to hike interest rates in order to prevent wages and inflation from surging.
Beach said the Heritage model assumes that falling debt ratios will keep inflation and interest rates in check, allowing the Fed to let unemployment fall to what would be the lowest level since 1953.
An economist at IHS Global Insight, whose model Heritage employed in the analysis, seemed skeptical of the low unemployment projections on Tuesday.
Nigel Gault, Global Insight’s chief U.S. economist, noted that in any economic model, forecasters make assumptions about labor supply, capital spending and other details that can affect the projections.
“I’m not quite sure what assumption... would deliver 2.8 percent unemployment,” Gault said in an interview, adding: “We might assume different parameters.”
Clifford Marks contributed