Of Paul Ryan and Buggy Whips

First of all, I have to admit that my prediction was wrong. I predicted that Paul Ryan would not be the Republican nominee for Vice President in 2012. My reasoning was simple: I didn’t believe that Mitt Romney would risk being overshadowed by his running mate on questions of economic policy. However, Mitt Romney did indeed choose Paul Ryan as his running mate late last Friday, thus demonstrating that he is comfortable running for President on a fiscal blueprint that is known as “The Ryan Plan” rather than “The Romney Plan.”

The selection of Paul Ryan immediately transforms the presidential race, turning it from an up or down referendum on President Obama’s performance into a choice between two starkly different views of economic policy. The Republican Party, which proudly labels itself a “brand,” will now embark on an effort to sell a plan that includes tax cuts for the wealthiest Americans, reductions in monies spent on programs that benefit low income Americans, and the acceptance of unrestrained budget deficits because defense spending is left untouched.  The sales pitch is that this combination will lead to a faster economic recovery. The question is whether anyone will buy what they are selling.

Simple demographics indicate that the cultural issues that have traditionally defined the Republican Party since the 1980s have become less important to an electorate that every year becomes younger and less white. Opposition to same sex marriage, opposition to any immigration reform that includes amnesty for those who are already present in the country, and reduced access to abortion and contraception for women will all continue to be popular policies in certain segments of the country, but they are not issues that will attract majority support nationally.

For this reason, the Romney campaign has chosen not to focus on these issues, even though they provide a stark contrast with the policies of the Obama Administration. Younger voters are simply more egalitarian, and more tolerant, than older voters on cultural issues.  Support for the Republican position on these issues is strongest with whites who are currently over age 55, a demographic that is shrinking annually through natural attrition (I do not say this with any relish, as I am fast approaching that age cohort myself).

By re-focusing this election on economic policy, the Romney campaign is gambling that the budgetary plan advocated by Paul Ryan will prove popular with younger voters and will buck the demographic trend on cultural issues. Ryan is a straightforward and unabashed advocate of the theory that cutting federal taxes will lead to increased federal revenues and that entitlement programs that benefit the poor should be cut in order to fund tax cuts for the wealthy.  Proponents of this view call it “supply side economics” while critics label it “voodoo economics.” Paul Ryan happens to articulate a version of this economic theory that is so purified and absolutist that not even Friedrich Hayek would recognize it.

It is important to recognize that the Republican Party was not always associated with the belief that markets should operate free from any government regulation or interference. The idea that the federal government should adopt economic policies that level the playing field for entrepreneurs and poor laborers can be traced back to the Lincoln Administration.  Later, Teddy Roosevelt led a Republican wing of the Progressive Movement that viewed the federal government as a necessary counterweight capable of protecting the public from the growing economic power of corporations. As President, TR didn’t favor comprehensively regulating the markets, but he did advocate aggressive government prosecutions of the most egregious corporate offenders as a way for the federal government to send a message of self-restraint to corporate leaders.

More recent Republican Presidents have governed in ways that the 2012 ticket now firmly rejects. Deviations from the mantra of cutting taxes and cutting social spending include the tax increases adopted by Presidents Reagan and George H.W. Bush, and the expensive social spending programs initiated by George W. Bush (“No Child Left Behind” and the Medicare Prescription Drug Benefit).

The Republican Party of 2012 has repudiated all of this history. It has done so at the very time when the unacceptable risks assumed by the financial sector in the run up to the 2008 economic crisis, the resulting recession, and persistently high unemployment have all combined to leave many persons fearful of their future. Voters who are anxious about their economic future are not likely to favor reductions in the federal “safety net,” nor will they vote to reduce the federal government’s power to protect consumers from predatory business practices.

However, by choosing Paul Ryan to be the economic face of his campaign, Mitt Romney has decided against changing his free market message to appeal to today’s nervous electorate. Instead, he has decided to purge his message of any moderation whatsoever and to double down on his selling efforts. It’s as if Coca-Cola responded to poor sales for “new Coke” by keeping its new flavor and doubling the marketing budget.

Not only will elderly Republicans react negatively to Ryan’s proposals to privatize Social Security and transform Medicare, but so will younger voters who blanch at the prospect of bearing a growing proportion of the cost of their parents’ health care (a result which is inevitable if the Medicare vouchers that Ryan advocates rise in value at a rate lower than the annual rise in health care costs).

The Republican sales effort will involve labeling President Obama a communist who will collectivize the means of production and redistribute incomes. In other words, “buy our unpalatable product because the alternative is worse.” This sales pitch is doomed to fail, because voters know that social democracies such as Great Britain, Canada, Germany, and Israel all maintain adequate taxpayer-funded social safety nets without slouching towards communism. The stark choice presented by Team Romney is too obviously a false choice.

The truth is that the majority of the voting population in this country likes our moderately socialist spreading of the burden of health costs and the costs of supporting the elderly, and they oppose proposals to significantly diminish these programs. Polling consistently demonstrates this acceptance.  Not only do all generations benefit personally from these policies, either currently or in the future, but such policies of moderate redistribution to the less well off are also consistent with the basic morals espoused by all of the major religious denominations.

In a democracy, it is seldom fruitful to lecture the crowd about the wrongheadedness of its preferences. Segments of the Republican Party have been “educating” the public on the supposed benefits of supply side economics since the Reagan Administration, and the majority of the public isn’t buying. However, rather than pursuing less extreme economic plans, or modifying its views in accord with changing economic conditions, the strategy of the Republican Party in 2012 has been to keep the same policy whilst reducing the size of the crowd that votes, through Voter ID laws  and through aggressively partisan re-districting efforts.

This is at best a short-term strategy, given the demographic reality, to say nothing of the fact that it is a bald attempt by office seekers to shape the electorate to their own personal benefit. In other words, instead of following the market, and adapting their policies, the Republicans are focusing on polishing their existing brand.

Ironically, the Republican political strategy runs counter to the basic principles of creative destruction, as applied in the private equity market and as espoused eloquently by “Larry the Liquidator” in the movie “Other People’s Money.” Here is what Larry, played by Danny De Vito, tells the shareholders of a struggling company:

[Y]ou know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure. You know, at one time there must’ve been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company? You invested in a business and this business is dead. Let’s have the intelligence, let’s have the decency to sign the death certificate, collect the insurance, and invest in something with a future.

Better yet, watch the clip.

With his Ayn Rand inspired, absolute fealty to the free market, Paul Ryan makes the perfect buggy whip. There is no longer any place for economic moderates in the Republican Party. Mitt Romney is now ready to sell an economic policy that is as extreme and uncompromising as his position on cultural issues. His problem is that there just aren’t enough consumers out there who are willing to buy it.


This Post Has 9 Comments

  1. Tom Kamenick

    Hi Professor, I wanted to comment on a couple points you made.

    “In a democracy, it is seldom fruitful to lecture the crowd about the wrongheadedness of its preferences.” – This seems an unusually negative spin to put on the attempt to educate people and change their minds. I realize you disagree about what they are trying to teach, but I would find it hard to criticize a strategy (from either side) that focuses on trying to change people’s minds rather than reacting to preconceptions.

    “[Y]ounger voters [will] blanch at the prospect of bearing a growing proportion of the cost of their parents’ health care (a result which is inevitable if the Medicare vouchers that Ryan advocates rise in value at a rate lower than the annual rise in health care costs).” – This is already inevitable with the ACA’s Independent Payment Advisory Board. They are tasked with capping increases in Medicare spending in relation to inflation – a rate of increase far lower than historical increases in Medicare spending. Both plans have the same effect of reining in Medicare spending – the difference is whether an unelected, unaccountable board of “experts” makes the reduction choices by dictatorial fiat or market participants make the aggregate choices as to what coverages they do and do not want.

    “The Republican Party of 2012 has repudiated all of this history” – Of course they have. They don’t like (or at least, they’re speaking as if they don’t like) where this history has brought us. The doom of not learning from history and all that. Big government politicians of both parties are the perceived problem and where the pushback is aiming.

  2. Nick Zales

    Good post. Tom Kamenick points out the real issue for the TEA party folk who have taken over the Republican party. For 32 years these people have sought leaders who promised smaller government and balanced budgets. Once in office, however, these leaders, such as Ronald Reagan and Bush II, have vastly expanded the size and scope of government. Worse yet, both never presented anything even close to a balanced budget. The TEA party screams about our $15 trillion national debt while ignoring who was responsible for most of it.

    When I first saw the Ryan budget, I thought I was reading an article in the Onion. What politician would propose gutting major social programs, giving tax breaks to billionaires and increasing military spending? We live in a country where the top 400 people own as much as the bottom 150,000,000. Ryan wants the 150 million to sacrifice all to benefit the 400. One would expect crazy ideas from a career politician, but Ryan’s ideas are beyond crazy. Let’s not forget that he was Bush’s point man on the plan to “privatize” social security. Had that happened most of our senior citizens today would be destitute.

    The choice of Ryan is not one of leadership but of capitulation to the TEA party. They keep believing that if they vote in a “conservative,” their dreams of limited government will come true. All the evidence points otherwise. Ryan’s voting record is one of vastly growing government, bailouts for Wall Street and ever increasing wasteful wars and military spending. How that jibes with limited government that lives within its means is beyond me.

  3. Steven Cochran

    Good analysis as always by Professor Fallone. Rather than give a further pat on the back about the 90% of stuff I agreed with, my dissent in part:

    Labeling the message as “New Coke” with poor sales/results, seems to ignore the very positive 2010 election results. Sure, historically, midterm elections don’t favor the incumbent’s party, that point is understood. Nonetheless, the message resonated with independents (you know, those voters who will determine the winner here) in a manner unbefitting of the New Coke label.

    What seems to be understated in the Ryan pick, is how much it could help secure the independent, small government, less spending Ron Paul types that are still lukewarm to Romney.

  4. Ed Fallone

    Tom raises a valid perspective. Maybe the rules of business — “the customer is always right” — don’t apply to political campaigns. Maybe political parties are not “brands,” policy positions should not be focus-grouped in advance, and aircraft carriers should not serve as props for photo ops. There is something odd, however, about a campaign that embraces “vision” in disregard of market principles, when the very content of that vision is that the federal government should be run more like a business.

  5. Tom Kamenick

    For one thing, there are a lot of newcomers – both to politics and these national issues – to convince. You probably won’t change the minds of people whose minds are made up and dead set, but there’s a very large segment of the populace (the “customers” of a political business) whom you can still reach.

    Coca Cola doesn’t stop advertising just because they figure most people have made up their minds about whether they prefer Coke or Pepsi.

  6. Jay Torsian

    Professor Falone,

    Maybe you should more closely analyze your comment about “Larry the Liquidator” in the context of taxation. “You know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure.”

    Think about it this way: raising taxes is like getting an increased share of the nation (market). No company is just hoping and waiting for that next tax increase so they can start hiring again; in fact it likely has the opposite effect. A company either has to accept that they will be less profitable due to higher taxes or has to reduce staff to maintain their profit levels (the more likely occurrence). Either way, the taxable market share is diminished through lower income of the corporation or fewer employees generating payroll and income taxes (a larger decrease in tax dollars).

    Either way the result is a diminishing tax base (market). So what is the solution? Expand the market by allowing more profits and encouraging investment in new employees or further raising taxes creating a downward spiral in the size of the tax base (market).

    Yes, let’s follow your advice and listen to Larry the Liquidator.

  7. Ed Fallone

    Mr. Torsian:

    The comments of Larry the Liquidator in the movie are recognized by many as the most eloquent defense in popular media of how private equity leads to a more efficient market. The entire film is built around the competing speeches, and competing viewpoints, of the Danny De Vito and Gregory Peck characters. The play on which the movie was based was actually written in consultation with a well known securities law professor.

    My use of the quote in the context of Mitt Romney’s choice of running mate is a (slightly) tongue-in-cheek application of business principles to critique a candidate who is a devotee of business. It is also a way to underscore how current political strategy has become captured by political consultants who apply marketing techniques in order to sell their candidates just as they would sell a bar of soap.

    Taking Larry the Liquidator’s comments about the efficiency of capital markets and applying them to tax policy is completely incongruous. You might as well argue that Einstein’s Theory of Relativity should be applied to set tax rates.

    There IS a lively debate between economists on the topic of whether tax cuts magically lead to greater government revenues, or whether tax increases can successfully reduce the deficit without strangling economic growth. Taking the latter position are economists who point to the actual results of tax increases enacted during the Clinton years and of tax cuts enacted during the George W. Bush years. Taking the former position are a shrinking pool of economists who continue to espouse their faith in “voodoo economics” without any empirical evidence to support their claims.

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