As Obama Signs Stimulus, A Look Back: A Conversation With Paul Ryan, Ranking Republican On Budget Committee

House Republican leader Paul Ryan thinks the stimulus resembles Japan in the 90s.

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President Obama signs into law the historic $787 billion stimulus today. The question on everyone's mind is: will it work?

I had a conversation with Republican Congressman Paul Ryan of Wisconsin, the highest-ranking Republican on the Budget committee and one of the most high-profile leaders in the House on economic issues. (Note: this interview took place in December, but Congressman Ryan's points on the stimulus still apply to today's bill as he talks about the stimulus effort as a whole, not the details.)  Read why he thinks we're repeating the mistakes Japan made in the 1990s, and his suggestions for alternatives, after the jump.

USN: Do you like any of the policies for stimulus that Obama has talked about?

Ryan: The only thing I’ve heard is spend more money on Keynesian stimulus. It may give you a one or two quarter pop in GDP numbers, but it doesn’t actually grow the size of the pie. There are better things to do.

Such as what?

The big problem today is fear and uncertainty. When you have to wake up and read the newspaper to find out what the government is doing, that’s producing a lot of uncertainty in the market. We need more certainty from the government with respect to its fiscal and monetary policies. We also have big tax increases on the horizon, which is holding back people’s decision-making. When the tax rates on capital are scheduled to increase so much, investors are weary to get back into the marketplace. That’s why I think the Keynesian stimulus misses the mark. The Keynesian solution does nothing with uncertainty. It suggests the only way out of this is a public sector solution. I believe there’s a private sector solution. If we can tell investors that their after-tax returns are going to be predictable, that will do more to get the economy going than spending $850 billion more on roads, bridges, and trains.

Why not a public-sector solution?

The evidence is just not there that it works. Japan deployed the exact same thing in the 90s after their banking crisis. We refer to the 90s in Japan as “the lost decade.” Their economic recipe was Keynesian stimulus. They ended up having their debt go up to 130 percent of GDP, and they didn’t grow out of it for ten years. The lesson is that we need to deal with uncertainty in the market, and having these massive tax increases on income, investments, and savings rates is one of the biggest problems. If we lock the lower rates down so we have predictability, that will get us on to a faster recovery.

But in a world where federal government spending is only going to be accelerating, do we need more tax cuts?

I worry that after this Keynesian stimulus, the deficit is going to be so big that everybody is going to be calling for tax increases. The last thing you do in a recession is raise taxes, and this is going to be a deep recession.

If Obama is going to give us an enormous deficit, won’t that surely doom the extension of these low tax rates?

The answer is sadly yes given who’s in control of Congress right now. That’s going to do more damage to the economy.

You've also been vocal about reforming U.S. entitlement programs as a way to deal with economic problems. Does that still matter when the focus in Washington is on more short-term issues?

It matters tremendously. Forget about the deficit. The deficit is going to be high for awhile. There’s no point in arguing about deficits right now. Our fiscal and our monetary policies converge down the road. If we don’t get a handle on our long-term fiscal situation by tackling entitlements, our dollar will lose its credibility. It will be that much more difficult to get us on the path to growth. We’re baking inflation into the cake right now. It will be that much harder to fight inflation down the road if we have not shown the world markets that we are able to deal with our long-term fiscal situation. If we just throw caution to the wind in terms of spending and entitlements, that will make it that much more difficult to return our monetary policy to solid, non-inflationary growth.

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