The hottest debate in town is over how best to encourage growth and economic prosperity through the vehicle of the Federal Budget. There are two sides to this debate, the pseudo Keynesians on the left and the more Free Market oriented ones on the right. The real debate is over which direction our country should take to restore full employment (approximately 5%) keep inflation in check, and create the opportunity for a greater creation of wealth. The Free Market has the answers to this problem, and it is diametrically opposed to the vision from the White House and the Democrats in the US Senate, which tend to take a more Keynesian view of economic issues.

First, let us look at the Federal Budget from the Free Market side. Currently, Representative Paul Ryan, R WI has introduced a budget, the “Path to Prosperity” as a roadmap for strong economic growth (Rep. Paul Ryan). What makes this such an important issue? The simple answer is that the path to prosperity attempts to reign in a Federal Government that is expanding at an exponential rate, and spending money far in excess of what it receives in revenues. To quote Speaker of the House John Boehner, R OH, “Washington does not have a revenue problem, it has a spending problem”. This out of control deficit spending is having a deleterious effect on economic growth, unemployment, and even inflation. Rep. Ryan argues that if we do not begin to get a handle on this deficit spending now, its long-term effect on growth and prosperity will be economically devastating.

The key components in the path to prosperity include as follows: massive restructuring to Medicare and Medicaid in an attempt to provide care for those currently in the system, reduce the costs to the taxpayer, and providing a path for future generations to have better care and lower costs in the future. Next, Solving the Social Security problem, that threatens to default on its obligation to seniors in the very near future. The plan also calls for eliminating duplications and overlap in government agencies and programs, reducing both personal and corporate tax rates, and eliminating the loopholes that equate to little more than corporate welfare. The potential cost savings in the plan are in the neighborhood of 6 Trillion dollars (that is a six followed by 12 zeroes) over a 10-year span.

This is an important aspect of Rep. Ryan’s plan as the current budget deficit stands at over one trillion dollars, and the countries debt stands in excess of 14.2 Trillion dollars (Clock). Now for any household or business, this level of debt would be crushing, and, in fact, it is crushing on the federal level as well, forcing the government to borrow $700 million weekly just to meet the debt service. It should not be too difficult see how this debt can stifle economic growth and prosperity. The vision of the “Path to Prosperity is to bring that burden more in line with what the country needs to rise from the ashes of this recession and begin again to be the economic powerhouse that our founders envisioned.

Additional parts of the “Path to Prosperity” are the tax provisions included therein. Rep. Ryan has called for an overall reduction in both personal and corporate tax rates and a removal of many of the loopholes allow individuals and companies to avoid paying taxes on profit and income. Currently, the U.S. has the highest corporate tax rates among 20 industrialized nations of 40% (Edwards). The “Path to Prosperity” posits that by reducing those tax rates to levels more representative of the rest of the industrialized world, and removing many of the loopholes corporations use to avoid paying those taxes, revenues to the federal treasury would increase, causing the budget deficit to close at a greater rate.

Rep. Ryan’s vision is in direct contravention to the plan proposed by the White House and latched on to by the Congressional Democrat Caucus (Obama). This plan calls for no real reduction in spending, and in fact, by some accounts, once you remove the accounting gimmicks, actually increases the deficit spending over ten years to levels that are even more unsustainable. In an attempt to offset that level of spending, this opposition plan calls for massive tax increases on the so called “wealthy”. This includes rate increases on individuals earning more than $250,000 as well as an additional increase in the corporate tax rates.

Of course, the argument from the President is that in order to bring debt as a percentage of GDP in line, the wealthy need to suffer a little more. However, as we have learned throughout this class, and as history has shown, raising tax rates, even on the so-called “wealthy”, actually reduces net revenue as those same “wealthy” reduce either their own income, or find ways to shield that wealth from ever-increasing tax rates. This is where the Keynesians in the White House diverge from traditional Keynesian economics, which call for a reduction in taxes while increasing spending to bring about full employment and lower inflation.

The crux of this argument will shape America for the next 10 years. The policy outcome of this budget debate will determine if America returns, at least in part, to the principles espoused by our founders, or, we will become a socialist democracy such as those which are failing economically throughout the world. The Free Market principles promoted by Rep. Ryan could in fact bring us back to a path of Prosperity.