Mr. Ryan Makes His Mark

From: The Economist

WHEN Paul Ryan, the Republican fiscal wunderkind, moved from opposition to power in last year’s midterm elections, the biggest question hanging over him was whether he would bring his radical fiscal views with him or quietly stash them in a dark corner as he settled down to the realities of governing.

Mr Ryan has answered the question today by unveiling a budget plan that, at least superficially, is almost as bold and painful as the Roadmap for America that he has flogged for years. It claims to slash the federal budget deficit from a little over 9% of GDP this year to just 1.6% by 2021. By contrast, the Congressional Budget Office reckons the deficit would fall to just 4.9% under Barack Obama’s budget. He does this without, on net, raising taxes. By closing loopholes, he would pay for a cut in the top personal and corporate rates. So how does he shrink the deficit? Through an eye-watering assault on entitlement spending, in particular health care. Mr Obama’s health care reform would be ditched, Medicaid would be converted to block grants, and traditional Medicare would be replaced with vouchers.

There are many problems with this strategy but it’s worth keeping in mind how remarkable it still is: a legislative proposal that takes dead aim at the real source of the long-term fiscal imbalance, namely, entitlements. Republicans now have an answer to editorials and Democrats demanding to know what their plan is for tackling that looming crisis. Of course, the proposal remains just that, a non-binding resolution that leaves the grimy details to other legislators who may wad them up and toss them in the rubbish bin. But for now, Mr Ryan may have turned what has long been an arcane part of the budget process, the annual budget resolution, into a focal point for long-term debate.


Mr Ryan’s "chairman's mark" for fiscal 2012 incorporates the steep cuts to discretionary spending (spending that must be authorised each year) that his party is now battling to embed in this year’s fiscal 2011 budget. It assumes the same spending on defence and security that Mr Obama did in his 2012 budget.

The bigger real cuts come in entitlements, also called mandatory outlays: this is spending that continues automatically from one year to the next. Instead of matching state Medicaid spending the federal government would provide block grants, as was done with welfare under Bill Clinton in the mid-1990s. This would strengthen states’ incentives to control costs, rather than having the federal government share in the cost of increased eligibility or coverage.

At present, Medicare beneficiaries typically pay premiums and deductibles in return for full coverage of a wide range of medical services. Mr Ryan proposes that starting in 2022, new enrollees receive a voucher from the federal government to buy a private plan. (He prefers the term “premium support” to vouchers, but they’re really the same thing.)

Neither block grants nor vouchers magically cures the root of rising health care costs, namely, medical inflation and rising case loads. What they do is shift the responsibility for bearing those costs to the states and to individuals. Mr Ryan rather disingenuously says his proposal would “strengthen” Medicaid. I guess you could call it that, if your idea of strengthening your son is to throw him out of the house at age 16 to fend for himself. States will no doubt welcome the freedom to shape Medicaid as they see fit; I doubt they will savour the need to raise taxes or slash services to cope with foregone federal funding.

Mr Ryan notes that with the government now paying roughly half of all health care costs, more disciplined federal funding could force efficiency into the system. However, that still leaves rising costs due to technological progress, an aging population, and the shrinking coverage offered by private sector employers. Mr Ryan’s cuts will have real consequences. The proportion of Americans with no insurance, which was set to decline significantly under Mr Obama’s plan, will rise instead. Medicare beneficiaries, who now enjoy benefits on a par with those enrolled in private plans, would instead have to accept a far less generous range of services, or pay out of pocket for more.

On taxes, Mr Ryan proposes chopping the top personal rate to 25%, from its current 35%, and from the 39.6% it is scheduled to reach if George Bush’s tax cuts expire as planned in 2013. He would also cut the top corporate rate to 25% from 35%, bringing America’s rate in line with international norms. Mr Ryan implies that his plan would be revenue neutral by eliminating loopholes and deductions.

Despite the impressive rhetoric, this is still a timid and politicised document by the standards of Mr Ryan’s original roadmap and the health care plan he proposed with Alice Rivlin, a budget director under Bill Clinton. Both contained far more detail about precisely how the entitlement changes would be implemented. Unlike the roadmap, his latest proposal completely ignores social security; apparently, you can only touch so many third rails at once. His tax reform plan is so bare bones that judging its credibility is almost impossible. Of the plan's $6.2 trillion in spending cuts over 10 years, more than a quarter come from "other mandatory" categories, without specifying which: food stamps? Pell grants? Veterans' benefits? If the Congressional Budget Office scores this plan, it may well find the numbers don’t add up.

Its projections of the economic impact are also surreal. To be sure, the plan is not as severe as Britain’s: the deficit is only 1.7 percentage points of GDP smaller in 2015 than under Mr Obama’s 2012 budget. Economic growth would be dented, but not grievously. Yet Mr Ryan, citing analysis by the Heritage Foundation, claims his plan would actually create 1m additional private sector jobs and slash the unemployment rate to 4% by 2015, compared to the Blue Chip private sector consensus of 6.6%. While the Heritage Foundation is probably not the first organisation most people turn to when seeking authoritative, impartial economic analysis, I’ll give them the benefit of the doubt. Yet when I read their report, I find the prediction of a massive investment boom utterly implausible. Corporations today enjoy record or near record profits. If government deficits were crowding out private investment (a key assumption of their analysis), short-term interest rates would not now be near zero and long-term rates near postwar lows. Mr Ryan risks undermining the credibility of his overall plan by casting its economic consequences in such an implausibly optimistic light.

The final question mark about Ryan’s plan is: what is it for? It’s a non-starter with Democrats and even fellow Republicans are going to think twice about embracing it. After all, they won last year’s midterm elections by scaring seniors into thinking Mr Obama would cut their Medicare benefits. Moreover, there is already an alternative long-term deficit reduction plan available: the one advanced by the Simpson-Bowles commission which has been embraced by a growing band of bipartisan senators. Mr Ryan was a member of the commission, but voted against its report, because it included tax increases and didn’t repeal Obamacare. Today, he offered his alternative, perhaps not as a final offer but in an attempt to drag the debate further to the right. Whether or not it succeeds, the debate is better off for having it.