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Federal Budget

Mr. Ryan Goes To Washington

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On March 21st, 2012, Representative Paul Ryan (1) presented a Republican alternative to President Obama’s recently submitted budget for fiscal 2013. The proposal was passed by the House and killed in the Senate, with voting following partisan lines. While it was never intended to be more than a political statement, a “shot across the bows” of President Obama’s own budget, Mr. Ryan’s budget was so vague, so lacking in the detail of any serious invitation to a meaningful debate, and in some cases so misleading, that Common Sense is convinced that Mr. Ryan should have submitted his proposal two weeks earlier.

The Good

In fact, Mr. Ryan does make some worthy proposals in his budget. It is unfortunate that Republicans failed to take this opportunity to make a substantive contribution to the debate on the President’s budget – which is far from good itself – choosing instead to use sleight-of-hand and generalizations to produce a balanced budget. These tricks do nothing but detract from the otherwise shining parts of the proposal.

The need to expand revenues. Mr. Ryan breaks with the Norquist Doctrine of never increase Federal revenues for any reason whatsoever, and actually proposes a sensible increase in collections from today’s 15% of GDP to 19% of GDP. That’s equivalent to approximately $600 billion per year in additional taxes. This would be accomplished mainly by eliminating some deductions and credits, though no detail is provided as to which would be removed. Mr. Ryan also plans reductions in income tax rates – which could be accomplished if the elimination of tax expenditures were aggressive enough.

Common Sense believes these to be very positive contributions on the surface. Tax expenditures are little more than hidden subsidies to privileged groups favored by Congress. They introduce complexity in tax preparation, distort markets, play favorites and reduce federal revenues. A good example is the deduction of mortgage interest for homeowners. This very popular deduction is nonetheless regressive, as most renters are lower income families, as well as distorting housing and financial markets towards bigger houses and bigger loans, since the interest burden is passed on by the buyer to the government. A much better way to stimulate home ownership would be a “first time buyer credit” which could be need-tested, unlinked to the value of the property and much more transparent fiscally than the mortgage deduction.

There are approximately $1.3 trillion in tax expenditures in the 2012 fiscal budget, compared to $1.1 trillion in individual income tax revenues. (2)

Unfortunately, Mr. Ryan does not go into any detail. We are left wondering which tax expenditures would be eliminated by Republicans and how regressive those that remain might be; we are left in the dark regarding the readjustment of income tax rates and brackets, and whether these would entirely favor affluent Americans or whether a few crumbs might be given the middle class. No mention is made of reducing the complexity of the income tax code, or of the estate tax, or of a national value added tax, all measures that would greatly add to the fiscal retrenchment necessary for our future financial solvency.

But at least Mr. Ryan has opened the door to a debate on raising revenues, and he should be applauded for this break with Republican orthodoxy.

Social Security. Mr. Ryan avoids the frothing at the mouth that is typical of so many of his ideological colleagues when talking about this entitlement program. Essentially, he leaves Social Security untouched, recognizing the CBO estimates that the Fund is approximately stable from 2030 onwards. Perhaps it is a measure of expediency as well, not wishing to incense senior voters, a wealthy and politically active constituency that usually breaks Republican, but which loves Social Security.

I’m pleased that Mr. Ryan has resisted the temptation to call for a privatization of this important and highly successful government program. Even so, Common Sense believes that Social Security can and should be reformed to make it even more efficient and targeted, as well as more sustainable over the long-term. A gradual increase of the retirement age to 68 years would not only be in-line with longer life expectancies and with experience in other advanced nations, it would save approximately $70 billion per year. (3) Reducing the growth rate of benefits to the top 40% of lifetime earners would save $55 billion per year (4) and making benefits need-tested would save even more. Using alternate inflation measures to slow cost-of-living adjustments could save up to $80 billion per year.(5) Raising the wage cap on the payroll tax (which stops at $106,800) would add approximately $100 billion per year to the Social Security Fund.(6)

So there are potentially measures to reduce Social Security expenditures by almost 30% without harming the program’s core constituency, those senior citizens that are no longer able to work and who depend on the payments for their livelihood.

While it is pure fantasy to expect any serious proposal on Social Security reform during an election year, it seems that Mr. Ryan at least is someone that the next Administration – even a second Obama team – could work with to strengthen this vital program.

The Bad

There are some unacceptably bad provisions in the budget proposal as well, as might have been expected. Mr. Ryan guts all Federal involvement in health care, though he is careful to masquerade the most direct assault on Medicare and Medicaid, two programs which remain broadly popular with most Americans. His plan to cut “other spending” from 12% of GDP to 6% of GDP is a not very subtle elimination of the Federal government from anything other than defense and social security. The fact that he gives no details of what programs would be cut is not even disingenuous: simple arithmetic demonstrates that he would have to cut everything from education, transportation and law enforcement to White House toiletries to the bone to achieve his targets.

Health Care. Mr. Ryan would begin by repealing the 2010 Patient Protection and Affordable Care Act (Obamacare). Leaving 50 million Americans without access to health care doesn’t seem to faze Mr. Ryan, and the repeal of ACA is a first and necessary preliminary to his second step, which is the elimination of Medicare.

Oh, Mr. Ryan doesn’t come right out and say “we propose to eliminate Medicare”, more´s the pity. No, he proposes to replace it with another program – wait for it – also called Medicare! which would consist of “premium support payments”. These would essentially be vouchers to subsidize the purchase of private health insurance. The government would send these checks directly to the insurance companies. So instead of using public funds to pay doctors and hospitals for curing the sick, your taxes can pay for denial of coverage, claim rejections, and executive bonuses. I would be overjoyed if only I held stock in a health insurance company.

Not only are the elderly and sick disadvantaged by having to go the far more expensive and discriminatory private insurance market, Mr. Ryan has another trick up his sleeve. The initial yearly voucher payments would be approximately $8,000, which is estimated to be the same dollar amount paid by the existing Medicare program in 2022. Let’s ignore the fact that this is an average for the program, and some Medicare recipients who consume far more than $8,000 per year due to illness would be materially disadvantaged by this measure. Annual increases to the premium support program would be tied to the consumer price index (CPI) a standard measure of average inflation.

Well, that sounds like a deal, don’t it? Until we take a look at this chart: (7)

 

It turns out to be a sucker’s bet. Inflation (blue line) has been below – significantly below – the increase in national health expenditures (red line) for every year in the past 21 years. Assuming that the average rate of change remains the same for health expenditures and inflation, the value of that premium support (green columns) would go from $8,000 in 2022 to $3,500 in 2043. It would lose 67% of its face value, leaving the elderly sick digging out of their pockets – or of their children’s and grandchildren’s pockets – to make up the difference.

This is undoubtedly what Mr. Ryan has planned, since no one has ever accused him of being unable to do sums or of gross stupidity. Though apparently he believes that the rest of us are both.

At least now we know why the proposed budget is called the “Path to Prosperity” – prosperity for insurance company executives and their investors.

All Other Spending. Lest anyone confuse Mr. Ryan with a moderate after reading my comments in “The Good” section, his proposal on cuts to “all other spending” quickly undeceive us. “Prosperity” calls for all spending not already covered in previous sections of the proposal to fall from today’s 12% of GDP to 6% of GDP. That’s approximately $900 billion dollars. Where might this money come from? Which programs might be cut? Mr. Ryan does not say… but a quick glance at the 2012 budget should prove informative: (8)

 

The total Federal Budget for 2012 was approximately $3.7 trillion dollars. But Mr. Ryan has already dealt with Social Security, Medicare and Medicaid. Let’s also assume that defense spending is not cut (hardly a stretch). What does that leave?

 

That leaves “Income Security” – unemployment, food stamps, welfare assistance – and “Everything Else” – Transportation, Veteran’s Administration, Education, training, Internal Affairs, Justice, Science, Space, Tech, Environment, General Government, Agriculture, Community Development, and Energy.

“Income Security” is $546 billion.
“Everything Else” is $803 billion.
Mr. Ryan wants to cut $900 billion.

The math is pretty simple. Mr. Ryan proposes to stop building roads, stop granting education loans, stop job training programs, stop food assistance, stop unemployment support, stop technology research, stop energy research, stop space programs, stop agricultural support, stop community development, eliminate National Parks. Whatever is left over after Mr. Ryan savages everything the government does to actually help people and their communities will undoubtedly go to VA, Internal Affairs and Justice.

No sense pissing off veterans or the FBI, they have guns.

That’s 6% of GDP in 2022. Mr. Ryan proposes to slash it even further, to 3.5% of GDP by 2050. Maybe the veterans and FBI will be disarmed by then.

The Ugly

The worst part of the charade is the hypocrisy of this political theater. Mr. Ryan’s proposal is devoid of any useful detail and filled with dubious and unsupported assumptions. (9) Mr. Ryan proposes to fix the budget through government fiat, apparently without consideration of the economic and social costs of his actions.

Yet Republicans feel justified in bashing Democrats for not taking their alternative seriously!

I know, this is America. Politicians are not expected to offer serious solutions or provide substantive reasoning. But this seems an extreme case. Republicans have squandered yet another opportunity to truly engage in a useful, and necessary, debate about our country’s future, choosing instead hyperbole and fiscal parlor tricks. Rhetoric wins out over reason yet again. The American people deserve better than that.

Sources and Notes:

(1) Chairman of the House Budget Committee, R (WI)
(2) Internal Revenue Service, Statistics on Income.
(3) Co-Chair’s Proposal, National Commission on Fiscal Responsibility, November 2010
(4) Co-Chair’s Proposal, National Commission on Fiscal Responsibility, November 2010
(5) Co-Chair’s Proposal, National Commission on Fiscal Responsibility, November 2010
(6) Co-Chair’s Proposal, National Commission on Fiscal Responsibility, November 2010
(7) CPI data is from the Bureau of Labor Statistics Historical CPI table. National health care expenditure is from the Center for Medicare and Medicaid National Health Expenditure data base. Projected value of premium support payments is calculated the difference between the average annual change in national health care expenditures and the average annual change in CPI.
(8) 2012 Federal Budget from the Office of Management and Budget
(9) The CBO’s estimates of impacts are all based on percentages of GDP, as per Mr. Ryan’s request. There is no effort to quantify the economic impact of a huge decrease in Federal spending on the economy, or to explain how GDP is supposed to grow at a faster rate than today under these scenarios, or how national health care costs are to be contained, or how private health care providers are to be convinced to accept less money than they currently receive for services.

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