Saturday, April 23, 2011

Thoughts on the Ryan Plan

Paul Ryan (R-Wisconsin) is arguably the face of the Republican Party right now. His proposed budget is driving much of the discussion on how to deal with debt, spending, and taxes. Here is a brief summary of what it would do:

1. Bring non-defense discretionary spending to pre-2008 levels
2. Convert federal share of Medicaid into a block grant that states would have control over
3. Repeals Obamacare
4. Privatizes Medicare. Future beneficiaries will choose from a menu of private options. They won’t have the choice of the standard Medicare plan. Wealthier beneficiaries will get a small voucher and poorer beneficiaries will get a larger voucher. Vouchers grow at GDP+1%, whether or not Medicare does the same.
5. Cuts the top marginal tax rate from 35% to 25%

I want to start by giving Ryan credit. He has proposed something which has sparked debate. He has come up with real measures to reduce spending and taken considerable risk doing so. There are however two fundamental problems with his budget. First, it does not actually balance until far down the road. This is primarily because it preserves tax cuts for the wealthy and holds off on making changes to Medicare for those 55 or older. This was understandably done to make the plan an easier sell politically. But the result is that dramatic savings will not be realized in the near term.

That means the problems attendant in having such a large debt still exist. Creditors will be worried and could demand higher interest rates to invest in US debt, thereby increasing the burden of debt. In the next decade, high government borrowing could still crowd out private investment. Debt is projected to reach $16 trillion, requiring an increase in the debt ceiling that Republicans say they oppose. So, Ryan’s budget fails at its most important goal: balancing the budget and getting the debt under control.

It’s debatable whether the plan has impact in the medium term because of some assumptions the Ryan plan makes. He assumes that growth will be 3% instead of the average of 2.8%, and that we will have an unemployment rate of 4% in 2015 and a shocking 2.8% in 2021. These lower unemployment rates would of course mean more tax revenue which would help balance the budget. Of course, Ryan is not the only politician to make optimistic forecasts in budgets; Democrats do the same. Regardless, these assumptions make it hard to believe that Ryan’s plan will have the effect he says.

Furthermore, even if Ryan could balance the budget with his plan, it’s politically unrealistic. Those who are say 50 years old—right under the age Ryan proposes exempting from changes—who have planned on having Medicare for decades will be unhappy to see fewer benefits. Many will believe that they have been left in the lurch and worry that they will not be able to pay for healthcare when they retire.

So while Ryan may have mitigated political difficulties by sparing those over 55, he did not eliminate them by a longshot. At the same time, the wealthy will be paying lower taxes. Democratic campaign strategists will have a field day running ads showing millionaires paying the lowest taxes ever while insinuating that vulnerable senior citizens are not getting the help they need. Ryan will be accused, not just of balancing the budget on the backs of the poor, but on the backs of everyone who is not rich.

Ryan’s contribution is that he has made us consider fundamental changes to our social compact and challenged us to consider how expansive a welfare state we can afford over the next decades. But his plan’s shortcomings mean that while it made a good beginning to our deficit debate, it would be a poor end.

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