The Ryan Budget: Voodoo Economics Redux

On Tuesday morning, Republican Representative Paul Ryan released a budget plan that would slash spending over the next few decades with no increase in taxes and very limited cuts to defense programs. It’s like a stool with only one leg. It will not stand.

By Isabel Sawhill

Paul_Ryan.jpgOn Tuesday morning, Republican Representative Paul Ryan released a budget plan that would slash spending over the next few decades with no increase in taxes and very limited cuts to defense programs. It’s like a stool with only one leg. It will not stand.

Although it’s a wobbly stool—in both political and in policy terms—it will have a big impact on the debate. David Brooks calls it “a moment of truth,” noting that despite a presidential commission that has issued a bold plan for getting our fiscal house in order, the President failed to endorse its work.

How should the President and other progressives respond? For starters, progressives should be unabashed in labeling the Ryan plan for what it is: an ideological manifesto for a Tea-Party-dominated Republican Party.

Here’s what the progressive rebuttal should be in a nutshell: 1) point out that voodoo economics is back in full gear; 2) start talking about tax reform and its potential to produce a fairer, simpler, and more pro-growth system that has the added advantage of plugging a big hole in the budget; 3) instead of worrying about protections for the elderly, many of whom are quite affluent, remind people that, whether young or old, wealthy Americans have made out like bandits in recent decades and that it’s time to do something for working families of modest means; 4) rethink America’s defense posture and whether we can continue to be the world’s policeman, and 5) be open to some reforms to Medicare and Medicaid but only if they’re combined with additional revenues and a more streamlined military.

Voodoo Economics. The economic projections in the plan are straight out of Alice in Wonderland. Big cuts in spending produce an unemployment rate of 2.8 percent. Wow. The Mad Hatter has joined the Tea Party. No mainstream economist can do anything other than laugh at the audacity of the claims.

Tax Reform. Tax reform is badly needed, and Ryan’s plan recognizes its productivity-enhancing effects, but devotes all of the proceeds from eliminating a host of deductions to reducing tax rates to 25 percent on both individuals and businesses. If we kept tax rates at current levels, or even reduced them a bit, we would be able to plug a big chunk of the deficit hole. A liberal competitor to Ryan’s plan would eliminate half of current deductions, producing about $5 trillion in new revenues over the next ten years. It would also allow the Bush tax cuts for all but the lowest-income households to expire, producing another $4 trillion or so. The two combined could, by themselves, solve the near-term problem. But this stool would also be a bit wobbly and unbalanced. It would affect the middle class, not just the rich, and thus would face a storm of protests from a wide swath of the public.

Fairness. What Ryan has done is politically risky and some Democrats are undoubtedly salivating over the prospects of defending Medicare and Medicaid from the kind of deep cuts that Ryan’s plan entails. And while Ryan ducked getting specific about Social Security, he insisted that it’s broke and called on the President to come up with a plan to make it solvent. Given the overwhelming political popularity of Medicare and Social Security, one option is to simply play this for everything it’s worth in political terms. Even supporters of the Tea Party have been known to complain that a government takeover of health care would be unwise because it would involve “messing with” their Medicare.

My own view is that these programs are a big part of the problem and that they can be reformed in ways that protect vulnerable groups and make them fiscally sustainable over the long run. As I have argued elsewhere, if they aren’t reformed, it is working-age families and their children who will be hurt. So rather than focus just on protecting Medicare and Social Security, progressives should instead keep emphasizing the distributional implications of the entire Republican package, including cuts in Food Stamps and other safety net programs. According to a new analysis from the Center for Budget and Policy Priorities, two-thirds of the cuts in Chairman Ryan’s plan would fall on lower-income families, while the wealthy would clearly benefit from lower taxes. Yet 90 percent of the gains in income since the 1970s have gone to the top 10 percent of the population.

The Military. Another option is to cut defense. The Ryan proposal endorses Defense Secretary Gates’s effort to cut $178 billion over 10 years and reinvest $100 billion in new capabilities. That makes for a savings of $78 billion over 10 years, which is not a lot of belt tightening. Terminating operations in Iraq and Afghanistan and making a 10 percent cut in the Pentagon’s core budget would, by contrast, save something like a $1 trillion over a decade. Given that our defense budget is more than four times that of China’s and represents 40 percent of all military spending in today’s world, how can we ask taxpayers to tighten their own belts when the defense establishment gets a virtual pass? We need an adequate defense, but all parts of government need to contribute to fiscal restraint.

Medicare and Medicaid. In the end, we are going to have to limit the growth of spending on public health-care programs, although not as drastically as Ryan proposes. Rapidly rising health-care costs along with the aging of the population are the root cause of an exploding level of debt over the next few decades. The Ryan plan attempts to solve the problem in two ways: First, by subsidizing the purchase of health insurance instead of paying directly for care in the open-ended, fee-for service Medicare system; and second, by block-granting Medicaid to the states.

Together these two provisions would sharply reduce spending on Medicare and Medicaid. Critics of the proposal complain that it will leave some low-income and elderly Americans without affordable health care. That’s clearly a risk. However, if premium subsidies are structured in a way to provide adequate health insurance to vulnerable groups, they need not be adversely affected. To be sure, more affluent seniors would have to pay more out of pocket. We should keep in mind that the Affordable Care Act already calls for a slower rate of growth in Medicare after 2015 and empowers an independent advisory group to recommend changes that would accomplish a rate of growth similar to what Ryan is proposing. Everyone realizes that slower growth in health-care costs is essential to sustain the system over the longer run, and all the evidence points to our getting very poor value for our health-care dollar. Spending on health care does not necessarily lead to better health as dozens of other advanced countries have shown. Finally, by capping the growth rates for these programs, the system would be forced to find more efficient ways of delivering care, and some resources would be freed up for investments in education, research, and infrastructure, and for helping lower-income families and their children join the middle class.

Unfortunately any hope that Ryan would rise above party politics and seek compromise with Democrats or even the moderates in his own party has been dashed by this proposal. At bottom, his plan is an ideological platform for the 2012 campaign—a Tea Party manifesto clothed in some nice rhetoric and sprinkled with a few good ideas.

Isabel Sawhill is the director of the Budgeting for National Priorities project at the Brookings Institution, where she also co-directs the Center on Children and Families.

Isabel Sawhill is a Senior Fellow in Economic Studies at the Brookings Institution. She is the author, most recently, of The Forgotten Americans: An Economic Agenda for a Divided Nation.

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