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Paul Ryan’s inequality plan increases inequality

at 09:00 AM ET, 11/19/2011


Rep. Paul Ryan(R-Wis.) is chairman of the House Budget Committee. (Joshua Roberts - BLOOMBERG)
Paul Ryan’s 15-page response to the Congressional Budget Office’s inequality report can be summed up in two sentences: Inequality isn’t a problem. But if it is a problem, then the ideas I’ve been pushing all along will solve it.

And I applaud him for it.

For one thing, it’s important for Republicans to join the conversation over inequality. This is more evidence that Occupy Wall Street, whatever its eventual fate, has forced the political system to pay attention to issues it was previously neglecting.
(Congressional Budget Office)

Ryan’s paper also makes some good points. He emphasizes the CBO’s finding that government transfers are more regressive than they were 30 years ago and that that’s largely due to Medicare and Social Security taking up a larger portion of the federal budget and spending a fair amount of their money on wealthy seniors rather than poorer households. If you worry about equity — either between rich and poor households or between different generations — you should worry a lot about the unchecked growth of Medicare and the structure of Social Security. We can and should do better.

But more broadly, Ryan’s paper tries to create a false choice between reducing income inequality, encouraging economic mobility and accelerating growth. Toward the end, Ryan actually says the debate over inequality breaks down into two groups:

1. Is the problem simply that some households make more than others, in which case policymakers should be focused on closing this income gap by any means at their disposal, indifferent as to whether government policies aimed to close relative inequality result in lower absolute levels of income?
2. Or is the problem that incomes for households in the middle- and lower-quintiles are not rising fast enough, in which case policymakers should focus first and foremost on creating the conditions for income growth and job creation?

If there actually is anyone out there who believes we should be focused on closing the income gap no matter the cost to growth, I’ve never met them. Conversely, there actually are people who focus on what they think to be pro-growth policies without heed to the income gap. People like, say, Paul Ryan.

In 2010, the Tax Policy Center released a detailed analysis of the tax provisions in Ryan’s Roadmap for America. If you were in the top 1 percent, they found, Ryan’s plan would save you $350,000 a year. If you were in the middle of the income distribution, it would cost you $152 a year. And if you were in the bottom 20 percent, it would cost you $393 a year. That would undoubtedly increase inequality.

And there’s good evidence that increasing inequality is, ultimately, bad for growth. Over at the International Monetary Fund, Andrew Berg and Jonathan Ostry recently published a paper looking at the relationship between inequality and growth across the world. In a sense, they were testing Ryan’s proposition exactly. “Some dismiss inequality and focus instead on overall growth — arguing, in effect, that a rising tide lifts all boats,” they write.

Berg and Ostry found that “high ‘growth spells’ were much more likely to end in countries with less equal income distributions.” Moreover, “the effect is large . . . closing, say, half the inequality gap between Latin America and emerging Asia would more than double the expected duration of a ‘growth spell.’ ” And it was robust: “Inequality seemed to make a big difference almost no matter what other variables were in the model or exactly how we defined a ‘growth spell.’ ”

Ryan also plumps for his Medicare reforms as a solution to inequality. As you’ll remember, his budget proposes converting Medicare into a voucher system where seniors would be given a check and sent into a regulated private market to purchase insurance. The plan saves money because the check would grow at the rate of inflation, while health-care costs often increase three times faster than inflation, so, quite quickly, the check would cover only a small portion of an individual senior’s costs.

For rich seniors, this wouldn’t much matter. They could easily afford the cost of private insurance. For middle-income seniors, or lower-income seniors, it would be a disaster. Ryan offers them some subsidies, but not nearly enough. The cost of coverage would quickly outpace the resources many of them have to pay for it.

I mention this because Ryan’s paper emphasizes the difference between “absolute” and “relative” inequality. “A century ago,” Ryan writes, “the average American lived a life that was dramatically different, in terms of what he or she could experience and obtain, from an elite like Rockefeller. In many important respects, the difference between ultra-elites and average Americans is less pronounced today.”

But that difference is less pronounced in large part because of programs like Medicare, which ensure that poor and middle-class seniors have access to health care of similar quality to that of richer seniors. So where Ryan’s analysis suggests the need to means-test Medicare and control health-care costs to ease inequality, the core of his health-care plan, the very plan he touts in the conclusion to his paper, would dramatically increase absolute health-care inequality for seniors.

So it’s good that Ryan has started thinking hard about inequality. But it would be better if he thought harder about what policy could do to address it, or at least to avoid making it dramatically worse.

 
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