Five myths about Paul Ryan’s budget
By Peter Orszag,
by Peter Orszag I’ve worked closely with Rep. Paul Ryan. He’s an honest and amiable guy. In part because of his winning personality, Ryan, Mitt Romney’s running mate in the presidential election, has convinced many in Washington that his budget blueprint is a serious proposal for solving our long-term fiscal problems. Unfortunately, it’s not. Let’s dig into the asterisks of Ryan’s plan and unearth the fine print.
1. Paul Ryan’s budget would reduce the deficit.
The Ryan budget is a Potemkin village: It looks good from afar but is just a facade. The Congressional Budget Office has estimated that the plan would cut the public debt almost in half as a share of the economy by 2040. Sounds good, right?
Take a closer look, and you’ll see that the Ryan budget rests on three pillars that rely on capping and punting — limiting spending to a certain level but providing no specifics on how to achieve that number.
First, federal Medicaid spending is currently forecast to double by 2040, from 2 percent of gross domestic product to 4 percent. Under Ryan’s budget, it is projected to be cut in half over that period. This dramatic turnaround will supposedly occur by turning Medicaid over to the states through block grants. Anyone want to bet that will work? If states can’t find huge efficiencies in Medicaid, expect them to pressure the federal government to avoid the fanciful reductions in federal support assumed in the Ryan budget.
Second, the Wisconsin congressman has specified $4.5 trillion in tax cuts, counting on massive rollbacks of tax breaks — such as the mortgage interest deduction — to pay for them. But he offers no details as to how to achieve such reductions, and most serious tax analysts don’t think such changes are politically feasible.
Third, Ryan assumes that other spending, including nondefense discretionary spending, will fall from more than 12 percent of GDP last year to less than 5 percentby 2040. Again, he provides scant details on how to get there.
If you take out everything Ryan is assuming and look at his concrete proposals, his budget is not fiscally conservative. Without the magical reductions in Medicaid, other spending and tax breaks, his plan would expand the deficit in 2040, not reduce it.
2. The Ryan budget would help the middle class.
Ryan says he would cut tax rates for all families, but that doesn’t mean the middle class would be any better off. Even after the Bush tax cuts, Ryan’s reductions would amount to about $1,000 a year for families with annual incomes between $50,000 and $75,000— compared with a cut of more than $250,000 a year for those with incomes above $1 million.
Ryan says he would pay for these cuts by broadening the tax base, which means scaling back tax breaks. But he is also committed to maintaining low taxes on capital gains, a bigger source of income for wealthier people. Most of the other big tax breaks — such as the mortgage interest deduction, state and local tax deductibility, and pension and health tax benefits — help the middle class.
So any attempt to broaden the tax base without raising taxes on capital income would almost inevitably place a higher burden on middle-class families. And if those middle-class tax breaks were not slashed to pay for Ryan’s high-income tax cuts, other spending would have to be reduced further or the deficit would spiral — either of which would also hurt the middle class.
Furthermore, unlike the proposal from the nonpartisan Domenici-Rivlin deficit-reduction commission, the Ryan budget does not include any provisions to create jobs immediately. With unemployment above 8 percent, we should couple any long-term deficit reduction with additional support for the economy today. That would help the middle class more than promises of a tax cut that will probably turn out to be a mirage.
3. Ryan’s proposal would cut health-care spending by reforming Medicare.
Ryan says his plan would reduce health-care spending by increasing competition, but reality doesn’t remotely match his rhetoric. The CBO analyzed Ryan’s 2011 budget proposal, which would over time move Medicare entirely to private plans, and found that it would significantly increase total health-care spending (that is, spending by the government and Medicare beneficiaries).
“Both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare,” the report said. That effect, according to the CBO, would outweigh any savings achieved by people choosing less costly health care.
Ryan’s supporters argue that the most recent version of his proposal, which would retain traditional Medicare but expand the role of private plans, would have different results. The CBO has not fully evaluated this proposal. But how could moving entirely to private plans be hugely costly, while moving partially to private plans would save lots of money?
Besides, the plan is similar to what we already have: Almost 30 percent of Medicare beneficiaries are also enrolled in Medicare Advantage, which offers private plans alongside the federal program. The evidence suggests that these plans cost more than traditional Medicare, once you take into account their ability to skim off the least costly beneficiaries. So much for Ryan’s health-care-competition tooth fairy.
4. Ryan’s plan would provide certainty to the markets and the economy.
Ryan likes to highlight the job-killing effects of uncertainty, but his budget would exacerbate it. Corporate executives hold back on investment and hiring when they don’t know what will happen next in terms of government policy. From that perspective, uncertainty is created when specifics are unknown — just like in Ryan’s plan.
How would tax deductions be rolled back? How would the block-granting of Medicaid work, and what happens if it doesn’t? What programs would be cut to hit Ryan’s spending targets? All of these are huge questions. Leaving them unanswered does nothing to reduce uncertainty.
5. If Romney wins, Ryan’s budget will be his fiscal blueprint.
Differences between Romney’s budget proposal and Ryan’s are already emerging, most prominently the fact that Ryan’s plan would retain the Medicare savings included in the Affordable Care Act, but Romney’s would not.
More fundamentally, if the Romney-Ryan ticket wins, their administration would probably have to choose one or two of the big three items: tax reform, Medicare changes or block-granting Medicaid.
Among the three, I’d bet on Medicaid, given how difficult the other two goals are. The fact that the harm from block-granting would be concentrated on the poor, and that Congress would get to leave it to governors to impose the pain, sadly makes that change more politically viable than the others.
Peter Orszag, director of the Office of Management and Budget from 2009 to 2010, is vice chairman of global banking at Citigroup and a columnist at Bloomberg View.
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