Rep. Paul Ryan (R-Wis.) has released the official House Republican proposal for the 2012 federal budget. It compares extremely favorably to President Barack Obama's own plan, but that is damnably faint praise.
Indeed, Obama's plan for 2012 is so awful that it should make us feel lucky that he and the Democrats failed to pass a budget for the current fiscal year (the only time such a thing has happened since 1974). Obama's dream budget would mean a 2021 budget that spends $2 trillion more than we do today, increase debt held by the public from 62 percent to 77 percent of Gross Domestic Product (GDP) and maintain massive annual deficits. And that's if things go according to his plan, which they won't (built into his budget are unrealistic assumptions about the rate of economic growth, revenue collection, health care savings, and more).
So compared to such an exercise in recklessness, Ryan's plan is refreshingly engaged with reality. Unfortunately for taxpayers and citizens, Ryan's plan looks better when standing in the shadow of Obama's. Neither budget provides a good way forward for a country still battling the effects of recession and the non-stop, self-inflicted spending binge that began with George W. Bush and has proceeded unabated since then. Ryan's budget is indeed a positive break from past efforts by Republicans and Democrats alike, but it doesn't provide the solutions the American people deserve.
We made the case against Obama's budget here. Now, we discuss the good, the bad, and the ugly of Ryan's budget.
Ryan's budget spends considerably less money over the next decade than does Obama's. As the chart above shows, Obama expects to spend almost $6 trillion by 2021, while Ryan's plan comes in at more than a trillion dollars less, around $4.7 trillon (these amounts are in nominal dollars). Ryan's plan also calls for less revenue (taxes) than the president's and posits a significantly smaller set of annual deficits. So the amount of borrowing built into Ryan's plan is less too. That's all to the good. Lower levels of government spending and debt and taxes leaves more money in the hands of private citizens and businesses, who are far more likely to generate economic growth.
More important, Ryan's budget, like his 2010 "Road Map For America's Future" (from which much in the budget is inspired), is a serious attempt to think through the implications of the past decade's wild spending spree, in which federal outlays increased by more than 60 percent in real terms and debt held by the public exploded from 36 percent of GDP in 2007 to its current 62 percent level. Ryan should be commended for refusing to be passive in the face of spending trends that threaten to swamp the nation's economy. Shockingly, the "new normal" for the 21st century has been massive expansions in government spending and reach, first under Bush and now under Obama. Ryan, who voted in favor of No Child Left Behind, the Medicare Part D expansion (which gave free and reduced-price prescription drugs to seniors), TARP, and all major war funding, has certainly been part of the problem, but more recently he seems to have discovered his inner cheapskate. Better late than never.
Given that spending on Social Security, Medicare, and Medicaid comprises around 40 percent of annual outlays, Ryan's emphasis on reforming two of the nation's major entitlement programs is among the most attractive part of his plan. He is largely responsible for starting a much-needed discussion of changing "entitlements" from open-ended obligations on the government that get paid out regardless of their effectiveness or need. The three major entitlements - Social Security, Medicare, and Medicaid - are not just fiscally unsound, they have proven time and again to yield poor results (Social Security yields anemic 2 percent annual returns on investment for current beneficiaries) and increase health care inflation.
Ryan's budget proposes block granting Medicaid, which provides health care for the poor, so that states have more flexibility in how they deliver care and control expenses. Essentially, the states would get a fixed pile of money each year that they would be free to spend as they see fit. When the money's gone, that's it. According to Cato's Chris Edwards, full block-granting of Medicaid could save around $95 billion a year while delivering more effective care. Critics worry that states would simply cut care to save money, but that assumes that voters in states simply don't care about the poor or the quality of services. And it assumes the current system is actually performing well, which it is not. Most spectacularly, several studies confirm that current Medicaid recipients often have worse health-care outcomes than similar people not in the system. Changing the funding and control structure of Medicaid is the best hope lower-income people have at this point when it comes to health care.
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For Medicare, which provides health care for senior citizens, Ryan wisely suggests getting rid of the current system, in which payments are made for every procedure performed with no cap or restraint on overall spending. Instead, Ryan proposes shifting to subsidizing premiums for seniors, who would then choose from a range of plans that best suit their needs. The phase-in of this shift would take place over the next 10 years (those 55 years and older will stay in the current system), allowing for transition. By subsidizing premiums rather than covering payments for services rendered, Ryan's plan will ostensibly make seniors and their doctors think twice before ordering up whatever test or procedure they might want at a given moment. Injecting pricing into the health care system is the only way to bring prices down and his plan should help that along. In a more combative gesture, the plan also zeroes out spending on the new health care law (see S-3 here).
The other good conceptual element to the Ryan budget? He calls for simplifying the income tax by reducing the number of brackets and ending tax expenditures such as the mortgage-interest deduction. And he wants to reduce the corporate income tax from its current 35 percent rate to 25 percent, a figure that would make the U.S. competitive with other developed countries. That's all good, though it's worth pointing that the budget plan, while calling for any tax reforms to be neutral in relation to revenue raised as a percentage of GDP, has essentially no specifics in it beyond the corporate tax rate.