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Mar 22 2012

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Demogoguing Paul Ryan’s Budget

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The Truth-Teller

For those who believe that Washington has lost all sense of reality, no further confirmation is required than a quick review of Establishment comments regarding the House Budget Committee’s FY2013 spending blueprint.

“Mr Ryan’s plan envisions….draconian spending cuts….[and] a budget path that would leave government unable to fulfill essential functions.” said today’s Washington Post’s lead editorial.

The Post goes on,  quoting the “non-partisan” (inserted extended chuckle here) Tax Policy Center, “Mr Ryan’s plan would reduce revenues by an eye-popping $4.6 trillion – and that’s on top of the $5.4 trillion cost of making the Bush tax cuts permenant…while Mr Ryan would take a machete to programs that help the least fortunate.”

Wow.

Sounds cataclysmic.

And not to put too fine a point on it, but maybe not the best policy choice in an election year.

But crucially, are the assessments true?

The simplist answer is no – not when you actually read what Ryan and his committee are actually proposing;  and importantly, assess the remedy against the problem.

From that vantage point, it is not Ryan’s budget that is cataclysmic, but rather the precarious and deteriorating finances of the United States that threaten to undermine our social contract.

Ryan’s budget blueprint lays out the problem succinctly. “Total federal debt has now surpassed the size of the entire U.S. economy.  And the government’s non–partisan auditors have issued report after report warning of even larger debts to come, driven by health and retirement security programs that are being weakened by severe demographic and economic challenges.”

Ryan captures today’s crisis as a choice between two futures. “Both parties share the balme for failing to take action over the years. But…the President and his party’s leaders are still refusing to take seriously the urgent need to advance credible solutions to the looming fiscal crisis.”

To emphasize Democratic fecklessness, Ryan notes that it has been three years since the Democratic-controlled Senate passed a budget.

Ryan finishes, “This looming crisis represents an enormous challenge but it also represents a defining choice; whether to continue dow the path of debt, doubt and decline, or put the nation back on a path to prosperity. It also represents a tremendous opportunity for this generation of Americans to rise to the challenge, as previous generations have, and fulfill this nation’s unique legacy of leaving future generations with a freer, more porsperous America.”

To cope with the monumental problems ahead, the Budget Committee lays out a remarkably comprehensive seven-point plan that: guards against the the debilitating consequences of a sequester in defense spending, rebalances energy policy in favor of development of competitive and plentiful domestic energy sources, streamlines government operations, repairs Medicaid, saves Medicare, abolishes Obamacare, promotes pro-growth tax reform and tackles the “culture of spending” in Washington, all with the goal of lifting the crushing burden of debt on the US.

There is no doubt that the parts of the Ryan plan range from novel to provocative.

The Budget Committee calls for ending US government involvement with Fannie and Feddie.

It makes Medicaid a block grant to states, providing unique flexibility to governors to tailor the program to their individual needs, with indexed caps on the program’s growth; it means-tests Medicare for future retirees who are wealthier, while creating a competitive healthcare marketplace for seniors to control costs.

It consolodates government training programs and reprioritizes education loans to focus on the neediest, as part of an overall effort to streamline government.

And to improve economic competitiveness and transparency, it calls for the elimination of nearly a trillion dollars in existing in tax preferences and the consolidation of the individual income tax structure in two brackets – 10% and 25%.  It lowers the corporate tax rate from the world leading 35% to the more internationally competitive 25%

As noted above, the Washington liberal establishment sees utter ruin from these proposed changes, particularly in light of assertions that the poor will be shortchanged, the budget starved for $10 trillion in revenues over a decade, with the wealthiest Americans reaping the benefits.

But a look at Ryan’s numbers shows the fallacy of the Democratic argument.

First, $1.5 trillion of Ryan’s ten year savings comes from elimination of Obamcare.

That is money that has not been spent, on a program that does not currently exist, that was going to be financed by the Chinese in the first place, and which did nothing – programmatically – to bend the cost curve for healthcare in the US overall. CBO has already shown that cost estimates for Obamcare are well above the $900 billion, ten year estimate that accompanied passage of the Affordable Care Act.

At this point, it is useful to delve in to the concept of program cuts.

For average Americans, a cut is a reduction in the acual amount of outlays from one year to the next. That is how we run household budgets, and prioritize our personal spending. Thus, when citizens hear about $5 trillion in cuts, they are rightfully concerned as they assume these cuts come from today’s baseline.

But that is not how Washington works.

This whole concept of “cuts’ is a shameless rhetorical device, that actually measures anticipated outlays against an ever increasing baseline each year, which represents the “new zero”. Thus for all the talk of “gutting” programs for the poor, the Ryan budget actually adds $1.4 trillion to the budget between 2014 and 2022.

That’s right – adds.

Under the Ryan budget, over the next decade Social Security spending will increase by half a trillion. Medicare will increase by $352 billion and Medicaid and other health programs will get an additional $100 billion.

What the Ryan budget does is slow the growth of government spending, while seeking to implenent policies to catalyze economic growth, so that government revenues will increase in tandem, shrinking the deficit.

Democrats have also castigated the plan because it eliminates of loopholes and consolidation of personal income tax structure into two rates.

This is odd.

According to Ryan, the much reviled Top 1% get three times the benefit from the tax deductions as middle income Americans and 12 times the benefit as lower income earners. The move to consolidate a transparent and accountable tax system from the 70,000 page tax code is a move toward the tax fairness that Democrats constantly harp on, with wealthier Americans paying their fair share.

But the proposed tax reform goes further by recognizing a truth that progressives and Democrats have refused to accept; that the biggest driver of revenue for the federal government isn’t higher tax rates, but rather economic growth. Kennedy, Reagan, Clinton and Bush have all proved this.

Indeed, the British government just lowered it’s top tax rate on high income earners as the higher rates designed to capture more funding were not generating the anticipated revenues.

This informs the Democratic criticism that the Ryan plan will deprive the Treasury of $5.4 trillion by making the Bush tax cuts permenant. This idea that lower tax rates “cost” money is as wide spread as it is insidious.

But it is also untrue.

In 2007 – with the Bush tax cuts fully implemented – the US budget deficit was $163 billion, for the entire year.  That represents about 10% of President Obama’s 2009 budget deficit.

What changed? Recession had a cratering effect on economic growth, which took a concurrent toll on government revenues. But at the same time, government spending skyrocketed from 35% of GDP in 2007, to 42% in 2009.  That is where the gap is – not in “lost revenue.” Indeed, the idea that lower tax rates represent “lost revenue” that is measurable for budget purposes is an corrupt as baseline budgeting is to the concept of real  program cuts.

In the final analysis, when the Ryan budget is reviewed in whole – despite Democratic hysteria – a few facts become sobering.

The Ryan budget doesn’t end the budget crisis; it simply makes it more manageable. It is a fact that there will be budget deficits for all ten years in the Ryan plan.  Those deficits just keep going down as outlays are restrained and revenues increase.

While debt held by the public does decrease, from 73% today to 62% in a decade, that remains the amount of debt that the US held in 2006, still in a range of concern, if not as much concern as today.

So if Democrats consider this a “radical” plan, imagine what would be required to actually bring the budget into balance and begin paying down the debt so that the US is gets out ahead of the game.

But right now, our political discourse is the sound of one hand clapping.

The foundation of the Ryan plan is rooted in the understanding that real changes now will avoid unacceptable or economy ruining consequences in the decades ahead, if no fundemental changes are made. In contrast, beyond platitudes, the Democrats have yet to offer a plan that safeguards American entitlement programs, while aligning those programs with available resources.

So at the end of the day, what is more alarming?  An austerity plan to restore our economic ompetitiveness and financial health, while preserving our social safety, or conspicuous denial?

Americans pick straight talk every time.

 

 

 

 

 

 

 

 

 

 

 

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