Paul Ryan's Budget: The Path to Prosperity?

At first glance, House Budget Chairman Paul Ryan’s FY2012 Budget Resolution is a step in the right direction. With a determined moniker -- “The Path to Prosperity” -- the Republican roadmap is oriented on spending cuts, debt reduction, and credible revenue expectations.

The plan is not too surprising to those of us who have followed Ryan’s previous budget crusades. It concentrates on cutting government spending -- reforming two of our three largest autopilot programs, Medicare and Medicaid -- while recognizing that attempts at raising tax revenue will not support economic growth or fix our spending problem.

The new plan realistically projects that tax revenue as a percentage of the economy will grow as a result of economic growth and not rate hikes. Still, there are those who will argue that a serious debt and deficit reduction plan must include tax rate increases.

However, the Congressional Budget Office estimates that tax rates would have to more than double to address projected spending and -- as Robert Barro and Charles Redlick of Harvard have demonstrated -- such rates would paralyze the economy. Also, the Deficit Commission’s plan called for reducing the deficit by raising tax revenue to an unprecedented 21 percent of GDP which amounts to no more than wishful thinking on the part of its authors.

By contrast, under Ryan’s plan tax revenue will consume 17.1 percent of the wealth created by American families, a number that is still too high but more in line with the government’s abilities to collect money.

The real question is whether the plan will live up to its name by addressing our fiscal problems and putting us on the “path to prosperity.” Here are the guiding principles for responsible budgeting and how the Ryan plan matches up to each.

Guiding Principle 1: Does the budget plan include real spending cuts and are we addressing the biggest ticket items of Social Security, Medicare, and Medicaid?

A quick look at the data shows that the plan is cutting spending the first three years and then slowing down the rate of spending. In nominal terms, spending increases from $3.6 trillion in 2011 to $4.7 trillion in 2021. That equates to a $1.1 trillion increase over ten years.

This is an improvement over the Deficit Commission’s proposal that increased spending by $1.6 trillion over ten years and a big improvement over the president’s budget which increases spending by $1.9 trillion over the same period.

The main drivers of future spending are Medicare, Medicaid, and Social Security and it appears that the plan focuses on curbing some autopilot spending.

The plan has two principal features. First, people who turn 65 in 2021 or later would not enroll in existing Medicare. Instead, they would receive premium-support from the federal government to purchase health care from an insurer of their choosing.

These payments would introduce price competition as a meaningful element into the health care system, one currently missing from our single-payer Medicare program. By introducing competition for consumers into the insurance market, premium-support will pressure insurers to compete on cost while maintaining a high standard of care.

Second, the plan would establish Medicaid block grants for states. These grants would continue providing states with federal Medicaid, but determine funding evenly by the state’s proportion of low-income residents, growing in future years at gross domestic product plus some percent (including adjustments for population growth). In exchange for slower growth in federal support for Medicaid, states would have a greater level of flexibility than under the current system.

Overall, under the plan the growth of Medicare and Medicaid would be much slower than under current projections. That slower rate in spending would reduce the deficit down to $385 billion in 2021 as opposed to the projected $774 billion. Maybe more importantly, it would reduce the debt held by the public down to 67.5 percent of GDP as opposed to the projected 90 percent.

While a good start, there are three major problems with the plan. First, it continues the Washington tradition of extending open-ended promises on Medicare, Medicaid, and Social Security to millions of people without paying for them. Second, Medicare will continue to provide health care support to everyone including the richest Americans. Third, the plan introduces some competition between providers but consumers may still be bound to a list of guaranteed coverage options chosen by the government (even though that may not be a problem depending on how many providers are on that list).