I want to restore limited and constitutional government, which we had for much of our nation’s history, with the burden of federal spending consuming only about 3 percent of economic output.
So I look at the Ryan budget in the same way I look at sequestration – as a very modest step to curtail the growth of government. Sort of a rear-guard action to stem the bleeding and stabilize the patient.
But, to be colloquial, it sure ain’t libertarian Nirvana (though, to be fair, the reforms to Medicare and Medicaid are admirable and stem in part from the work of Cato’s healthcare experts).
But my frustration doesn’t exist merely because the Ryan budget is just a small step.
I also have to deal with the surreal experience of reading critics who assert that the Ryan budget is a cut-to-the-bone, harsh, draconian, dog-eat-dog, laissez-faire fiscal roadmap.
If only!
To get an idea of why this rhetoric is so over-the-top hysterical, here’s a chart showing how fast government spending is supposed to grow under the Ryan budget, compared to how fast it grew during the Clinton years and how fast it has been growing during the Bush-Obama years.
I vaguely remember taking the SAT test in high school and dealing with questions entitled, “One of these things is not like the others.”
Well, I would have received a perfect score if asked to identify the outlier on this chart.
Now ask yourself whether the economy was more robust during the Clinton years or the Bush-Obama years and think about what that implies for what we should do today about the federal budget.
Sigh. Even when they’re sort of doing the right thing, Republicans are incapable of using the right argument.
Paul Ryan, Chairman of the House Budget Committee, has unveiled his proposed budget and he and other Republicans are bragging that the plan will balance the budget in 10 years.
Now for the good news. The Ryan Budget does satisfy the Golden Rule of fiscal policy. As you can see in the chart, federal spending grows by an average of 3.4 percent annual, and that modest bit of fiscal discipline is enough to reduce the burden of government spending to 19.1 percent of economic output by 2023.
And there’s also some good tax policy. Not bold tax reform like a flat tax, but top tax rates would be reduced to 25 percent and many forms of double taxation like the death tax and capital gains tax presumably would be reduced or eliminated.
Let’s be clear, though, that this is not a libertarian budget. Federal spending will still be far too high. Indeed, the budget will consume a larger share of the economy than it did when Bill Clinton left office.
And while Republicans do a good job of restraining spending in the first couple of years of the new Ryan Budget, outlays rise far too rapidly beginning around 2016.
At this rate, it won’t be that long before the GOP budget and Obama budget converge.
Okay, that’s an exaggeration. But the moral of the story is that the Ryan Budget is a step in the right direction, but much more will be needed to restore limited, constitutional government.
When I give speeches about entitlement reform, I often make the point that there’s nothing radical about Paul Ryan’s plan to reform Medicare.
Spending will go up, for instance, not down. And the reforms only affect people under age 55. This is evolutionary change, not revolutionary change.
But my main example is that future seniors, for all intents and purposes, will have a health plan similar to what’s now available for Members of Congress. Not only the politicians, but also their staff and the entire federal bureaucracy.
The Medicare-reform proposal of presumptive GOP running-mate Paul Ryan is precisely as extreme as the health plan available today to every member of Congress. Ryan envisions average seniors’ being able to enjoy Capitol Hill–style medical options. This itself, however, would be a choice. Seniors who oppose choice in health coverage will be 100 percent welcome to remain within traditional Medicare. …Wyden-Ryan mirrors the way federal legislators buy health insurance. As FactCheck.org’s Brooks Jackson notes, “House and Senate members are allowed to purchase private health insurance offered through the Federal Employees Health Benefits Program, which covers more than 8 million other federal employees, retirees and their families.” …As FactCheck.org, elaborates, “All plans cover hospital, surgical and physician services, and mental health services, prescription drugs and ‘catastrophic’ coverage against very large medical expenses . . . There are no exclusions for preexisting conditions.” Participants may change plans during annual “open season” periods. Also, the government pays 72 percent of the average worker’s premium, with a maximum of 75 percent. Democrats cannot explain why Medicare recipients need to become congressmen to enjoy such choices in health coverage. If Ryancare, in essence, is good enough for senior citizens like Nancy Pelosi and Harry Reid, it’s good enough for any senior who wants it after 2022.
Deroy’s column shows how supporters of entitlement reform can counter some of the left’s demagoguery.
He’s making a point about political salesmanship, but it’s also important to understand why Medicare modernization is good healthcare policy.
But if a sufficient share of future seniors use their premium support vouchers to buy high-deductible catastrophic insurance policies (which presumably will be the smart approach), then a growing share of routine medical expenses will be purchased directly by consumers – thus slowly but surely returning market forces to healthcare.
So I fully agree with Deroy that there are smart ways to promote the Ryan Medicare reforms. But I also want people to understand what it is that we want to accomplish.
Last but not least, check out this chart and you’ll begin to understand the potential benefits of fixing the third-party payer problem.
P.S. The current version of the Ryan plan, now known as Ryan-Wyden, is not as good as the original version because it keeps the current Medicare system as an option.
Even though I’ve already made clear that I am less-than-overwhelmed by the thought of Mitt Romney in the White House, I worry that people will become to think I’m a GOP toady.
That’s because I’ve been spending a lot of time providing favorable analysis and commentary on the relative merits of the Ryan budget (particularly proposed reforms to Medicare and Medicaid) compared to President Obama’s statist agenda of class warfare and bigger government.
Here are some highlights. In one of my early paragraphs, I give Ryan credit for steering the GOP back in the right direction after the fiscal recklessness of the Bush years.
…the era of bipartisan big government may have come to an end. Largely thanks to Rep. Paul Ryan and the fiscal blueprint he prepared as chairman of the House Budget Committee earlier this year, the GOP has begun climbing back on the wagon of fiscal sobriety and has shown at least some willingness to restrain the growth of government.
I probably should have also credited the Tea Party, but I’ll try to make up for that omission in the future.
These next couple of sentences are the main point of my column.
The most important headline about the Ryan budget is that it limits the growth rate of federal spending, with outlays increasing by an average of 3.1% annually over the next 10 years. …limiting spending so it grows by 3.1% per year, as Mr. Ryan proposes, quickly leads to less red ink. This is because federal tax revenues are projected by the House Budget Committee to increase 6.6% annually over the next 10 years if the House budget is approved (and this assumes the Bush tax cuts are made permanent).
To balance the budget within 10 years would require that outlays grow by about 2% each year. …There are many who would prefer that the deficit come down more quickly, but from a jobs and growth perspective, it isn’t the deficit that matters. Rather, what matters for prosperity and living standards is the degree to which labor and capital are used productively. This is why policy makers should focus on reducing the burden of government spending as a share of GDP—leaving more resources in the private economy. The simple way of making this happen is to follow what I’ve been calling the golden rule of good fiscal policy: The private sector should grow faster than the government.
Actually, I’ve been calling it Mitchell’s Golden Rule, but I couldn’t bring myself to be that narcissistic and self-aggrandizing on the nation’s most important and influential editorial page.
One of the best features of the Ryan budget is that he reforms the two big health entitlements instead of simply trying to save money. Medicaid gets block-granted to the states, building on the success of welfare reform in the 1990s. And Medicare is modernized by creating a premium-support option for people retiring in 2022 and beyond. This is much better than the traditional Beltway approach of trying to save money with price controls on health-care providers and means testing on health-care consumers. …But good entitlement policy also is a godsend for taxpayers, particularly in the long run. Without reform, the burden of federal spending will jump to 35% of GDP by 2040, compared to 18.75% of output under the Ryan budget.
The last sentence of the excerpt is critical. If the Golden Rule of fiscal policy is to have the private sector grow faster than government, then the Golden Goal is to reduce government spending as a share of GDP.
While most people in Washington are focused on the political implications of adding Paul Ryan to the GOP ticket, my only concern is trying to limit the size and scope of government so we can enjoy more freedom and prosperity.
In this debate for PBS, I explain that the Ryan budget would boost the economy – but only if Republicans actually followed through on their rhetoric and did the right thing after obtaining power.
A few comments on the debate. I channel the wisdom of Mitchell’s Golden Rule by saying the most important goal is restraining the growth of federal spending.
I fully agree with Jared that the GOP economic plans won’t work if Republicans get squeamish about doing what’s best for America. If Romney wins, and does a repeat of the statist Bush years, the GOP will deserve to be cast out of power for decades.
I also appeared on Bloomberg TV to comment on Ryan’s economic plan.
It won’t surprise regular readers of this blog that I emphasized the importance of restraining the growth of government so that the burden of the public sector shrinks as a share of overall economic output.
In my second soundbite, I make a simple point about the Laffer Curve. As we saw in the 1980s, lower tax rates don’t automatically mean lower tax revenues.
The honest answer is that it probably means nothing. I don’t think there’s been an election in my lifetime that was impacted by the second person on a presidential ticket.
And a quick look at Intrade.com shows that Ryan’s selection hasn’t (at least yet) moved the needle. Obama is still in the high 50s.
Moreover, the person who becomes Vice President usually plays only a minor role in Administration policy.
With those caveats out of the way, the Ryan pick is mostly good news.
Ryan is a proponent of the flat tax and can competently discuss not only the importance of low tax rates, but also why double taxation is misguided and why it’s wrong to use the tax code to pick winners and losers.
Here are two reasons why I’m worried.
Both Romney and Ryan are somewhat sympathetic to a value-added tax. My worst-case scenario is they win the election, but then can’t get a good budget approved because of some squishy Republican senators who put self interest above national interest. Romney and Ryan then decide that this European-style national sales tax is the only way – on paper – of making the budget balance. In reality, of course, we’ll suffer the same fate as Europe since the VAT revenues will be used to finance ever-larger government.
Ryan has some very bad votes in his past, including support for TARP, the auto bailout, the no-bureaucrat-left-behind education legislation, and the reckless Medicare prescription drug entitlement. Everyone says to ignore those votes because Ryan knew he was voting the wrong way, but if he’s already made some deliberately bad decisions for political reasons, what’s to stop him from making more deliberately bad decisions for political reasons?
But as I said above, don’t read too much into Ryan’s selection. if Republicans win, Romney will be the one calling the shots.
Though this does give Ryan a big advantage the next time there’s an open contest for the GOP nomination – either 2016 or 2020.
P.S. I suspect putting Ryan on the ticket will shift Wisconsin into the GOP column. Based on my last prediction, that would be enough to defeat Obama. But I’ll have to contemplate whether the pick hurts Romney’s chances in another state. You’ll have to wait until September 6 for my updated election prediction.
P.P.S. For those who care about politics, some are saying that selecting Ryan was risky because it gives Obama and his allies an opportunity to demagogue the GOP ticket about entitlement reform. I disagree. Even if Romney picked Nancy Pelosi, that demagoguery was going to happen. Heck, they’ve already accused Romney of causing a woman’s death, so I hardly think they’ll be bashful about throwing around other accusations.
This was followed by an opportunity yesterday evening to debate Jared Bernstein on the PBS NewsHour.
Here’s the interview, though I warn you that excerpts of Obama’s speech take up the first 3:17 of the video, and you won’t get to the debate until about 4:20.
A few observations about the interview (other than that I need a haircut).
It irks me that I was introduced as someone who served as a “Republican economist” on Capitol Hill. At the risk of nit-picking, I was an economist who worked for a Republican.
I should have mentioned that Obama is MIA on the budget. The non-serious plan he proposed this year was unanimously rejected by the House of Representatives and the budget he proposed last year was turned down 97-0 by the Senate.
I should have explained that Obama’s status quo approach means that America becomes Greece.
It would have been a good idea to elaborate further on the issue of federalism, but at least I linked Medicaid reform with the success of welfare reform.
Actually, Bill Clinton must be something even worse than a social Darwinist. That’s because the title of this post is wrong. Obama said that Paul Ryan’s plan (which allows spending to grow by an average of 3.1 percent per year over the next decade) is a form of “social Darwinism.”
Yet when Bill Clinton left office in 2001, following several years of spending restraint, the federal government was consuming 18.2 percent of economic output.
And by the President’s reasoning, this must make Clinton something worse than a Darwinist. Perhaps Marquis de Sade or Hannibal Lecter.
Mr. Obama’s attack, in a speech during a lunch with editors and reporters from The Associated Press, was part of a broader indictment of the Republican economic blueprint for the nation. The Republican budget, and the philosophy it represents, he said in remarks prepared for delivery, is “antithetical to our entire history as a land of opportunity and upward mobility for everyone who’s willing to work for it.” …“Disguised as a deficit reduction plan, it’s really an attempt to impose a radical vision on our country. It’s nothing but thinly veiled social Darwinism,” Mr. Obama said. “By gutting the very things we need to grow an economy that’s built to last — education and training, research and development — it’s a prescription for decline.”
I’m particularly amused by the President’s demagoguery that Ryan’s plan is “antithetical to our entire history” and “a radical vision.”
Is he really unaware that a small and constrained central government is part of America’s history and vision? Doesn’t he know that the federal government, for two-thirds of our nation’s history, consumed less than 5 percent of GDP?
Of course, that was back in the dark ages when people in Washington actually believed that the Constitution’s list of enumerated powers in Article 1, Section 8, actually enumerated the powers of the federal government. How quaint.
What makes this cartoon especially biting is that Ryan’s current plan isn’t quite as good as the one he proposed last year, but that isn’t stopping demagogues from complaining.
Which raises a good issue. If you’re going to be viciously demagogued regardless of whether you solve 5 percent of a problem or 100 percent of a problem, why not go all the way?
Perhaps most important, Congressman Ryan’s plan restrains spending growth, allowing the private sector to grow faster than the burden of government, thus satisfying Mitchell’s Golden Rule so that spending falls as a share of GDP.
The most important detail in the proposal is that the federal budget, which currently consumes 24 percent of GDP, would fall to less than 20 percent of GDP beginning in 2016.
That’s the good news. There are three pieces of not-so-good news.
I suppose it’s also worth mentioning that Ryan’s proposal isn’t as good as Rand Paul’s budget. Spending only climbs 2.2 percent yearly under the plan put together by the Kentucky Senator, and he also abolishes several useless cabinet-level departments.
But the very good shouldn’t be the enemy of the good. As noted already, Congressman Ryan’s plan meets the most important test, which is restraining spending so that the federal budget grows slower than the private economy. And, as the chart shows, he obviously imposes more fiscal restrain then President Obama.
P.S. I am frustrated and nauseated by all the people who are fixating on whether Congressman Ryan’s plan balances the budget in 10 years, 20 years, or whenever. What matters is shrinking the burden of government. I hereby bestow the Bob Dole Award on all the people who are mistakenly focusing on the symptom of red ink rather than the underlying disease of bloated government.
P.P.S. I’m happy to report that there is no value-added tax in the revenue portion of Congressman Ryan’s budget. There is a VAT in his Roadmap plan, and I endlessly worry that this poison pill will re-emerge and ruin other good fiscal plans put forth by the Wisconsin lawmaker.
Notwithstanding this dismal track record, some advocates of free markets argue that anybody would be better than Obama.
But that’s not necessarily the case. Economic history shows that the burden of government often expands the most under Republicans, with Nixon and Bush (either one) being obvious examples.
On the other hand, even a skeptic like me has admitted that Romney’s record in Massachusetts is difficult to assess because he was governor of a very left-wing state and he had to deal with a state legislature with heavy Democratic majorities.
That being said, there’s a new development that suggests Romney may be an unacceptable alternative to Obama. In an interview with the Wall Street Journal, he basically said he is willing to consider a value-added tax for the United States. Here’s the relevant passage.
He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.
For those who are not familiar with a VAT, it is a version of a national sales tax, but imposed at every stage in the production process and embedded in the price of goods and services. Perhaps more important, it is despised by everyone who wants to limit the size of government. This video explains how it works and why it is a money machine for big government.
Any politician that supports a VAT (or even hints at supporting a VAT) should not be allowed anywhere near the White House. That applies to Mitt Romney. And it should be the rule for Paul Ryan as well.
But what about Barack Obama, you may be asking. Hasn’t he said nice things about a VAT?
But there’s no way a VAT will happen if Obama gets reelected. Republicans will be overwhelmingly opposed, even if only for shallow reasons of partisanship.
But if Romney wins and decides to push a VAT, many Republicans will say yes because of loyalty (much as many GOPers went along with Bush’s statist agenda) and many Democrats will say yes in order to get a new source of revenue to expand government.
The consequences, as explained here, would be disastrous.
P.S. For a humorous – but accurate – perspective on the VAT, take a look at these clever cartoons (here, here, and here).
It’s obviously quite disappointing that Congressman Paul Ryan has teamed up with Senator Ron Wyden, a Democratic from Oregon, to put forth a significantly watered down version of his Medicare reform plan.
I’m not happy, but I’m not surprised. Having read a lot of the commentary flowing back and forth today, I have two initial observations.
1. Blame Romney and Gingrich. Republican House members are very nervous about getting demagogued during next year’s election because of their courageous vote this year for the Ryan budget. And since the two frontrunners for the GOP nomination are very squishy on the issue (and likely to become even worse once one of them gets the nomination), this leaves House GOPers in a risky position.
2. Ryan-Wyden may be “Obamacare for Seniors,” but that’s still better than the current system, which is sort of a “UK-single-payer-for-seniors” plan. In other words, Ryan-Wyden isn’t a good plan, but it’s not as bad as the current system. It would be a small step in the right direction. But it’s hard to get excited about a small step when lawmakers earlier this year voted for a big step.
But here’s the problem. America needs leadership to make the changes that are necessary to save the U.S. from a Greek-style fiscal crisis. Given the weak set of candidates running for President, I can understand why Ryan and other congressional Republicans are trimming their sails. But that doesn’t change the fact that America needs something bolder.
Here’s a very good new video from the Chairman of the House Budget Committee, in which he explains why lower tax rates and fewer loopholes are the keys to a simple, fair, and competitive tax system.
But I’m a glass-half-empty skeptic and pessimist, particularly when dealing with Republicans, so here are a few additional thoughts.
1.Why not take the logic of this video to its sensible conclusion and come out in favor of a flat tax? Yes, a half loaf is better than no loaf, but the special-interest groups and class-warfare crowd will fight just as hard against partial tax reform and they will against full tax reform, so why not go for the Full Monty?
3. There was no discussion of double taxation. Since every economic theory, even socialism and Marxism, acknowledges that saving and investment are vital for long-run economic growth, higher wages, and better living standards, this is an unfortunate omission. Given that a single dollar of income can be hit by several layers of tax – capital gains tax, corporate income tax, double tax on dividends, and death tax, this is not a trivial concern.
4. Congressman Ryan has been sympathetic to a value-added tax. Indeed, his “Roadmap Plan” includes a VAT. As I’ve explained many times before, a VAT would be fiscal poison for America. If tax reform ever becomes a vehicle for a VAT, the exercise will either blow up or become a scam to rip off the American people.
The concerns I just outlined are not a knock on the video, which obviously was designed to highlight a couple of key principles.
But I am saying that good tax policy involves more than what Congressman Ryan outlined. Lower rates and fewer loopholes are necessary conditions for better tax policy, but there are other pieces of the puzzle that can’t be ignored.
Republicans have finally woken up and are beginning to explain why Medicare needs to be reformed.
Here’s a very good new video from Congressman Paul Ryan, Chairman of the House Budget Committee. He hits on key points regarding market competition versus government monopolies, and warns about the danger of giving control of the health care system to Obama’s panel of bureaucrats.
Senator Marco Rubio, meanwhile, has a video emphasizing the need for reform. He also trashes the demagoguery of the left.
Not surprisingly, I can’t resist adding my video to the mix. I’m not as polished as the two lawmakers, but I hope the information in my video is a very important complement to the issues discussed by Rep. Ryan and Sen. Rubio.
This new video from the Center for Freedom and Prosperity discusses a proposal to solve Medicare’s bankrupt finances by replacing an unsustainable entitlement with a “premium-support” system for private insurance, also known as vouchers.
Narrated by yours truly, the video has two sections. The first part reviews Congressman Ryan’s proposal and notes that it is based on a plan put together with Alice Rivlin, who served as Director of the Office of Management and Budget under Bill Clinton. Among serious budget people (as opposed to the hacks on Capitol Hill), this is an important sign of bipartisan support.
The video also notes that the “voucher” proposal is actually very similar to the plan that is used by Members of Congress and their staff. This is a selling point that proponents should emphasize since most Americans realize that lawmakers would never subject themselves to something that didn’t work.
The second part discusses the economics of the health care sector, and explains the critical need to address the third-party payer crisis. More specifically, 88 percent of every health care dollar in America is paid for by someone other than the consumer. People do pay huge amounts for health care, to be sure, but not at the point of delivery. Instead, they pay high tax burdens and have huge shares of their compensation diverted to pay for insurance policies.
I’ve explained before that this inefficient system causes spiraling costs and bureaucratic inefficiency because it erodes any incentive to be a smart shopper when buying health care services (much as it’s difficult to maintain a good diet by pre-paying for a year of dining at all-you-can-eat restaurants). In other words, government intervention has largely eroded market forces in health care. And this was true even before Obamacare was enacted.
Medicare reform, by itself, won’t solve the third-party payer problem, but it could be part of the solution – especially if seniors used their vouchers to purchase real insurance (i.e., for large, unexpected expenses) rather than the inefficient pre-paid health plans that are so prevalent today.
Washington is filled with groups that piously express their devotion to balanced budgets and fiscal responsibility, so it is rather revealing that some of these groups have less-than-friendly responses to Congressman Ryan’s budget plan.
The Committee for a Responsible Federal Budget, for instance, portrays itself as a bunch of deficit hawks. So you would think they would be doing cartwheels to celebrate a lawmaker who makes a real proposal that would control red ink. Yet Maya MacGuineas, president of the CRFB, basically rejects Ryan’s plan because it fails to increase the tax burden.
…while the proposal deserves praise for being bold, the national discussion has moved beyond just finding a plan with sufficient savings to finding one that can generate enough support to move forward. All parts of the budget, including defense and revenues, will have to be part of a budget deal… Now that both the White House and House Republicans have made their opening bids, this continues to reinforce our belief that a comprehensive plan to fix the budget like the one the Fiscal Commission recommended has the best hope of moving forward.
I’m mystified by Maya’s reference to an “opening bid” by the White House. What on earth is she talking about? Obama punted in his budget and didn’t even endorse the findings of his own Fiscal Commission. But I digress.
Another example of a group called Third Way, which purports to favor “moderate policy and political ideas” and “private-sector economic growth.” Sounds like they should be cheerleaders for Congressman Ryan’s plan, but they are even more overtly hostile to his proposal to reduce the burden of government.
House Budget Chairman Paul Ryan’s budget is a deep disappointment. There is a serious framework on the table for a bipartisan deal on our long term budget crisis. It’s the Bowles-Simpson blueprint, now being turned into legislation by the Gang of Six. It puts everything on the table – a specific plan to save Social Security, significant defense cuts, large reductions in tax expenditures and reforms to make Medicare and Medicaid more efficient, not eliminate them.
That sounds hard left, not third way. But it’s not unusual. Many of the self-proclaimed deficit hawks on Capitol Hill also have been either silent or critical of Ryan’s plan.
Which leaves me to conclude that what they really want are tax increases, and they simply use rhetoric about debt and deficits to push their real agenda.
What really matters is how much money government is spending this year compared to how much money will be spent in subsequent years. Using this common-sense benchmark, let’s look at two competing proposals.
According to the new numbers released today, Congressman Ryan’s budget plan will result in government growing, on average, by almost 2.8 percent annually over the next 10 years.
President Obama’s budget plan, by contrast, would increase the burden of government spending by an average of nearly 4.7 percent each year.
This chart compares the two budget plans. Because Chairman Ryan does not let spending grow as rapidly, cumulative spending over that period will be $6.2 billion less than it would be based on the President’s plan. That’s an impressive amount of money that taxpayers will save if Ryan is successful, but it’s not a spending cut.
Not surprisingly, the big spenders in Washington are claiming that the “spending cuts” in Representative Ryan’s budget are “harsh” and “extreme.” But Ryan’s proposal would allow the budget to grow faster than inflation, which is projected to average less than 2.1 percent annually over the 10-year period.
That’s exactly what happens with Ryan’s plan. By 2018, the federal budget will drop to less than 20 percent of GDP. That still doesn’t bring us back to where we were at the end of the fiscally responsible Clinton years, when federal spending consumed only 18.2 percent of GDP. But after a 10-year spending binge under Bush and Obama, Congressman Ryan’s plan would move America back toward fiscal responsibility.
The left already is wailing about the Medicare and Medicaid reforms in Congressman Paul Ryan’s budget. They don’t have any solutions of their own for these bankrupt programs, but they hope to scare voters in the short run and don’t seem to care about the nation in the long run.
But, as Margaret Thatcher famously warned, the problem with socialism is that sooner or later you run out of other people’s money. With that in mind, it’s quite appropriate to cite a story about another needless death resulting from the inefficient U.K. government-run health care system.
But what makes this story so remarkable is that the person who died was part of the upper-level bureaucracy. When folks relatively high in the pecking order start suffering from needless death and wind up having their surgeries delayed four times, you know it’s just a matter of time before the system collapses.
A former NHS director died after waiting for nine months for an operation – at her own hospital. Margaret Hutchon, a former mayor, had been waiting since last June for a follow-up stomach operation at Broomfield Hospital in Chelmsford, Essex. But her appointments to go under the knife were cancelled four times and she barely regained consciousness after finally having surgery. Her devastated husband, Jim, is now demanding answers from Mid Essex Hospital Services NHS Trust – the organisation where his wife had served as a non-executive member of the board of directors.
Keep in mind that this is America’s future if we don’t reform entitlements. That’s what the leftist critics of Ryan’s plan aren’t telling you.
The Chairman of the House Budget Committee, Congressman Paul Ryan of Wisconsin, will be unveiling his FY2012 budget tomorrow. Not all the details are public information, but what we do know is very encouraging.
Ryan’s plan is a broad reform package, including limits on so-called discretionary spending, limits on excessive pay for federal bureaucrats, and steep reductions in corporate welfare.
But the two most exciting parts are entitlement reform and tax reform. Ryan’s proposals would simultaneously address the long-run threat of bloated government and put in place tax policies that will boost growth and improve competitiveness.
1. The long-run fiscal threat to America is entitlement spending. Ryan’s plan will address this crisis by block-granting Medicaid to the states (repeating the success of the welfare reform legislation of the 1990s) and transforming Medicare for future retirees into a “premium-support” plan (similar to what was proposed as part of the bipartisan Domenici-Rivlin Debt Reduction Task Force).
2. America’s tax system is a complicated disgrace that manages to both undermine growth and promote corruption. The answer is a simple and fair flat tax, and Ryan’s plan will take an important step in that direction with lower tax rates, less double taxation of saving and investment, and fewer distorting loopholes.
What matters most is “bending the cost curve” of government. Obama’s budget leaves government on auto-pilot and leaves America on a path to becoming a decrepit European-style welfare state. Ryan’s budget, by contrast, would shrink the burden of federal spending relative to the productive sector of the economy.
Along with other Cato colleagues, I’ll have more analysis of the plan when it is officially released.
While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.
Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.
I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.
But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.
Our side (broadly speaking) wants to solve the budgetary situation by restraining the growth of government. One proposed solution is Congressman Paul Ryan’s Roadmap plan, which would reform entitlements and curtail other programs so that the long-term burden of federal spending is reduced to less than 20 percent of GDP. Since long-term federal tax revenues under current law – even if the 2001 and 2003 tax cuts are made permanent – are expected to be about 19 percent of GDP, this solves the budet problem (the tax reform component of the Roadmap includes a VAT, which is a poison pill in an otherwise excellent plan, but let’s set that aside for another day).
The left, by contrast, generally wants to let federal spending consume ever-larger shares of economic output, and they believe that increasing the tax burden is the right way of keeping the deficit from getting too large. No statist has put forth a detailed plan to match Rep. Ryan, but several high-ranking Democrats have made no secret about their desire for a VAT (see here, here, and here). And everyone agrees that a VAT is capable of extracting a lot of money from the productive sector of the economy.
These two visions are fundamentally incompatible, which helps to explain why there is a standoff. The bad guys do not want to control the size of government and the good guys do not want to raise taxes. But now we have to add one more piece to the puzzle. While gridlock normally is a good result, inaction to some degree favors the other side because entitlement programs automatically expand. The helps to explain why Tyler (with reluctance) thinks that it may be best to acquiesce to a VAT now rather than to wait for a fiscal crisis.
Now let’s explain why Tyler is wrong. First, it is far from clear that surrendering to a VAT now will result in better (less worse) policy than what will happen during a crisis. It certainly is true that some past crises have led to terrible policy, such as the failed policies of Hoover and Roosevelt in the 1930s or the more recent Bush-Paulson-Obama-Geithner TARP debacle. But at other points in time, a crisis atmosphere has paved the way for better policy, with Reagan’s presidency being the most obvious example.
The wait-for-a-crisis strategy clearly is a bit of a gamble, but even if we lose, we get a VAT in the future rather than a VAT today. So what’s the downside? Tyler and others might say that the future legislation in the midst of a crisis could be a vehicle for other bad provisions, but he offers no evidence for this proposition. And it may be the case that the other side would be forced to add good provisions instead. Moreover, the lack of a VAT in the period between today and the future crisis might help lead to some much-needed spending restraint.
What about Tyler’s argument that the good guys could extract some concessions from the other side by putting a VAT on the table. This is horribly naive. Even though George Mason University is less than 20 miles from Washington, and even though Tyler is a renassaince man with many talents, he does not understand how Washington really works.
Imagine there is a budget summit where politicians from both sides get together to work on this supposed deal. Here are the inevitable ground rules – and the consequences they will produce:
1. The deal will be 50 percent spending cuts and 50 percent tax increases, but the supposed spending “cuts” will be nothing more than reductions in already-legislated increases. The tax increases, by contrast, will be on top of all the additional revenue that is already exepected under current law (not a trivial matter since receipts will be $1.5 trillion higher in 2015 than they are today according to OMB). For proponents of limited government, using the “current services baseline” as a benchmark in budget negotiations is like playing a five-minute basketball game after spotting the other team a 20-point lead.
2. All spending and revenue decisions will be examined through the prism of CBO income distribution tables, and the left will successfully insist that nothing is done to make the tax code less progressive. But since a VAT is a proportional tax, the only way of preserving overall progressivity is to raise tax rates on those wicked and evil rich people and/or to massively increase “refundable” tax credits (what normal people call income redistribution). Any proposal to lower income tax rates or eliminate the corporate income tax, as Tyler envisions, would be laughed out of the room (though Democrats will offer a fig leaf or two in order to seduce a sufficient number of gullible Republicans into supporting a terrible agreement, and that might include a cosmetic change to the corporate tax regime).
3. Many of the supposed spending cuts, for all intents and purposes, will be back-door tax increases on saving and investment. More specifically, a big chunk of the supposed spending cut portion of a budget deal will be from means-testing entitlement programs. This sounds good. After all, who wants to send a Social Security check to Bill Gates when he retires? But consider how such a system actually will work. The government will say that people with income (and/or assets) above a certain level are ineligible for some or all of the benefits available to less-fortunate retirees. From an economic persepective, this is very much akin to a higher tax rate on people who save and invest during their working years. And since means testing would only generate substantial budgetary savings if it applied to millions of regular people in addition to Bill Gates, we would wind up with a system that created big penalties on middle-class families that were dumb enough to save and invest.
I’ve already pontificated enough for one blog post, so let me summarize by stating that Tyler’s approach, while not unreasonable, is about how to lose gracefully. Even if his strategy works perfectly, the result is bigger government. I’d much rather fight. If you want some inspiration for the battle, watch this video. If you haven’t had enough of me already, here’s my video explaining why the VAT is a horrible idea.
