This is an additional, longer-than-usual post, to provide detail on the news of the last few days. We will be back to the usual format later this week.
Former Massachusetts Governor Mitt Romney’s choice of Wisconsin Representative Paul Ryan as his running mate already has proven controversial. But virtually every authority agrees that it will put budget policy front and center in the election campaign.
The nation needs a debate about the budget. Now, apparently we will get one. Whether it will prove to be productive is another question.
This is to give you some background to put the issue and the candidate into perspective.
Representative Ryan and the Budget
Rep. Ryan was elected to the House in 1998. When Republicans gained control of the House in the elections of 2010, they selected Rep. Ryan as Budget Committee chairman.
Rep. Ryan had made the federal budget one of his most important priorities throughout his House career, and as chairman, it became his responsibility to present and pass a budget resolution, which is a general blueprint for spending and taxes. The budget resolution sets a total amount for appropriated spending, but the allocation of that amount among broad categories, and then among individual programs, is done by the Appropriations Committees. The budget resolution also can, but is not required to, set numerical targets for savings in entitlement programs, and then require that the various authorizing committees produce legislation to achieve those savings. The Budget Committee then assembles those bills into a single “reconciliation bill,” which is considered by both chambers under privileged parliamentary procedures; in particular, a reconciliation bill is immune from filibuster in the Senate.
As House Budget chair in 2011, Rep. Ryan had little hope of his budget blueprint being implemented into law. The Senate remained under Democratic control, and so the Ryan budget resolution itself would not likely be passed by both chambers without change. And then beyond the Senate hurdle, with President Obama in the White House, any legislation to implement the policies in the House resolution would face a potential veto. Therefore, Rep. Ryan’s budget resolution would be either an attempt at bipartisan compromise, or a political statement.
If Rep. Ryan’s 2011 budget resolution was a first step toward compromise, then it arguably was the first offer for a very long negotiation (the current version, with a few changes discussed below, is available here). Following from earlier documents that he had produced as the Committee’s ranking minority member, it called for substantial changes in programs that would be likely to find agreement from few, if any, congressional Democrats. (The key program change was to Medicare; more on that in a separate section below.)
Still, Rep. Ryan’s budget did receive praise from many pundits for facing up to the budget problem, and daring to touch the “sacred cows” that are important to solving it. Even President Obama was quoted this weekend as saying, “I know him. I welcome him to the race. He’s a decent man, a family man, an articulate spokesman for Governor Romney’s vision.”
But for those who would characterize the Ryan budgets as political documents, two families of issues stand out.
First, the bottom line: The Ryan budget plan would have reduced future deficits substantially, but by less than some would have expected given the severity of its program changes. To give a sense of scale, Rep. Ryan’s FY 2012 budget resolution was projected to leave the nation’s debt held by the public at 70 percent of GDP as of the end of fiscal year 2022. The plan of the Bipartisan Policy Center’s Debt Reduction (AKA Domenici-Rivlin) Task Force would have left the debt at 60 percent of GDP at the end of 2020. Some on the Republican side used the Ryan budget to argue that they bore no responsibility for the need to increase the debt limit in 2011; those Republicans said that they had a plan – Rep. Ryan’s – to solve the problem. However, even after full implementation of the Ryan budget resolution (the FY 2012 version) then in place, there would have been a need to increase the debt limit by about $8.5 trillion over its ten-year duration.
In short and taken at face value, Rep. Ryan’s budget resolution would have meaningfully reduced the growth of the public debt, but it fell short of bipartisan approaches to the problem.
And second, how Rep. Ryan’s budgets achieved their results: As was noted at the outset, a budget resolution is only a general outline. It does not actually spell out much detail of how it proposes to achieve its savings, although significant detail sometimes can be found between the lines of the reconciliation instructions to the entitlement-program and tax-writing committees. In Rep. Ryan’s resolutions, there were two major areas where claimed savings appear to be questionable.
The first area was future annual appropriations, which encompass both defense and domestic spending by government agencies. Again, a budget resolution sets only a total for annually appropriated spending (its more-disaggregated spending numbers are ignored). Furthermore, the actual appropriations bills are written one year at a time, and include plans for literally thousands of programs each year – far beyond the level of detail that the budget resolution provides. Therefore, any multi-year budget plan is a leap of faith for appropriations spending from the second year on out. There is always a strong temptation to make future years’ deficits look smaller by assuming appropriations spending levels that are unrealistically low. Both parties have used this device. It is a matter of judgment whether any particular budget plan exhibits a firm determination to cut spending, or rather a willingness to promise the impossible to make the numbers add up.
In following Rep. Ryan’s instructions to make future year budget projections on the basis of his FY 2012 resolution, CBO found that the sum of annually appropriated spending plus all entitlement programs other than health care and Social Security was assumed to fall from 12 percent of GDP in FY 2010 to 6 percent in FY 2022, and to 3-1/2 percent by FY 2050. For perspective, total appropriated spending has never been less than 8.3 percent of GDP since 1990. In fact, defense spending alone has been at least 3.5 percent of GDP in 26 of the last 32 years, and in each of the last 10 years; it is now running over 4 percent of GDP. Gov. Romney’s announced defense program calls for “…defense spending…at a floor of 4 percent of GDP.” Rep. Ryan’s budget program calls for defense spending, plus domestic appropriated spending, plus all of the non-health, non-Social Security entitlement programs, to fall to 3-1/2 percent of GDP. This clearly raises questions about whether Rep. Ryan’s assumed cuts in annual appropriations are realistic.
To be fair, it is easy to fall into a bumper-sticker mentality about defense spending as a percentage of the GDP, and unconsciously to assume that the nation that spends the highest percentage of its GDP can beat up any other nation. Merely to scratch the surface of this fallacy, note that the size of each nation’s GDP is highly relevant. To choose an absurd example merely for purposes of illustration, the U.S. economy is approximately six times the size of that of France. Thus, the United States could spend on defense half the percentage of its GDP than does France, and still have a defense establishment three times the size. So the appropriate size of defense spending relative to our GDP should not be chosen casually, and could conceivably be lower than it has been historically; only time, technology, and threats will tell. And also to be fair, be aware that President Obama’s deficit-reduction plan itself would reduce total appropriated spending (but not including the minor entitlement programs, which were 3.1 percent of GDP in FY 2011) to 5.0 percent of GDP by FY 2022; this would be the lowest level since at least 1962 (the lowest level on record is 6.2 percent in 1999).
A second issue regarding projected budget savings in Rep. Ryan’s plans is taxation. As has become a behavior pattern in Washington, Rep. Ryan’s budget program is a marriage of detail and blanks to be filled in later. On the detail side, Rep. Ryan knows precisely what he wants for tax cuts: two rate brackets for individuals with rates of 10 and 25 percent; a corporate tax rate of 25 percent, with replacement of the current worldwide system by a territorial system; and repeal of the alternative minimum tax (AMT). All of that is to be financed through closures of tax loopholes, which are not specified – although tax preferences on income from assets are expressly off-limits for reduction or repeal. However, this package was never submitted to either the Congressional Budget Office or the Joint Committee on Taxation, the technical authority of the Congress’s tax-writing committees (House Ways & Means, of which Rep. Ryan is a member, and Senate Finance), to see if that circle in fact could be squared, and what it would imply. Rep. Ryan makes no statement about whether this package would tax typical working families more or less; a recent analysis by the Tax Policy Center suggests that it would be more. In lieu of a full specification of the plan for purposes of budget scoring by the Congressional Budget Office, CBO was instructed as follows:
The path for revenues as a percentage of GDP was specified by Chairman Ryan’s staff. The path rises steadily from about 15 percent of GDP in 2010 to 19 percent in 2028 and remains at that level thereafter. There were no specifications of particular revenue provisions that would generate that path.
Even if the Ryan tax plan could achieve all of its stated goals at its claimed tax rates, the long-term revenue goal may be too low. The last time the federal budget was balanced with revenue below the Ryan long-term target of 19 percent of GDP was fiscal year 1960 – more than half a century ago, before either Medicare or Medicaid was created, and while some of the members of the baby-boom generation were still unborn, rather than knocking on the door of retirement as they are today.
Therefore, the claimed budget savings in Rep. Ryan’s two budget resolutions are in substantial part the products of assumptions: future appropriations cuts, which are at least ambitious; and future tax revenues, which may not materialize if the plan’s other specific conditions (tax rate reductions and protections of tax benefits for income from assets) are met. One might question the assumption of such substantial cuts in annual appropriations. One might also question whether the Ryan plan would hit its revenue targets, and also whether the revenue targets are themselves too low. Putting all three of those questionable assumptions together in one package must raise significant concerns. Every budget deficit reduction plan in history has relied upon an element of hope. Rep. Ryan’s is no exception.
In fact, however, a third programmatic part of Rep. Ryan’s budget plans has been and will be the center of most of the attention – and that is Medicare. The Ryan proposal for that program is worth a discussion of its own.
Representative Ryan and Medicare
When President Obama issued his executive order to create the National Commission on Fiscal Responsibility and Reform (the “Simpson-Bowles Commission”) in February of 2010, Rep. Ryan was appointed by the Speaker of the House to be a member. In the course of the early meetings, Rep. Ryan and Alice Rivlin, one of the public members appointed by the President, talked about plans to reform Medicare, and went so far as to prepare a specific proposal. That proposal followed the key element of CED’s recommendations for overall healthcare reform – specifically, giving beneficiaries cost-responsible choices among competing healthcare plans. Obviously, we at CED believe that this approach holds great promise for “bending the cost curve” for health care. (Notably, this Rivlin-Ryan plan would have replaced fully the current, traditional Medicare program with competing private plans – but read on.)
Then, when Rep. Ryan assembled his budget resolution in 2011, he referred back to what came to be called the “Rivlin-Ryan” Medicare proposal. However, he made a significant change on his own. The Rivlin-Ryan plan, like virtually every other serious proposal to shore up Medicare’s finances, put a cap on spending – in this case, a cap on the amount that the federal government would contribute toward beneficiary premiums. If private insurance premiums grew faster than a pre-set limit, the federal government contribution would grow more slowly, and beneficiaries would have to pay the difference. In Rivlin-Ryan, the growth limit was relatively generous – the rate of growth of GDP per capita, plus 1 percent; advocates would have considerable confidence that competition would slow premium growth enough that this cap would not bind. However, in his budget, Rep. Ryan reduced that growth cap to the rate of increase in the consumer price index (CPI), which could be expected to grow much more slowly than per capita GDP plus 1 percent, and more slowly than actual premium costs. In other words, the Ryan budget plan – unlike the Rivlin-Ryan proposal – pre-programmed gradual but significant increases in Medicare beneficiary costs year by year.
Why this change? The answer is not obvious. In fact, and quite reasonably, the Ryan Medicare plan would not take effect for 10 years into the future, to allow current and near-term retirees a better chance to plan their health care. Therefore, over the customary 10-year budget time horizon, this more-rigorous provision was essentially immaterial. However, a reasonable guess is that the budget resolution’s substantial tax cuts would not have been affordable in the long run without these greater savings from Medicare. Recall from the discussion above that the longer-term deficit reduction from the plan was not overwhelming. Without those greater Medicare savings, the bottom line may not have been acceptable; and other sources of deficit reduction, noting the already ambitious cuts in assumed annual appropriations, were fully tapped.
There was an awkward moment in the presentation of the plan, when Rep. Ryan was pressed on the details and he made reference to Alice Rivlin’s support. But when approached by the press, Dr. Rivlin had to respond that yes, Rep. Ryan had informed her of his changes to their plan, but no, she had told him in no uncertain terms that she did not support them.
The overwhelming majority of Democrats salivated at this proposal. The prospect of the elimination of traditional Medicare plus virtually certain beneficiary premium increases for the private-plan alternatives gave Democrats the opportunity to talk about “ending Medicare as we know it.” Still, House Republicans held firm in support of the plan, with all of them (joined by five Democrats) voting for the resolution.
Over the rest of 2011 and early 2012, however, thinking on this issue evolved. Alice Rivlin developed a new version of her ideas, now the “Domenici-Rivlin” plan (named in the first part after her Debt-Reduction Task Force co-chair, former New Mexico Republican Senator and longtime Senate Budget Committee chair Pete Domenici), which would retain traditional Medicare as an option, competing against alternative private insurance plans. Rep. Ryan observed this plan as it evolved, and worked with Democratic Senator Ron Wyden (D-OR) to formulate a bipartisan congressional version (although there is as yet no legislative language, and there are some details on which Rep. Ryan and Sen. Wyden have publicly agreed to disagree), and it was this version that was reflected in the 2012 (FY 2013) version of the Ryan budget plan.
The rollout of the second Ryan budget and Medicare proposal may have been a missed opportunity. One could imagine a presentation that began with a bit of a mea culpa and highlighted the revisions in the plan, which might have led to a serious bipartisan conversation. However, that tone was absent. This may also have been due in part to the unwillingness of Democrats to let go of what they perceived to be their advantage from the Medicare version of the previous year. Whatever the reason, the world seems to have overlooked the change in the Ryan Medicare proposal from last year’s budget resolution to this year’s.
An additional issue: Rep. Ryan and other Republicans have attacked President Obama and the 2010 Patient Protection and Affordable Care Act on the ground of its Medicare spending cuts (needed to finance the costs of extending coverage to the working-age uninsured). However, the Ryan budgets retained those Medicare spending cuts, even while they eliminated the coverage expansions in the PPACA. Democrats can be expected to raise that issue, although it may be too subtle to gain much traction in a presidential election campaign.
And an interesting side question: In 2009 and 2010, Sen. Wyden worked with Sen. Bob Bennett (R-UT) to formulate a bipartisan healthcare reform proposal (which CED endorsed) as an alternative to what became the PPACA. As a perceived direct result, Sen. Bennett was vilified by the Tea Party and failed even to achieve re-nomination to his Senate seat in 2010. In 2011, Rep. Ryan collaborated with Sen. Wyden on his alternative Medicare proposal, but remains a darling of the Tea Party. Why did Sen. Bennett fail to survive his dalliance with Sen. Wyden, while Rep. Ryan has thrived on his? There must be a subtle answer.
Representative Ryan and Chemistry
The early buzz about Gov. Romney’s selection of Rep. Ryan has touched upon the apparent positive chemistry between the two. It is worth noting that there arose some highly negative chemistry between Rep. Ryan and President Obama, in a fashion that may have hindered the search for a budget solution.
On April 13, 2011, President Obama was scheduled to reveal his budget plan in a speech at George Washington University in Washington, D.C. This was one day before the House floor vote on the first Ryan budget resolution, which marked the beginning of the intense debate leading up to the debt-limit crisis. The Ryan budget was garnering some attention, and there was a clear need to begin a dialog to avoid a debt-limit-driven default.
As is the case in relatively formal addresses, the President’s remarks were prepared verbatim. George Washington University is all of seven blocks from the White House; you will recall that President Reagan was taken to the University’s hospital after the attempted assassination in 1981. Being close to the White House, it also is not far from the Capitol. It was only in the last seconds after the President’s just-in-time delivery to the site and his walk onto the stage that he (and his speechwriters) learned that Rep. Ryan had made the trip to George Washington and was in the room. The President’s prepared speech included an aggressive attack on Rep. Ryan’s budget plan. The President had to decide whether to stay with his prepared remarks, and risk offending Rep. Ryan, or to extemporize his speech, and run the risks inherent in speaking off the cuff on a complicated subject. The written speech may have been released to the press already, or have been scheduled for momentary release by staff back at the White House. For whatever reason, the President chose to read the speech as written. At the end, Rep. Ryan stormed out of the hall, clearly not soothed by the President’s staff who ran after him to explain that the President had not known that he would be present.
One can ask whether the President should have winged his speech on the spot, or whether such an aggressive speech should have been written in the first place. One can question who hit whom first, and whether Republican rhetoric in the Congress justified the President’s rhetoric in the speech. Whatever these judgments, Rep. Ryan and the President have a less-than-happy history on the budget in general, and on Medicare in particular – which could not have helped in the debt-limit dispute that followed last year.
To repeat: The nation needs a debate about the budget. Now, apparently we will get one. Whether it will prove to be productive is another question.
Rep. Ryan has become so closely identified with his budget plan that his selection as Gov. Romney’s running mate can raise little else. Many on the Democratic side would quarrel with the content of Rep. Ryan’s budget plan, and there are arguable negative points to make. However, Rep. Ryan did put forward a budget, and did articulate his views on Medicare, while the Democratic Senate has not passed a budget resolution at all over the last two years. It is true that proposing an honest and complete budget in a world of anti-tax and anti-spending shibboleths is dangerous. But Rep. Ryan has taken on those on the other side of the aisle who will attack any proposed change in Medicare – an equivalent bright line.
And the most noteworthy part of the Ryan budget plan far and away is the proposal for Medicare. Medicare reform and tax reform are the two foundation stones on which a budget deal can be built. Without them, the numbers don’t work. With them, everything else will fall into place. The Ryan budget’s tax reform is an assumption rather than a proposal, and its assumption arguably is implausible. However, the Medicare plan cites the one force – competition – that has any serious prospect of bending the cost curve and getting the budget under control in the long run. (Some would prefer federal regulation of reimbursement rates, but that cannot work beyond some maximum margin between Medicare and private-sector prices. Others argue for reimbursement “bundling” and government propagation of best practices, but both are mere approximations of what competition would do even better.)
The upside of the nomination of Rep. Ryan is that this issue will reach the agenda. The downside is that a political campaign may not be the best platform for rational debate, and that the evolution of the issue so far has left it much too easy for the two sides to retreat to extremes and caricatures. The first Ryan plan is easy to attack politically as cutting off those dependent on traditional Medicare (even 10 years in the future; that detail is easy to ignore), and shifting substantial costs onto retirees. The revised Ryan plan avoids the former problem and mitigates the second with a higher growth cap; but why debate the revised plan when it is so much fun beating up on the original plan?
Rep. Ryan’s budget plan by itself, on the numbers, will not solve the problem. The most common Democratic budget plans by themselves, on the numbers, will not solve the problem. Will this campaign debate be the first step toward combining the best ideas of the two into a workable compromise? Or will it rather destroy the credibility of the very tools that we need to solve the problem before it is too late? Stay tuned.