Roving thoughts and provocations

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Budget Fallacies: Why the Ryan Plan Won’t Work

Among the economic fallacies embraced in Congressman Paul Ryan’s budget proposal, two are particularly egregious: that getting rid of Medicare will reduce health care costs and that enacting yet further tax cuts for the rich will spur growth and investment.

Critics on the left are up in arms because Ryan’s proposal to force Medicare recipients to buy private insurance will raise the amount those now under 55 will pay when they are old enough to get Medicare by an average of $6,000 a person. In other words, critics say, we are trying to cut health care costs—and supposedly reform it through more privatization—on the backs of future elderly Medicare recipients.

But the Ryan plan won’t reduce health care costs. As Peter Orszag, the former White House budget director, told me recently, the bipartisan Congressional Budget Office calculates that overall health care spending will go up as Medicare recipients are forced to buy private insurance, since private insurance has far higher administrative expenses than Medicare. Health care expenditures, as Orszag nicely puts it, are not being reduced on the backs of seniors, they are being raised on the backs of seniors.

And herein lies a further misunderstanding. It is true that the main cause of long-term budget deficits today is the expected rapid rise in expenditures for health insurance programs like Medicare and Medicaid (not Social Security, though they are all too often lumped together in the press). But the main reason those programs will become so costly is the rapid expected increase in health care costs in general, not the purported over-generosity of Medicare and Medicaid.

All effort should go into reforming health care. Americans pay far more per person in health care for outcomes that are typically not as good as in many nations that spend far less. In my view, effective health care reform will require much more serious government involvement—certainly not less—in improving efficiency and reducing costs.

As for the tax-cut mantra that it will automatically raise rates of growth, it is hard to believe that this theory has any credibility after the poor performance of the economy since the Bush tax cuts. Yet the Ryan plan would not only retain the Bush cuts for those who earn more than $250,000 a year; it would increase the cut for those who make more. This is in the tradition of Ronald Reagan, who spearheaded the sharp reduction in progressive income taxes as soon as he got into office, but helped reduce the enormous budget deficit that generated by supporting, with the help of Democrats, the regressive increase in payroll taxes for Social Security. That increase was supposed to be used to make Social Security financially secure in the future, but the excess money went to pay current budget expenditures instead. All the while, Reagan never produced more rapid productivity growth as promised—the output per hour of work, which is the source of prosperity. And budget deficits did not fall below roughly 3 percent of Gross Domestic Product, the national income.

It is time for the press, which has barely noticed how slow growth was under George W. Bush, to start pounding on this theme. Since the bottom of the 2001 recession to the top of the expansion in 2007—before the credit crisis and Great Recession!—GDP discounted for inflation grew more slowly than during any expansion in post-World War II history. Job growth was even worse, way behind any expansion in the last 65 years. Below are the data, prepared by the Economic Cycle Research Institute.

Expansion
(bottom to top)
Annual rate of
Real GDP Growth
Annual rate of
Job Growth
1949–53 7.5 4.4
1954–57 4.0 2.5
1958–60 5.7 3.6
1961–69 4.8 3.3
1970–73 5.2 3.4
1975–80 4.3 3.6
1980–81 4.4 2.0
1982–90 4.2 2.8
1991–2001 3.6 2.0
After Bush tax cuts
2001–07 2.7 0.9

Meantime, family income did abysmally in the same period, remaining below the highs it reached, discounted for inflation, in 1999. Failing to exceed former highs probably never happened before in a long expansion. But most disturbing, even capital investment grew unusually slow in this period where tax cuts were supposed to create incentives for wealthy people to take entrepreneurial risk. As profits rose, capital investment grew more slowly than in all but one economic expansion.

The right effectively ignores the record of the Bush tax cuts, and in my reading is rarely challenged on the issue. Yet recent history makes a powerful case against tax cuts. If the Ryan plan were passed, two thirds of alleged savings would be taken out of the hides of what the Center on Budget and Policy Priorities calls people of “modest means.” Sharp cuts would be made not only to Medicare and Medicaid, but also to infrastructure spending and funds for Pell Grants for college tuition—both areas that are crucial to the nation’s long term economic performance. In sum, poverty will rise and public investment in the economy’s foundation will founder, while people with an annual income of more than $1 million a year will get a tax cut of $125,000 a year. Does any rational person think this is a sound approach to our future?

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