Paul Ryan’s Budget is Not Nearly as Radical as the Status Quo
Posted by Jeffrey Brown on Aug 15, 2012
Filed Under (U.S. Fiscal Policy)
I find myself bemused by the sheer number of commentators that have labeled vice presidential candidate Paul Ryan a “radical” because of his views on the federal budget. His core view – that we ought to keep federal spending as a share of GDP at a level approximately equal to where it has been for the entire lifetimes of most Americans – strikes me as far less radical than the current policy status quo.
Let’s start with some basic facts. In the post-war period in the U.S., federal spending has averaged just under 20 percent of GDP. (You can confirm this for yourself by going to the White House OMB site and downloading Table 1.2). There have clearly been some ups and downs over this period for a variety of reasons, but it has never exceeded a quarter of GDP except for 2009 – the depths of the Great Recession – when outlays reached 25.2% of GDP.
In other words, for 60 years – through military conflicts great and small, through booms and busts, through the creation and demise of countless government programs, and through tectonic shifts in the global economic landscape, the U.S. has found it possible to keep government at about 20% of GDP. And throughout this period, the economic engine of the U.S. remained the envy of the world, even now in the aftermath of the Great Recession.
Absent substantial changes to our public policies, however, U.S. government spending as a share of GDP is projected to rise at an unprecedented rate. According to the CBO’s “extended alternative fiscal scenario,” which they describe roughly as a continuation of current policies, spending as a share of GDP is projected rise to 35.7% of GDP in just the next 25 years. This seems to me to be prima facie evidence that our future fiscal problems are being driven by rising spending, rather than a lack of revenue.
Given this, what sounds more radical? Suggesting that we make cut the growth rate of spending to keep the ratio of government-to-GDP near historical levels, as Paul Ryan has suggested? Or allowing government to grow from 20% to over 35% of GDP?
Google’s definition of radical is “affecting the fundamental nature of something.” A failure to change policy course would affect the fundamental nature of the U.S. economy. Now that is radical.
If we want to avoid this, then we need to re-think the role of government. Most of the future projected growth of government is due to a rising health care costs and an aging population. One cannot slow rising health care costs and population aging simply by cutting spending, as any serious student of the budget – of which I consider Paul Ryan to be one – already knows. Nor is it obvious we really want to stop all those trends – at least some of the rise in health spending brings new health benefits, and most of us are quite happy to live longer.
What we can do is recognize that our programs need to change with the times. Remaining life expectancy today, conditional on reaching age 62, is about 50% longer than it was in the 1960s. Yet we continue to encourage people to exit the labor force early. Even worse, we have created a mentality where most Americans seem to believe that they have a God-given right to have their retirement income and health care expenses paid for by taxpayers after they reach age 62 or 65. At a minimum, we should recognize that if people are living both longer and healthier lives than they were in decades past, we ought to make them wait longer to start receiving benefits.
There are good reasons to have Social Security and Medicare. But we need to recognize that the fiscal burden they are placing on taxpayers is going to grow rapidly in the years to come, and that the best way forward is to reform them to make them sustainable for future generations. Paying for these rapid cost increases through an inefficient tax system that depresses investment, discourages entrepreneurship, penalizes work, and retards economic growth is the real “radical” solution – and the one that should work hard to avoid.
Finally some sensible commentary that’s not fueled by the far left or right! Thank you very much.
While Federal spending capped at 20% of GDP sounds reasonable at first glance, a more thorough examination reveals that achieving this will require truly massive cuts in Medicare, antipoverty programs such as Medicaid and Food Stamps, defense, non-defense discretionary spending, and probably Social Security as well – just as Paul Ryan proposes. The main problem is the huge bulge in aging baby boomers that will be retiring over the next 25 years, straining Medicare, Social Security and Medicaid – we have not had to contend with such a demographic shift since WW2, and to ignore it is way too simplistic. If we want to maintain the programs that we have currently and have had for the last 40 years or so, Federal spending will have to be lot more than 20% of GDP.
Believe it or not, there is an alternative future that I, as a political independent, find much more appealing: let’s do absolutely nothing! Yes, I know, this means massive tax increases next year as the Bush tax cuts expire, that the alternative minimum tax will hit a lot more people, that physician reimbursements under Medicare will be cut, that sequestration early next year will cut defense and non-defense discretionary spending, etc. etc. etc. But, as the CBO’s extended baseline scenario (http://cbo.gov/publication/43288) based on current law attests, within 3 years the Federal budget deficit would be under 2% of GDP, and by 2037 total Federal debt held by the public would decline to 53% of GDP, from 73% currently. By the way, under this scenario, Federal spending does not exceed 25.3% of GDP over the next 25 years. It reaches 35.7% in the CBO extended alternate fiscal scenario you cite mainly because maintaining the Bush tax cuts causes a continuation of the gargantuan deficits we are running currently, which in turn results in Federal debt held by the public of 199% of GDP, and annual interest payments equaling 9.5% of GDP (vs. 1.4% today) by 2037.
Now if we could pass legislation eliminating preferential treatment of dividends, capital gains and carried interest at the personal level (perhaps combined with reductions in corporate income tax rates), we could ensure that the super wealthy like Mitt Romney pay income taxes at a higher rate than his 13.9% average tax rate in 2011 – which, incidentally, is almost exactly identical to mine, even though his income was well over 100 times higher. Obviously, the small amount of extra revenues we could gain by restoring progressive taxation would not eliminate our budget problems, but it would surely alleviate some of the issues in CBO’s extended baseline scenario, perhaps allowing a continuation of the “doc-fix” in Medicare and the maintenance of higher AMT exemptions.
Andrew,
You are absolutely right that achieving 20% of GDP in spending requires substantial changes to the status quo. That is basically my point. From the perspective of existing policy, sure, Ryan’s proposals are a very substantial change with real effects on real people. From an overall macro view of federal spending relative to the economy, his changes are far less radical than the status quo. The real goal of my post was simply to get people to think about this.
I have complete respect for those who advocate for allowing government to grow relative to GDP to deal with population aging and health care growth so long as they are realistic and honest about the burden this will impose through the tax system in order to pay for it all. What I object to are those that believe the policy status quo is sustainable without also having “radical” implications for our economy. (You are not one of those – you obviously are in the extreme right tail of the distribution of how well-informed people are, even among academics!)
Ultimately, I think we need to step back and reconsider not just the spending side, but also how we collect revenue. I believe we are the only major industrialized nation without a VAT of some form, for example.
Anyway, I was just trying to get people to recognize the enormity of the fiscal challenge. Your analysis contributes to that. So thanks!
Dr. Brown,
Overall, you make an important point. I would phrase it as such: given the aging of the population and the projected continuing increases in per-capita health costs, there is no policy going forward that can preserve the status quo. As you note, plans to preserve all the same federal spending programs exactly are plans to reduce private consumption dramatically.
I urge you, and your readers, to look a little closer than the top-level numbers, though, to get a feel for what the policy options are. The full CBO report is here:
http://cbo.gov/sites/default/files/cbofiles/attachments/06-05-Long-Term_Budget_Outlook.pdf
A quick take is to note that the trouble is originating from a 5%-of-GDP increase in predicted Medicare/Medicaid costs over the next 25 years (and another 1 pt for Social Security), compounded by projected interest expenses from putting off solution-finding, which cost another 8%-of-GDP.
Something (or somethings) has to give here. As I understand it, Ryan’s plan draws a line in the sand to say, it ain’t coming out of increased revenues, nor military expenditures. And so it comes out of Medicare (same projected cost control as Obama), Medicaid (pretty drastically), and other domestic spending (also dramatically). Is this the right prescription? I don’t think so (I also don’t think kicking the Medicare can down the road a la Romney is wise), but as I said, these are tough choices.
One thing I’d quibble with on your piece, though: you intimate that Ryan has proposed moving the age of Medicare eligibility back. I don’t think he’s done that. His cost saving all come from capping the value of his vouchers.
Thanks kdog for the very thoughtful reply. I have indeed read the CBO reports pretty carefully over the years, and, yes, your summary of the details are correct. And your point about tough choices is the real point of my piece.
As for the point about age of Medicare eligibility … I confess that in that sentence, I was not being clear on my views versus those of Paul Ryan. So, let me just say that *I* would favor gradually raising the age of Medicare eligibility, as well as both the early and full entitlement age for Social Security (OASI).
Thanks again for your very thoughtful and information-rich comment.
Jeff
Thanks Jeff
I’m certainly not surprised that you’ve spent copious time with the CBO reports. Have you also tried to make various proposals (like Ryan’s) add up?
From where I sit, it the stance of freezing/cutting taxes seems untenable, and you see that in the variance of Ryan’s various plans/proposals/bills/speeches. To make the math work with zero rise in revenue, you either need to either: cut Medicare payments drastically (I believe the 2011 bill did this, and proved to be political poison), run up more and more deficits for decades (I believe the current Romney/Ryan plan does this), or cut the rest-of-government share to virtually nil (I believe the original Path to Prosperity did this). It all adds up to an elaborate proof that taxes must rise, at least some. Getting health cost rate sunder control seem an important way to alleviate this pressure, but the demography is going to be king in the end.
Well, anyway, that’s my $.02.
It would be nice if something can be done to the entitlement programs, but what bothers me is the fact that he voted FOR Medicare Part D. (And he wouldn’t have been the only defected Republican if he had voted against it.)