Paul Ryan, Chairman of the House Budget Committee, has once again lived up to his billing as the most daring budget hawk of his generation. Last year Ryan proposed, and nearly every House Republican supported, a budget that was the twin of this year's Ryan budget. The three main features of both budgets are a remarkable decline in the long-term deficit and stabilization of federal deft, a radical and politically dangerous reform to control Medicare spending, and no tax increases. If the Ryan budget were passed and implemented as proposed, the odds of which are below zero, the deficit crisis would be over.
Both Ryan budgets share another feature. Both were greeted by heavy criticism, especially the Medicare reform proposal. Last year Vice President Biden said the Ryan proposal "eliminates Medicare," a claim that Politifact labeled as the "Lie of the Year." This year, Democrat Max Baucus, head of the Senate Finance Committee, who must understand that Medicare costs are the major cause of the looming deficit crisis, said that "We can't allow the House to balance the budget on the backs of seniors and we won't—not on my watch." Although the criticisms by Democrats were predictable, Ryan and his troops did not do a terrific job of defending their budget last year. In May 2011, when a Republican candidate lost a New York congressional seat in a normally Republican district, even Republicans began to doubt that they could survive the political fallout of serious proposals to change the Medicare program and balance the budget.
Given the assault Ryan and other Republicans suffered last year, this year Ryan prepared for his budget release by conducting polls to discover the arguments the public would understand and accept, by tutoring both his House and Senate colleagues in formal training sessions to learn the arguments (and even the specific words to use) to defend his Medicare proposal, and by briefing the Republican Presidential candidates. All the candidates except Ron Paul endorsed the Ryan budget. Even Newt Gingrich, who last year called Ryan's Medicare plan "right wing social engineering," endorsed this year's version of the plan.
If members of Congress were capable of reasoned debate over our shameful and dangerous budget deficit, the debate over Ryan's plan might proceed as follows. Most Democrats would still disagree with his Medicare proposal because there are real risks involved for the elderly, because Republicans forcing tough changes in Medicare is just too tempting a political target for Democrats in an election year, and because Democrats have a natural desire to defend the program that is an historic achievement of their Party. Even so, it is not impossible to believe that Democrats and Republicans could eventually—after mountains of rhetoric and invective—reach compromise agreements on both the most difficult health reform issues in the Democrat's Affordable Care Act and the Ryan Medicare proposal as well as on other reforms needed to move the nation's budget deficit to a sustainable level.
The first is by far the least popular part of the ACA—the mandate that everyone must have health insurance. As Princeton Professor Paul Starr has argued in the New Republic, it would be possible to have nearly all the sweeping reforms in the ACA without the individual mandate. If Democrats agree to a compromise on the individual mandate (which the Supreme Court may soon force them to do anyway), Republicans should agree to the exchanges (the regional market for the purchase of health insurance policies) that are an essential feature of the ACA for everyone not just the elderly, as well as to the mechanisms designed by Democrats to control Medicare costs. Chief among these mechanisms is the Independent Payment Advisory Board that could propose health care reforms to Congress that would keep Medicare on a budget.
If Republicans compromised on these issues, Democrats should compromise on premium support, the central feature of the Ryan Medicare proposal; namely, giving seniors a fixed sum of money (perhaps adjusted for health risks and income) to purchase their preferred health care plan each year. The bargaining might result in the agreement to try Ryan's plan in several states rather than the entire nation. My own view is that the version of Ryan's Medicare plan introduced last December with Senator Ron Wyden, which is endorsed by Democratic budget guru Alice Rivlin, is the best idea developed so far for using the market to control Medicare costs. Despite its great promise, as is always the case with major policy reforms, there will be implementation problems. Better to work those out on a state-level rather than national-level scale before going universal. In short, rational people could find a compromise between Obamacare and Ryancare. I propose that we call the resulting hybrid "O'Ryancare."
A second major criticism of the Ryan budget is that it cuts the big entitlement programs for poor and low-income families, especially food stamps and Medicaid. In 2012, CBO projects that the former will spend $80 billion and the latter $262 billion. Ryan would convert these programs to block grants and give the states fixed funding that increases modestly each year. CBO says that the Ryan Medicaid block grant would reduce federal Medicaid spending by about 45 percent or around $279 billion in 2022. Could states come up with that much money to make up for the cuts? Would many poor and low-income families lose benefits? Would costs rise more slowly because states were running the program and working diligently to cut costs? No one knows for sure, but it seems unlikely that states could cover the difference.
Even if the new arrangements save some money, I doubt they will save enough. Again, the Ryan policy is pretty risky. A possible compromise would be for Democrats to accept the block grant but to allow the amount of money in the block grant to increase faster each year than allowed for under the Ryan budget. The rise in federal spending for the Medicaid block grant, for example, could be tied in some way to the rise of health care costs and state population changes in the previous year. Similar compromises could be reached on the other Ryan block grants.
An important point in thinking about spending on means-tested programs that Democrats should consider is that most people believe these programs provide benefits primarily for the poor. However, due to program rules and the way these programs are implemented, a surprising fraction of spending goes to people above the poverty level. Studies show that about half the recipients of both food stamps and Medicaid have incomes above the federal poverty line and around 20 percent have incomes above 200 percent of poverty. One way states could economize in both programs if they were converted to block grants would be to focus the benefits on people below or near the poverty line.
The major reason Ryan must have radical changes in spending on means-tested programs is that he does not increase tax revenues at all. Many Democrats and media critics claim that he reduces taxes for the rich because he lowers the top rate to just 25 percent from the current 35 percent. However, Ryan claims that he would broaden the tax base by eliminating many tax breaks so that the lower rate would apply to a higher percentage of a person's income. The various tax breaks in the federal code lose well over a trillion dollars each year, so it would be possible to lower the rates but not lose any revenue if enough of the tax breaks are ended.
Unfortunately, Ryan does not specify which tax expenditures he would end so it is impossible to know whether the actual tax payments of the rich would decline or rise. In any case, if the tax reforms were planned so that enough tax breaks were ended to produce additional revenues, Ryan could produce the same impact on the deficit with lower cuts in spending programs.
Republicans appear to be stuck in their "no new taxes" catechism, a stance that is not reasonable when one House of Congress and the presidency is controlled by Democrats who are insisting on more revenues in exchange for program cuts. But there are cracks in the no-new-taxes dike. Last year, in negotiations directly with the president, Speaker Boehner was willing to raise taxes by $800 billion as part of an overall deal that involved cuts in Medicare and other entitlements. Further, conservative Senators Tom Coburn and Mike Crapo, and former conservative Senator Judd Gregg, were willing to sign on to the Bowles-Simpson plan which increased taxes.
As always, a compromise means that both sides must give. Of all the compromises outlined above, the big compromises are for Democrats to agree to cuts in Medicare and Social Security in exchange for a Republican agreement to increase tax revenues.
Most observers are pessimistic about a deficit deal along the lines outlined above, especially in an election year. In a well-functioning democracy, legislative achievements are found through the art of compromise in which both sides give up something and get something. However, the ugly partisan debate over the deficit for the last several years makes many political observers doubt that Congress and the president are capable of the requisite deal making.
But I believe Republicans and Democrats will reach a series of compromises over the next few years that will greatly shrink the deficit through both reductions in spending, especially on Medicare and Medicaid, and increases in revenue. Why do I believe this? Because they have children and grandchildren.