Along with a large and increasing number of Americans, I care about the long-term deficit because I think that, left unchecked, it will constrict and distort our future economy and society. And I am far from alone in believing that President Obama’s FY2012 budget proposal mostly evades the problem. According to the Congressional Budget Office’s recently released analysis, his proposal wouldn’t reduce the annual deficit below 4 percent of GDP, and the debt held by the public would double from $10.4 trillion to $20.8 trillion, nearly 90 percent of our GDP. That’s an outcome almost no one wants. To avoid it, we need to change course.
In these circumstances, you might imagine that I would welcome the budget plan House Budget Committee Chairman Paul Ryan released on Tuesday. I do not, because it spurns the only possible framework for an adult conversation between the political parties that could lead over time to a long-term fiscal agreement. We don’t have to speculate about the shape of that agreement. We saw one version of it in the report of the Bowles-Simpson commission and another in the report of the Domenici-Rivlin commission. We may well see a third if the bipartisan Senate “Gang of Six” can coalesce around an agreement. (Full disclosure: Maya McGuineas, the head of the Committee for a Responsible Federal Budget, and I put out a fourth version last fall.)
By contrast, the Ryan budget represents the victory of the Tea Party mentality over mainstream conservatism within the Republican Party. It illustrates the inevitable and draconian consequences of a fiscal policy that excludes net tax increases and holds federal government spending to its historic postwar average. “Draconian” is more than the adjective du jour; it is the literal truth. CBO estimates that under Ryan’s proposal, the portion of the federal budget not devoted to mandatory health programs, Social Security, or interest on the debt would decline from 12 percent in 2010 to 6 percent in 2022 to 31/2 percent by 2050. Does anyone think this is serious? Does anyone think this will happen? How many people—really, deep down—think it should?
There is an alternative approach that makes much more sense—economically, socially, and politically. Bipartisan discussions have converged on the objective of holding public debt to around 60 percent of GDP in 2020 through a balanced menu of spending cuts and revenue increases. While there are compelling economic reasons for not allowing the debt to rise as far as our current course would take it, only ideology requires it to disappear altogether. Nor is it necessary to hold federal spending to its historical level: All other things equal, the aging of the population and the rise in medical costs (even if slowed, as it should be, from the current rate) would suggest a somewhat higher level. The Galston-McGuineas proposal would hold spending to about 22 percent of GDP, higher than the postwar average but much lower than what the status quo would produce. Other bipartisan plans have ended up in roughly the same place.
But that’s the point: The Ryan plan is not bipartisan. (Given how skittishly House Republicans reacted to Ryan’s “Roadmap” last year, it remains to be seen whether it’s even mono-partisan.) If it’s the GOP’s best and final offer, it will be a conversation-stopper. It will be interesting to see how many contenders for the Republican presidential nomination calculate that they have no chance of winning the nomination of a Tea Party-dominated primary electorate unless they endorse the Ryan plan. One thing is pretty clear: Any Republican presidential candidate who embraces this plan will have committed general election suicide.
Ryan’s plan has one incontestable virtue: It recognizes, as do many analysts outside the conservative fold, that health care costs lie at the heart of our long-term fiscal problems. But the question is what to do about them. Turning Medicaid into a block grant to the states—a key Ryan proposal—is a genuinely bad idea, because it will lead inevitably to cutbacks in care for low-income people who have nowhere else to turn, contradicting Ryan’s own pledge of a “secure safety net.” Under his proposal, CBO estimates, federal spending for Medicaid would be 35 percent lower in 2022 and 49 percent lower in 2030 than currently projected. What are the odds that hard-pressed states could pick up the slack? And if not, how many poor children would go without health care? How many elderly Americans without personal resources would go without decent nursing homes?
By contrast, Ryan’s other key health care proposal—converting Medicare into a system of “premium support”—is at least worthy of discussion. In the past, serious analysts such as Robert Reischauer, a former CBO director now president of the Urban Institute, and Brookings’s Henry Aaron have endorsed a version of this approach. Alice Rivlin, another former CBO director, worked with Ryan on a previous premium support proposal. And it is true, as Ryan says, that federal employees, including members of Congress, now participate in a premium support-based program, which seems to be quite popular. (As a former participant myself, I can vouch for its merits.)
Critics have pointed out that Medicare recipients differ from the overall population in important respects: They are frailer and sicker, on average, and most of them rely on fixed incomes. Ryan claims that his plan would “provide increased assistance for lower-income beneficiaries and those with greater health risks.” Maybe so. But in many other respects it appears deeply flawed.
In an important piece just published in the New England Journal of Medicine, Henry Aaron clarifies the differences between Ryan’s approach to Medicare reform and the Reischauer-Aaron proposal. The key points are these: “Premium support would be tied to average health care costs, not an economic index. The menu of private insurance plans would be limited to facilitate informed choice by enrollees. A non-profit or government agency would provide explanatory literature and extensive counseling and handle sales to avoid misleading and costly sales methods. Group-based, retrospective risk adjustments—financial transfers among plans based on the risk profiles of actual enrollees—would make competition based on risk selection unprofitable.”
The Ryan proposal, Aaron says, jettisons nearly all these protections. One consequence: It would shift costs dramatically to Medicare recipients. Today, typical Medicare beneficiaries pay between 25 and 30 percent of health care costs out of pocket. CBO projects that under the Ryan plan, beneficiaries would be paying fully 68 percent of costs out of pocket by 2030.
Congressional Democrats and the Obama administration now face a key strategic choice. No doubt they will unite—as they should—to oppose the Ryan plan. The question is how that rejection is framed and justified. There are two basic approaches. One would reject the Ryan plan in terms so sweeping as to implicate the bipartisan discussion now underway in the Senate as well. The second would treat it as an unacceptable point of departure for a national discussion we can no longer defer.
The first—demonizing budget cuts as a war on seniors and the poor—is a play that Democrats have run for decades, mostly to their political advantage. Choosing it would guarantee no progress on basic fiscal issues until after the 2012 election, and maybe much longer. The second is much riskier, with uncertain outcomes for all participants. But if it leads to progress, it would move the country toward a more sustainable future. And who knows: It might even begin to restore the public’s trust in their governing institutions, which now stands near a record low.
One thing is clear: People are beginning to notice President Obama’s self-imposed absence from this discussion, and surveys are beginning to chart a decline in the public perception of him as a “strong leader.” At the end of March, for example, a Gallup poll found that only 52 percent of Americans regard Obama as a strong and decisive leader, down from 60 percent in May 2010 and 73 percent in May of 2009. And fiscal policy is a key element of this perception: A Pew survey made public on April 7 showed public disapproval of his handling of the federal budget deficit has risen to 59 percent, its highest level thus far. If the bipartisan Senate group fails to reach an agreement, he may be able to avoid this topic until after the next election. But if the Senate manages to coalesce around the Bowles-Simpson framework, he will have no choice but to respond. Reiterating his current proposal wouldn’t work. I hope someone in the White House is thinking about Plan B.