Representative Paul Ryan, Mitt Romney's new vice-presidential running mate, is, we are told, the man with the deficit-cutting plan. Not for this conservative policy wonk are the phoney figures and evasions of cowardly politicians. He is a man whose integrity his opponents have to respect.
Yet this story has one drawback: it is false. Do not take just my word for it. This is what David Stockman, director of the Office of Management and Budget under Ronald Reagan and a true conservative, wrote in the New York Times on August 13: "Mr. Ryan's plan is devoid of credible math or hard policy choices." This is right, with one exception: Medicare. On that, Mr. Ryan does offer a hard choice. But the maths are incredible.
The Ryan plan is the latest example of a consistent line of Republican fiscal policy since movement conservatism displaced traditional balanced-budget Republicanism some three decades ago. The priorities have been clear: first, tax cuts benefiting rich "wealth-creators"; second, cuts in spending, predominantly on the poor; and, last and least, reducing deficits.
Indeed, the "starve the beast" theory explicitly aims at cutting taxes, in order to increase deficits and so justify cuts in spending. From this point of view, the financial crisis has been a boon. The crisis, which occurred on George W. Bush's watch, is far and away the most important explanation for today's huge deficits. But it came after unfunded tax cuts, unfunded wars and the unfunded prescription drug benefit (Medicare D). The fiscal mess the Republicans bequeathed made it difficult – indeed, given Republican opposition, impossible – for the Obama administration to implement a stimulus plan on the scale needed, as Bruce Bartlett, a former official in the Reagan administration, notes in a blog post for Economix. Not that Republicans have anything against stimulus, provided it takes the form of unfunded tax cuts.
In all, the idea that Republicans care about the deficit does not pass the laugh test. Mr. Ryan, however, is supposed to be different: he is a conservative, but an honest one.
Really? As Heidi Przybyla notes in a report for Bloomberg, Mr. Ryan was pivotal in killing the Bowles-Simpson agreement, which, for all its faults, was (and is) the only politically realistic long-term fiscal solution. Moreover, the Congressional Budget Office's meticulous analysis of the initial Ryan plan demonstrated that it is smoke and mirrors. He is what the economist Paul Krugman calls a "chicken hawk".
As usual in any contemporary Republican plan, Mr. Ryan's offers upfront unfunded tax cuts, with the top marginal tax rate slashed from 35 per cent to 25 per cent. These cuts are to be offset by deliberately unspecified reductions in "tax expenditures". Of these, the CBO comments, "the path for revenues as a percentage of GDP was specified by Chairman Ryan's staff. The path rises steadily from about 15 per cent of GDP in 2010 to 19 per cent in 2028 and remains at that level thereafter. There were no specifications of particular revenue provisions that would generate that path."
In discussing these unspecified savings, Mr. Stockman notes: "Of the $1-trillion in so-called tax expenditures that the plan would attack, the vast majority would come from slashing popular tax breaks for employer-provided health insurance, mortgage interest, 401(k) accounts, state and local taxes, charitable giving and the like, not to mention low rates of capital gains and dividends." That is simpy not going to happen.
The plan also leaves social security and Medicare untouched before 2022. What the plan would do, instead, in Mr. Stockman's words, is "shred the measly means-tested safety net for the vulnerable: the roughly $100-billion per year for food stamps and cash assistance for needy families and the $300-billion for Medicaid". The intention here is to turn federal support into block grants of fixed dollar amounts, indexed to consumer prices. This would shift an increasing burden on to already stretched state budgets.
Would this plan improve the deficit picture over the next decade? No, not really. The CBO projects that, under current law, which includes expiration of the unfunded and unaffordable Bush tax cuts, the deficit would be 2¾ per cent of GDP in 2022 and the debt held by the public would be 67 per cent of GDP. Under the Ryan plan, if implemented (which is close to inconceivable), the deficit would be – wait for it – 1¾ per cent of GDP, while debt held by the public would be higher, at 70 per cent of GDP. Even if one did believe in Mr Ryan's plans, federal debt would rise by $6-trillion over the next decade alone, as Matt Miller has noted in the Washington Post. But the plan would make federal revenue 2½ per cent of GDP lower and spending 3½ per cent of GDP lower than the CBO's baseline, by 2022. The real difference, then, lies not in deficits and debt over the next decade, but in tax and spending.
It is true that, under the plan, by 2050 (if one believes that plans for such a distant date have meaning), the deficit would have turned into a surplus and non-interest federal spending would be down to 14¼ per cent of GDP, from 22½ per cent in 2010. Yet this assumes that all spending, other than on health, social security and interest, would be 3½ per cent of GDP. As the CBO notes, "spending in this category has exceeded 8 per cent of GDP in every year since World War II". Indeed, 3½ per cent of GDP would be less than the current share of defence alone.
The core of the plan for the long term, however, is elimination of Medicare for anybody below 65 in 2022. Its replacement would be a voucher for purchasing insurance that would put 68 per cent of the cost on to beneficiaries, by 2030. If that happened, it could bring federal health spending down to 4¾ per cent of GDP by 2050, against 5½ per cent in 2010, despite the rise in the share of elderly voters. If you believe that is likely, I have a bridge to sell you.
Over the next decade, the Ryan plan is inadequate and incomplete. Over the long run, it is incredible. It may be good politics. It is bad policy.