A Tale of Two Budgets

Published April 2, 2012

The Weekly Standard

Last spring, when House Republicans passed Budget Committee chairman Paul Ryan’s ambitious fiscal agenda, it would have been easy to make two basic guesses about the proposal’s lasting impact: On the one hand, it seemed that the budget’s focus on the immense scope of the fiscal calamity heading our way would put the deficit and debt at the center of our politics for the rest of Barack Obama’s term. But on the other hand, it looked like the Medicare proposal in the budget would be highly controversial and politically risky.

For a time, both predictions seemed to be confirmed by events. The Ryan budget forced President Obama essentially to retract the budget he had proposed two months earlier and replace it with a vague series of promises to address the deficit and debt. There followed several months of budget showdowns, with Republicans setting the agenda, even if they got only a small portion of the spending cuts they sought. Meanwhile, the Democrats were in full attack mode on Medicare, accusing Republicans of pushing old ladies off cliffs and asserting that the defense of “Medicare as we know it” would be the centerpiece of their own election platform.

As the year went on, however, both predictions turned out to be wrong. The case for saving Medicare (and with it the federal budget) from bankruptcy through consumer choice and competition quickly gained the status of Republican orthodoxy​—​with most of the party’s presidential candidates backing it, just about every congressional Republican voting for it, and almost no conservative commentators and pundits opposing it. And voters did not seem to hold it against Republicans, especially when contrasted with President Obama’s proposal to reduce Medicare spending by empowering the Independent Payment Advisory Board​—a panel of 15 experts​—​to ration care. By November, the New York Times was reporting that the merits of a Ryan-style reform were getting a serious look beyond Republican ranks and “some Democrats say that​—​if carefully designed, with enough protections for beneficiaries​—it might work.” In December, Democratic senator Ron Wyden of Oregon joined with Ryan to propose a bipartisan version of the idea.

But even as the notion of a market-oriented Medicare reform has taken hold, the intense focus on the country’s fiscal problems has dissipated. The Democrats seem to have realized that their political prospects depended on distracting the public from those problems, rather than on drawing attention to Republican attempts to solve them. So while budget politics dominated much of 2011, recent months have seen a shift of attention toward other subjects​—especially the question of income inequality. President Obama has been flying around the country raging against millionaires with corporate jets, bands of upper-middle-class college graduates have been occupying public parks to complain about having to repay school loans, and Warren Buffett keeps pleading for a higher tax rate.

It has made for good theater, but it has been completely disconnected from the fiscal realities facing the federal government, and that is exactly how the administration wants it. All the drama has masked a stunning dereliction of the president’s basic duty to keep the government solvent and avert economic catastrophe.

Obama’s 2013 budget, released in February, fails even to propose any means of preventing the coming explosion of debt, and the president’s economic advisers have been remarkably frank about their lack of answers. In a February 16 hearing of the House Budget Committee, Treasury Secretary Tim Geithner was asked by Ryan to describe the administration’s plans for addressing the mounting risk of a debt crisis. “We’re not coming before you today to say we have a definitive solution to that long-term problem,” Geithner replied. “What we do know is we don’t like yours.”

A few months earlier, when Washington’s attention was focused squarely on the coming fiscal calamity, such a stunningly irresponsible statement would have made news. But this winter, it barely registered. It seems clear, therefore, that the challenge for Republicans the remainder of this year is to bring the nation’s foremost economic and fiscal challenges back into focus for the public, to highlight Obama’s failure of leadership, and to offer an alternative​—​a governing vision of their own.

And once again it is of all things a House budget resolution that offers them an opportunity to make their case. If the goal of last year’s Ryan budget was to unite Republicans around a few key reform proposals, the goal of this year’s Ryan budget​—​released on March 20​—​seems to be to highlight the utter failure of President Obama’s vision of government and to propose a plausible alternative.

Much of the agenda is the same, of course. Ryan would repeal Obamacare, spend $5 trillion less than the president plans to over the next decade, reduce the deficit by $3 trillion more than the president would over that period, reduce debt as a share of the economy within two years, modernize and strengthen the social safety net, and reform Medicare. But the particulars, and some of the ways in which this year’s budget differs from last year’s, make for a striking contrast with Obama’s dereliction​—​one that will serve Republicans well this election year.

First, President Obama seeks to gut the defense budget to procure temporary life support for a bloated welfare state. Military spending has not been a significant driver of the growth in government spending in recent decades. While federal spending increased from 18 percent of GDP in 1960 to 24 percent last year, defense spending declined in that period from 9 percent to less than 5 percent of GDP, according to the Office of Management and Budget. But in President Obama’s 2013 budget, defense spending is cut by $487 billion by 2021 while overall federal spending actually increases by $2 trillion over the coming decade. The Ryan proposal would provide level funding for defense​—​not increasing the budget, but also not slashing it by half a trillion dollars while expecting the military to defend America’s interests in a dangerous time and leaving the real causes of our budget crisis untouched.

Second, President Obama’s budget seeks to use the tax code to advance a populist election message, while the Ryan budget seeks to reform the tax code to spur economic growth. In essence, the president wants to temporarily stabilize annual deficits at around $600 billion (the largest deficit in American history until 2009, even adjusting for inflation, was $460 billion) before seeing them climb again. And he would do so by increasing the top marginal tax rate from 35 percent to roughly 40 percent and increasing taxes on investment. The Ryan budget contends that such tax increases would be damaging to economic growth at a time when dynamism is badly needed, and pursues instead an aggressive pro-growth tax reform​—​consolidating today’s six personal income-tax brackets into just two (with rates of 10 percent and 25 percent), reducing the corporate rate to 25 percent, and broadening the tax base by curbing deductions, credits, and other so-called tax expenditures. The details of such reforms would depend on the House Ways and Means Committee, but the general outline, developed in tandem with that committee, aims for federal revenues at the postwar average of 18.5 percent of GDP (up from last year’s roughly 15 percent) with significantly lower tax rates.

Third, President Obama’s budget proposes simply to pump more money into our existing safety-net programs, which have been growing uncontrollably in recent years, while the Ryan budget seeks to modernize them to improve their effectiveness and reduce their costs. The
food-stamp program alone now costs more than four times what it did a decade ago, and that growth is by no means attributable only to the recession. Caseloads increased by almost 30 percent between 2003 and 2007, as unemployment was falling. The design of this and similar programs uses federal dollars to encourage states to increase their caseloads, and creates no incentives for efficient management. Ryan would use the model of welfare reform to put the states in charge of making these programs work for their populations—funding them through federal block grants indexed to inflation and the size of each state’s eligible population, and requiring that states make aid contingent on working or obtaining job training. The idea is not only to save money, though the cumulative savings from such reforms would be significant, but also to use our safety-net institutions to help make poor Americans more independent, rather than less so.

The most profound transformations of the welfare state in the Ryan budget, however, are directed to the federal programs most responsible for our current fiscal straits and for our coming debt disaster: our health care entitlement programs. Conservatives are in the habit of seeing reductions in domestic discretionary spending as the gold standard of reining in government, but in fact health-entitlement spending is the essence of the problem to be solved, and to a degree that few Americans appreciate. In 1971, federal health spending accounted for 1 percent of GDP, and all other government spending combined (excluding interest on the debt) accounted for 17.1 percent of GDP, according to the Congressional Budget Office. Forty years later, in 2011, health spending accounted for 5.6 percent of GDP and all other spending combined (excluding interest) accounted for 17.1 percent of GDP​—exactly the same portion of the economy as it had four decades earlier (having fluctuated rather little over that time). In essence, the net growth in government as a percentage of the economy in these 40 years has been entirely a function of federal health spending.

And without meaningful reform, this problem will only grow worse. In its latest long-term projections, the Congressional Budget Office forecasted that, between now and 2050, spending on the federal health care entitlements (especially Medicare and Medicaid) will more than double as a percentage of the economy, while all other federal spending combined will actuallydeclineas a share of the economy. The health care entitlements are, in essence, responsible for our disastrous long-term debt problem.

In his budget, President Obama proposes to see this trend continue unabated. Under Obamacare, 16 million more Americans would be shoved into an unreformed Medicaid program that is already failing to provide ready access to quality care. Millions more would enter a whole new poorly designed federal health entitlement created to subsidize coverage in new state exchanges. And the most powerful driver of American health care costs​—​the fee-for-service design of the Medicare system​—​would be left essentially untouched, with a board of price controllers expected to finally make it efficient but not empowered to actually change it.

It is on this front​—health care, where he claims to have marked his greatest achievement​—that President Obama has in fact failed most decisively. And it is on this front that Republicans have an opportunity to offer the starkest contrast with that failure of leadership. The Ryan budget goes a long way toward doing that, though it does not go all the way.

Ryan proposes a much-needed reform of Medicaid​—​ending the open-ended federal/state funding structure that creates an enormous incentive for overspending and transforming the program into a federal block grant that would allow states the flexibility to pursue greater efficiency and provide more options to the poor. And most important, he proposes to transform Medicare into a premium-support program​—​and in a way that draws an even more effective contrast with Obama’s approach than last year’s Republican budget did.

As with last year’s plan, none of Ryan’s proposed changes would apply to current seniors and people who are now over 55. For people who retire more than 10 years from now, Medicare would become a system in which the government would provide a fixed amount per recipient each year to pay for insurance that each senior would choose from a menu of comprehensive options. Unlike last year’s proposal, however, the private insurance options would be joined by one government-run fee-for-service option resembling the current Medicare system, and the level of the premium-support benefit each year would be set by competitive bidding among insurers, rather than just by a predetermined formula fixed to inflation.

Both of these new elements would tend to make the transition to the new system more gradual and orderly, and to complicate Democratic efforts to scare voters about it. The fee-for-service option would have a version of “Medicare as we know it” compete for consumers in the new system on something like a level playing field with private insurers, while the competitive bidding system would combine the best elements of defined-benefit and defined-contribution coverage.

A defined-benefit system, like today’s Medicare system, is one in which the government commits to provide a certain set of benefits and then pays whatever they cost. This assures recipients of a guaranteed benefit but encourages cost inflation, since providers of care have a huge incentive to perform more services and thus earn more fees. A defined-contribution system, like the one Ryan proposed last year, would have the government provide a predetermined amount to individuals to spend on insurance. They would choose the coverage they wanted; if it cost more than the preset amount they would pay the difference, and if it cost less they would keep the difference. This would make consumers more cost conscious, driving providers to seek ways to offer quality care at lower prices, but it risks leaving beneficiaries with more out-of-pocket expenses if health costs still grow faster than the premium-support benefit.

Ryan’s new proposal is a bit of both: The government would define the minimum insurance benefit to be provided to all covered seniors, based on the level of coverage Medicare now provides, and then there would be a process each year in which competing insurers would offer bids proposing to provide that (or a greater) benefit at the lowest cost they could. The level of the premium-support payment given to seniors would be set at the level of the second-lowest of the bids; poorer and sicker seniors would get additional help, while the wealthiest would get less. Thus, there would be a defined benefit, but payments to providers would not be open-ended. And there would be a defined contribution (with providers competing to win over consumers), but its value would be automatically set to a level that makes premiums affordable, since at least one option would always cost less than the government subsidy.

Because CBO refuses to score the effects of market competition, and a budget resolution has to be scored by CBO, Ryan had to back up his competitive bidding process with a blunt cap on Medicare’s overall growth (CBO then simply scores the proposal as meeting the cap). To sharpen the contrast with Obama, he chose to just give CBO the same cap Obama proposes for the IPAB​—​keeping the annual growth of costs below GDP growth plus 0.5 percent. Both caps are of course just scoring conventions; they are goals, not reforms. They raise the question of how costs would be kept below the cap, and the differing answers to that question clarify once again the choice before voters this year.

On one hand are Obama’s 15 numinous know-it-alls, charged with setting prices, rationing care, and finding just the right b
alance between quality and access from Washington, and without the power to change Medicare’s payment system. And on the other hand is a system that seeks efficiency by having 50 million consumers in search of the quality they want at the lowest price they can find pressuring 15 million insurance and health care providers to find innovative ways to meet their demands and make a good living. One involves sheer faith in expert managers, and the other involves using real economics to lift the burden of the oppressive fee-for-service system and enable a new era of innovation, efficiency, and quality in American health care. It is hard to imagine a clearer contrast for voters than that between the two visions of government, and of American life, at the heart of these two proposals​—​and indeed, at the heart of these two budgets.

The Ryan budget could certainly have taken a further step on health care and offered a specific alternative to Obamacare beyond its Medicaid and Medicare components. It could also have launched its Medicare reform sooner than a decade from now, especially since the two new elements in this year’s proposal would make the transition significantly easier for new beneficiaries. And it could have taken a more aggressive approach to cutting domestic discretionary spending in its first year. While such spending is not the driver of our fiscal problems, it has grown vastly in recent years, and trimming it back would make the larger task of fiscal responsibility a little easier. By not being quite as aggressive as it might have been, the Ryan budget has earned some critics on the right​—​some of whom are no doubt also unhappy with its move to avert steep defense cuts.

But seen in the context of the Ryan budget as a whole, and of the demands of this election year, such criticism seems to lack proportion. There is, of course, no chance that the House Republican budget will be adopted by the Democratic Senate this year, and no chance that President Obama will adopt it. Its purpose, rather, is to put before the public an agenda and a vision​—​to contrast Republican priorities with those of the president on the most important economic issues before the country. Its purpose is to remind voters that, as things now stand, we are headed toward a perfectly predictable yet thoroughly avertable calamity, that the president prefers to do nothing to prevent it, and that Republicans have a plausible, coherent plan to address it.

President Obama has successfully turned voters’ attention away from our most significant problems in recent months, and he surely hopes to keep them distracted through the election. But just as they did last year, House Republicans have the opportunity to recapture the agenda—not by distracting voters from our problems but by offering real solutions and daring the Democrats to offer their own. We can only hope that the Republican presidential candidate has the good sense to follow their lead.

Yuval Levin is the Hertog fellow at the Ethics and Public Policy Center and the editor of National Affairs.

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