The Budget Wars

If the debt ceiling debate did nothing else, it plainly demonstrated Washington’s unhealthy tendency to punt tough fiscal decisions down the line. It was remarkable then, when on April 5, 2011, Rep. Paul Ryan (R-WI), the Chairman of the House Budget Committee, released a long-term budget with a serious and potentially unpopular plan to reduce the deficit and pay off America’s debt. A week later, President Obama released his own blueprint.
Unfortunately, on examination, both plans fail to pass muster for typical Washington reasons. President Obama’s proposal is disappointingly vague and does not provide any necessary details that could be scored by the Congressional Budget Office. The Ryan plan is comparatively detailed, but his grand scheme fails to address rapidly rising healthcare costs.
Despite representing a significant rewriting of America’s contemporary social contract, the Ryan proposal, “The Path to Prosperity”, takes initiative in aggressively facing the deficit and debt reduction. Over 10 years, Ryan’s plan would save $3.9 trillion more than Obama’s budget. By 2050, government spending would be 20 percent of GDP, a smaller proportion than any time since Herbert Hoover. In the Reagan era, federal spending averaged 22 percent of GDP, when medical costs and entitlement rolls were significantly lower. This two percentage point cut, then, shrinks government to a size unparalleled in recent history.
At Your Discretion
To achieve this reduction, Ryan would cut some $1.7 trillion in discretionary spending over the next decade, including defense spending. From 1962-2008, discretionary spending averaged 3.3 percent of GDP. By 2021, the Ryan budget would lower spending to 1.5 percent with unspecified cuts to education, agriculture, infrastructure, and housing.
President Obama proposed cutting discretionary spending by $600 billion over 10 years, resulting in a still historically low 2.2 percent of GDP. The reductions in both plans are drastic, potentially undermining vital long-term investments in roads, teachers, medical research, and other national priorities. Furthermore, these cuts are paired with significant increases in Medicare and Social Security funding, skewing already unbalanced spending even more greatly towards the elderly.
Surgical Cuts
These medical entitlements are at the heart of America’s fiscal crisis, and yet neither plan addresses them fully. Healthcare spending has increased from seven percent of GDP in 1970 to 17 percent in 2009. The Office of Management and Budget estimated that Medicare and Medicaid alone would cost 20 percent of GDP—almost the entire current proportion of federal spending—by 2050.
The Ryan plan successfully cuts Medicare and Medicaid spending in half by 2040 and restrains its rapid growth. It would also repeal President Obama’s Patient Protection and Affordable Care Act (ACA), more affectionately known as Obamacare. Undoing the healthcare law would result in lower taxes and a lower government healthcare burden. But 32 million individuals would be once again be uninsured.
Ryan achieves these cost reductions by essentially shifting the healthcare burden to beneficiaries. Medicare would become a voucher system, giving the elderly a lump sum to purchase healthcare in exchanges—ironically a policy proposed by the possibly-to-be-repealed ACA.
Henry Aaron Jr., a Senior Fellow at the Brookings Institution, explained to ARUSA that these vouchers would quickly become inadequate for covering medical care. Instead of being indexed to the faster rising costs of healthcare, the vouchers increase at the speed of inflation. Compounded over time, that difference of several percentage points becomes very large. The CBO estimated that a beneficiary’s out-of-pocket share of healthcare costs would increase from 25 percent today to over 68 percent by 2030. Furthermore, without the purchasing power of Medicare, these private plans are estimated to cost 44 percent to 67 percent more than traditional Medicare.
The Ryan plan similarly shifts the Medicaid burden to the states. The federal government would make lump-sum grants to states. But again, these grants would be indexed to inflation and not cost of medical care, slowly eroding federal support for the program and leaving states to cut care or other services. Ryan’s plan is daring in its effort to cut entitlement but does not have a true solution to tackle uncontrolled healthcare costs.
The Obama plan, on the other hand, is far more incremental and builds off the President’s healthcare law. Aaron noted that in the realm of serious efforts to lower health spending, the ACA was “the only game in town.” He specifically pointed to its pilot programs designed to lower costs, including the Medicare Independent Payment Advisory Board, health IT incentives, pay-for-quality programs, hospital readmission penalties, and medicine comparative effectiveness research. These pilots, of course, may amount to nothing, and the CBO has appropriately been conservative in scoring their fiscal benefits.
Take Your Pick
The Obama and Ryan plans, then, are flawed in their own ways. Obama, through the ACA, provides a series of speculative programs, which may fundamentally bend the cost curve of medical care and halt the looming fiscal crisis. On the other hand, if cost savings do not emerge, the addition of 32 million covered individuals will only further worsen the deficit and debt. Ryan offers guaranteed cuts to federal expenditures and entitlements, but at the cost of increasing the burden on states, elderly, and poor.
Neither plan, however, provides a sustainable vision for America’s future. The discretionary spending cuts are too facile a political tool, penny wise and pound foolish. Both President Obama and Representative Ryan would bring this long-term investment to historic lows, re-envisioning how education, infrastructure, and research spending drives the American economy. Real solutions may emerge from the Gang of Six or the debt ceiling supercommittee, but for Washington, I wouldn’t hold my breath.
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