As we have opined in the recent past, we believe the Ryan budget plan is still a work in progress and not a panacea for the nation’s budget, deficit and debt woes. It is, however, the first serious congressional attempt to identify most (not quite all) of the structural issues that play havoc with the integrity of our national fisc, and advance serious steps to reform these fiscal time bombs that are ticking loudly and rapidly. We believe almost everyone now hears the ticking, except those who live and work in the isolation of 1600 Pennsylvania Avenue.
President Obama seems to have his eyes focused like a laser on the rapidly advancing 2012 election season, and has responded to the Ryan budget proposal with campaign-crafted rhetoric that unblushingly stakes out political battle lines rather than serious alternatives. His twofold objective is to try to cut Ryan off at the knees before too many people rally behind the Wisconsin congressman’s approach to budget reform, while simultaneously staking out for himself a strong populist position for the upcoming election. Keep in mind that Ryan proposed a detailed framework for the 2012 budget. Obama not only did not make a Presidential proposal, he made a campaign stump speech.
Sadly, this is no time to be playing politics with the budget. Last week, April 18th, Standard & Poors put the U.S. Government on notice that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.
“If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns,” New York-based S&P said in a report that maintained its top rating on U.S. long-term debt while lowering the outlook to “negative” for the first time.
The Treasury Department scoffed at the S&P outlook complaining that the rating agency “underestimates” U.S. leadership. Obama’s chief economic adviser, Austan Goolsbee also rejected the S&P’s negative outlook, calling it a “political judgment” that he said doesn’t deserve “too much weight.” Well, given that Standard and Poors has determined that the U.S. fiscal profile is meaningfully weaker (emphasis added) than that of peer AAA sovereigns, we wouldn’t be quite as dismissive as the Administration’s folks at Treasury and the Council of Economic Advisors. The S&P forecast is based on an experienced and independent view of today’s sovereign bond markets and can’t be brushed away with the back of the hand.
Ryan’s budget proposal focuses on real alternatives to very real structural problems. There is room for alternatives to be presented but not without an interlocutor at the other end of the table. Obama seems only to be focused on campaign rhetoric before carefully selected cheering crowds that he and his advisors must believe will play better to the masses.
For fixing escalating healthcare costs, President Obama proposes that old standby: a safe, time-tested, and totally non-specific, nebulous device for reigning in costs, a new “blue-ribbon” panel, he calls the “Independent Payment Advisory Board,” yet another bureaucratic creature that will magically bring costs under control. As the President sees it, it is not the structural system that represents a problem; just simply what hospitals and doctors believe they need to charge for service and treatment. He’ll solve that problem by having an “advisory board” determine what hospitals and doctors will receive for payment. Why grapple with the structural problems that need fixing when a spoon full of sophistry should do the trick…at least through the next election.
Paul Ryan, Chairman of the House Budget Committee, proposes very specific Medicare reform so that everyone who has the means to have some “skin in the game” provides for at least some of their healthcare expenses. He would accomplish this by providing voucher support (starting at $15,000) to enable citizens to buy health insurance from regulated health insurance providers. Ryan worked in concert with Democratic economist Alice Rivlin in arriving at the voucher alternative to the current system. And while Ryan and Rivlin differ on the formula for periodic premium increases, the basic premium-support voucher concept represents a real and positive departure from the current one-size-fits-all system that is sagging of its own weight.
Perhaps the greatest structural flaw in Medicare is that seniors have absolutely no incentive whatever to “shop” for the best care at the best price. Every provider gets from the government the same fee for any specific service or, for that matter, from the existing insurance arrangement where they negotiate rates with the insurance company. The actual user of the service is nowhere in the equation. The patient doesn’t pay the bill, and, frankly, doesn’t care what it costs. In fact, the government, by trying to finance Obamacare, at least in part, by reducing physician payments under Medicare is now coping with increasing numbers of doctors opting out of the Medicare system. So much for Medicare as a life line for seniors. By capping the subsidy the Ryan plan is designed to get the patient into the process by requiring the user to pay those marginal costs in excess of those costs covered by the approved plans. In other words, everyone above the poverty level has some skin in the game.
This is not an original Ryan idea. The concept has been on the table for a generation and economists from both sides of the political spectrum have, over the years, endorsed the concept as a more sensible way to go. By definition, the Ryan plan means the government role in providing health care is diminished. The user, having to bear some of the cost, will become more sensitive to what service doctors and healthcare facilities are providing and at what cost. The left, however, is determined to usher in a greater government role, not a diminished role.
The current Medicare system is going to change simply because it cannot be sustained. The only question really is when and how. Ryan is saying let’s change it now. Obama knows the system is going to change too. He seems to be saying…but not before the election.
Then there is the entire matter of taxes. This is the great class-warfare ace in the hole the President loves. Pit the 43% who pay no taxes, along with those who pay relatively little, against the upper two percent of taxpayers who earn about 25% of the nation’s income, but are hit for nearly 45 % of the nation’s tax bill and, he apparently figures, how can I lose? — And he might be right. To add fuel to the fire he invariably refers to those who earn over $200,000 (or $250,000 when referring to families) as the nation’s millionaires and billionaires.
Critics of the Ryan plan constantly complain that he relies more on spending cuts than on “revenue.” By revenue Ryan’s critics mean increases in tax rates NOT increases in tax revenues. They discount the notion that a nation whose people are taxed less is likely to be a more economically vigorous society, while those nations whose people are taxed more are apt to be more economically sluggish. Obviously, the greater the economic growth, the greater the tax collections will be if tax rates (particularly the top marginal rate) are less than those rates that retard economic growth. Moreover, Mr. Ryan incorporates his revenue concepts in a wrapper of tax reform. He argues that a simple tax code where the government does not pick and choose between favored industries so that most targeted deductions are disallowed will permit lower marginal rates which are the key to incentivizing investors. Given that the wealthiest Americans likely have the largest deductions, they will be hit the hardest from a flatter tax, which, even at lower marginal rates, should result in higher taxes for that segment of the population.
Just what is the magic tax rate for producing greater economic growth than the country is currently experiencing? The Simpson-Bowles Deficit and Debt Reduction Commission (you know, the one President Obama appointed with such fanfare) recommended doing away with most deductions and exemptions and reducing the number of brackets from the current six brackets to three tax brackets with the top bracket being 23% or, if fewer deductions and exemptions are eliminated, a top tax bracket of 28%. Simpson and Bowles WERE NOT (nor is Ryan) recommending lowering tax revenues. To the contrary, they understand that stimulating economic growth through lower tax rates for corporations and individuals will increase tax revenues. They also understand, however, that lowering tax rates in order to raise tax revenues can be self-defeating if, at the same time, Congress or the Administration (any Congress and any Administration) turns around and simultaneously increases spending enough to throw the budget into deficit even with the additional revenue.
The Simpson-Bowles report also recommended lowering the corporate tax rate to 26 or 28 percent, down from its current 35 percent rate. But neither Simpson nor Bowles (nor Representative Ryan) are interested in political class warfare. Their interest has been to advance proposals that advance the economy. Their proposals just didn’t fit in with President Obama’s class-warfare election strategy so he has deep sixed his own Commission’s report and aggressively attacked the Ryan plan.
The President says the Ryan Budget (and, by definition, his own Deficit and Debt Reduction Commission’s recommendations) “is wrong for America.” He apparently doesn’t consider eliminating nearly all deductions and exemptions, which mostly benefit the nation’s high earners as “sharing the sacrifice”, as he puts it. No, the President is determined to campaign next year on increasing taxes on “millionaires and billionaires” (not to be redundant, but that’s any family earning over $250,000 a year).
The Ryan budget offers a responsible alternative to the President’s healthcare plan, which two state courts have found to be unconstitutional, and which according to the latest Gallup Poll 25% of Democrats want to see repealed along with 78% of Republicans and a plurality of Independents by 43% to 39%.
Ryan knows the difference between “millionaires or billionaires” and those families earning $250,000 a year and, in any event, sides with the Simpson and Bowles Commission by embracing the logic that raising tax revenues by expanding the economy makes more sense than trying to raise tax revenues by merely raising taxes on the nation’s highest two percent of earners.
The President seems not to understand that many small businesses (S corporatons and limited liability entities) that may be earning just below the $250,000 threshold will forego putting extra business on their books if that new account or customer throws them into the higher tax bracket and, of course, also will forego hiring the extra employee(s) that might otherwise be required.
The higher 28% capital gains tax for higher earners proposed by President Obama (compared to the current 15%), which many economists recognize is a regressive tax that significantly reduces the number of taxable transactions that would otherwise take place, is consistent with a class warfare strategy. The data as outlined in the Wall Street Journal, just last week, shows that capital gains tax revenue has consistently gone up when capital gains tax rates have come down.
Perhaps, the Wall Street Journal summed up the President’s strategy best in its April 14 editorial following the salvo Obama fired at Representative Ryan at his George Washington University speech on the Administration’s budget proposal: “Mr. Obama did not deign to propose an alternative to rival Mr. Ryan’s plan, even as he categorically rejected all its reform ideas, repeatedly vilifying them as essentially un-American. Their vision is less about reducing the deficit than it is about changing the basic social compact in America,” he said, supposedly pitting “children with autism or Down’s syndrome” against “every millionaire and billionaire in our society” (those families making over $250,000). The President was not attempting to join the debate Mr. Ryan has started, but to close it off just as it begins and banish House GOP ideas to political Siberia.”
The Ryan budget plan is all about fixing. The President’s agenda seems to be all about nixing.
President Obama was recently heard on an open mike saying of the Republican leadership, “Do they think we’re stupid?” We suspect the people are beginning to ask the same question of the President and his minions in Congress.
By Hal Gershowitz and Stephen Porter
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