Commentary Magazine


Ryan's Hope

It’s probably safe to assume that no elected official in America understands the ins and outs of the labyrinthine U.S. budget the way Paul Ryan does. The 42-year-old Wisconsin Republican and chairman of the House Budget Committee has dreams of completing the small-government Reagan Revolution so that America might avoid repeating the “managed decline” of Old Europe. Ryan knows the numbers and projections and models backward and forward. He knows the strengths and weaknesses of his own arguments about reforming the Entitlement State and of those espoused by his opponents across the aisle and inside the Obama White House. He knows how the legislative process can breathe life into ambitious budget plans or, far more often, suffocate them in the cradle.

Ryan knows it all to a fine granularity. And that is not all he knows. As a veteran of the conservative movement who started out writing speeches for Jack Kemp and William J. Bennett at their joint think tank, Empower America, Ryan knows how three decades of off-and-on conservative governance in Washington have given credence to the notion that, in domestic affairs, Republicans understand how to cut taxes—and not much else. This has certainly been the case when it comes to fixing America’s social-insurance entitlements. Creating a financially sustainable safety net that does not sap America’s economic dynamism has been a political and policy puzzle, and repeated attempts to solve it have ended in economic or political disaster, or both.

Consider this: In 1983, President Ronald Reagan and House Speaker Tip O’Neill struck a deal to save Social Security through a combination of benefit cuts and tax increases. The agreement continues to be highlighted by Democrats as a model for bipartisan reform. Yet not only was Social Security not saved—the program almost immediately veered back into long-term insolvency—but several decades of surpluses in the Social Security “lockbox” were used cynically to make federal budget deficits look smaller than they were. For instance, if you don’t count “borrowings” from the Social Security trust fund, the four-year, $559 billion surplus in the late 1990s was really a two-year, $88 billion surplus.

In 1995, Newt Gingrich proposed $270 billion in cuts in future Medicare spending growth to help balance the budget. Clinton accused Republicans of wanting to use the program as a piggy bank to fund tax cuts for the rich and declared the cuts would hurl a half million seniors into poverty. Eventually, the cuts were halved and the tax cuts dumped. Two years later, the Balanced Budget Act created a new Medicare payment system for doctors that was meant to lower Medicare cost growth. But the “sustainable growth rate” formula has been consistently ignored by Congress—indeed, it has been violated year in and year out with the so-called doc fix that changes the formula in the direction of medical providers. And costs have continued to soar.

In 2004, right after the November elections, the newly reelected George W. Bush said he wanted to spend “political capital” on reforming Social Security. But just a half year later, the effort had imploded. Bush never proposed a specific plan or created a viable legislative strategy with congressional Republicans. Today the once hot idea of letting Americans divert a chunk of their payroll taxes into personal investment accounts is moribund, even in conservative policymaking circles—a victim not only of the fear of dealing with Social Security politically but also of the vertigo-inducing stock market gyrations between 2008 and the present.

This is the history of failure after conservative policymaking failure, helped along by plenty of liberal and Democratic demagoguery. By the end of the Bush years, free-market reformers seemed out of energy, out of ideas, and out of luck. The financial crisis gave Barack Obama a near landslide victory in 2008. With supposedly unfettered capitalism getting most of the blame for the meltdown, it seemed more probable that 21st-century America was on the verge of assuming a New New Deal or an Even Greater Society program than it was of undergoing a conservative transformation of the social-insurance Leviathan.

But three years into Obama’s presidency, his economic point man, Treasury Secretary Timothy Geithner, was reduced to telling Ryan the following at a recent House Budget Committee session: “We’re not coming before you to say we have a definitive solution to that long-term [entitlement] problem. What we do know is, we don’t like yours.” Geithner’s favorite aphorism is “plan beats no plan.” Yet here he was admitting that the administration had no plan to avoid a future debt crisis by reforming entitlements, even though the sooner you begin dealing with the problem, the cheaper and easier it is to correct.

The plan Ryan has, the one Geithner doesn’t like, is his “Path to Prosperity” budget blueprint. It would fundamentally revamp Medicare, the single biggest driver of America’s long-term debt, by transforming the system from an open-ended, defined-benefit plan into a limited, defined-contribution plan. Seniors could use Medicare dollars to choose among various plans, both public and private. A combination of competition and consumer choice would push insurers to be innovative and boost productivity, resulting in massive cost savings with no sacrifice in quality.

But for entitlement reform to work, the politics have to work as well as the policy prescription. And Democrats in the past successfully skewered plans far less ambitious than Ryan’s. Their “Mediscare” tactics soundly defeated the Gingrich Republicans, and they were cutting only hundreds of billions from future Medicare growth. Ryan wants to cut trillions while also completely restructuring the entitlement, so popular with seniors, in such a way that Democrats can easily accuse him of surreptitiously trying to privatize it. And, of course, they have been doing exactly that.

But Ryan is a new kind of combatant. He does not panic. He adjusts. And he takes the long view. He released the first version of his entitlement plan in January 2010, and Democrats jumped all over it. They believed Ryan had unwittingly given them a powerful weapon against the Tea Party Republicans who were trying to win back Congress. But the GOP took back the House anyway and narrowed the Democrats’ edge in the Senate.

In March 2012, for the second year in a row, the GOP-controlled House passed Ryan’s budget plan. Republicans knew they would again be attacked by Democrats for wanting to “privatize Medicare” and to “end Medicare as we know it”—and they were—but they voted for it anyway in overwhelming numbers. Only 10 of 242 Republicans rejected the Ryan budget, with the defectors mostly arguing that the Ryan plan didn’t go far enough fast enough.

The dynamics of the GOP presidential primary contest show that although Republicans can argue for change even more radical than Ryan’s proposal, making the case that Ryan goes too far is out of the party mainstream. When Gingrich called it “right-wing social engineering” in May 2011, he hindered his own claim to be the candidate who represented innovative conservative policymaking. Meanwhile, Mitt Romney’s plan for reforming Medicare is a transition into a “premium support system, meaning that existing spending is repackaged as a fixed-amount benefit to each senior that he or she can use to purchase an insurance plan.” That is specific, bold, sweeping—and it is all Ryan. Now compare that position with what John McCain was offering in 2008. At the second presidential debate with Obama, McCain was asked how he would fix Medicare. His reply: “What we have to do with Medicare is have the smartest people in America come together, come up with recommendations, and then, like the base-closing commission idea we had, then we should have Congress vote up or down.”

The change from McCain to Romney, from 2008 to 2012, indicates the way in which the policy ground on Medicare reform has shifted.  Ryan deserves a large amount of the credit for that. That the GOP and conservative intellectuals have embraced Ryan’s approach to fixing Medicare is every bit as significant as the party’s embrace of tax cuts as a core principle in the 1980s when Reagan took office. Not long before that, good Republicans would vote against tax cuts that weren’t paid for through offsetting spending cuts. Barry Goldwater voted against the across-the-board tax cuts of 1963 proposed by John F. Kennedy and Lyndon B. Johnson. And Reagan’s main opponent in 1980 for the nomination, Ambassador George Bush, derided his tax-cut plan as “voodoo economics.” But just as the supply-side approach to tax cuts has become the default GOP policy position, the same goes for Ryan’s Medicare plan.

Ryan has had an easier time making his case thanks to the rapid and alarming deterioration in America’s fiscal position during the Obama years. In 2008, publicly held debt as a share of GDP was 41 percent. The Congressional Budget Office’s best guess is that it will be 73 percent this year and 94 percent by 2022—with annual budget deficits averaging $1.1 trillion for the next decade. And it is in 2022 that Medicare really starts to contribute to our fiscal instability, as the single devastating chart at the heart of Ryan’s entire political project, illustrated below, indicates.

Washington budgeteers like to joke that the U.S. government is really just a giant insurance company with an army. Not true, at least not yet. But the day is coming. And when it does, even the Army might need to get cut from the equation. Last year, Washington spending amounted to 24.1 percent of GDP—the second highest level since World War II and its immediate aftermath.

Separating out interest payments on the $11 trillion national debt leaves 22.6 percent of GDP spent on what most Americans consider federal programs. And of that amount, nearly half (10.4 percent) was spent on the three safety-net entitlements: Social Security (4.8 percent), Medicare (3.7 percent), and Medicaid (1.9 percent). By 2035, the Congressional Budget Office says, 16.5 percent will be spent on those social insurance programs. Add back 8.9 percent for interest payments, and you will have already spent 25.4 percent of GDP without yet ponying up a nickel for whatever else Americans think worthy of taxpayer funds over those 23 years: not only the military and infrastructure and the like, but nuclear-fusion pilot projects, space-traffic controllers for orbital tourist cruisers, brigades of drone marines. (Oh, and sugar subsidies.) Beyond that, Medicare in particular will continue to gobble up a larger and larger share of the pie. And this all assumes that a debt crisis doesn’t bring the economy down by then.

So it helps that Americans are now far more aware than they ever have been that Washington, like the profligate nations of old Europe, is on the wrong fiscal track and headed for a nasty confrontation with global bond markets. But to take advantage of that opportunity, Ryan needed a plan where both the numbers and values worked—one that could absorb the punishment Democrats would surely inflict when they once again reopened the Mediscare playbook.

To achieve that, Ryan hasn’t been afraid to tweak his plan along the way. He learned from the invective that greeted the 2011 version. Obama described the plan this way: “Instead of guaranteed health care, you will get a voucher. And if that voucher isn’t worth enough to buy insurance that’s available in the open marketplace, well, tough luck. You’re on your own. Put simply, it ends Medicare as we know it.” An infamous ad showed a Ryan dopplegänger pushing an old woman in a wheelchair off a cliff. Wildly unfair, but the charges had just enough factual basis to make Republicans, such as Gingrich, nervous about selling it to the nation. First, the 2011 Ryan Plan did eliminate fee-for-service Medicare as an option for future seniors. Second, the government’s premium support—what Obama mischaracterized as a voucher—would only have risen at the rate of inflation, under the theory that competition among plans would lower costs. But, partly driven by Medicare, health-care inflation in America has consistently grown nearly twice as fast as inflation in the overall economy.

Ryan’s 2011 plan proved far too ambitious for former Clinton White House Budget Chief Alice Rivlin. Ryan and Rivlin had together created a premium-support plan that annually increased Medicare dollars at the rate of GDP growth plus 1 percent. When Rivlin heard about Ryan’s proposal, she balked, stripping it of any bipartisan veneer: “I don’t support the version of Medicare premium support in the Ryan plan. It’s both because the growth rate is much, much too low, and because it doesn’t preserve fee-for-service Medicare as the default option.” Even many conservative policy analysts thought that increasing premium support only by inflation was too risky—not to mention that the entire idea of government arbitrarily deciding how fast Medicare spending could grow sounded like some price-control idea right out of command-and-control ObamaCare.

So for 2012, Ryan adjusted the plan, improving it in the process. He added Medicare as an option within the premium-support system, thus achieving the assent of Sen. Ron Wyden, an Oregon Democrat, to sign on. And instead of Washington bureaucrats picking the rate at which the premium support would increase, private plans would bid against each other to supply a Medicare-like benefits package at a low price, thus injecting market forces and competition into the system. Seniors who wanted plans with more benefits would have to pay more. Those who wanted a skimpier benefit package could pocket the difference. This was an important improvement because the main thing driving health-care costs in this country is the disconnect between the people buying health-care services (you and me) and those who pay for it (government and employers). Now seniors would have some skin in the game.

These changes certainly made it harder for the liberal media to attack the 2012 version of the Ryan plan for ending Medicare because it explicitly doesn’t end Medicare. In Ryan’s less ambitious design, moreover, Medicare spending as a share of output would still rise to 4.75 percent by 2050 versus 3.25 percent today. That’s far less than if it continued on its current path (7.5 percent), but it’s still a concession, so much so that the conservative group Club for Growth declared its opposition to Ryan 2012, which it called “disappointing.”

Even Ezra Klein, the Washington Post’s liberal blogger, was forced to admit the Ryan plan had a lot going for it. “Competitive bidding has certainly shown some savings success,” he wrote. “Could [it] slow the cost of Medicare to hit Republican budget targets? There’s some evidence it would.” Some evidence? There’s all the evidence one could wish for in the program called Medicare Part B, which uses a competitive bidding process. The technique has helped spending on the program come in about 40 percent below the projections at the time of enactment back in 2003.

Now none of this has stopped the attacks from the Mediscare playbook. After Ryan presented the Path to Prosperity 2.0, Obama described the plan as “thinly veiled social Darwinism.” Vice President Joseph Biden quickly and perfunctorily recycled the argument that RyanCare would “end Medicare as we know it.” That sort of claim is much less powerful than claiming Ryan would end Medicare, full stop. And besides, “Medicare as we know it” simply cannot be saved in its current form. Even ObamaCare acknowledges that reality by creating all sorts of pilot projects to experiment with ways of restructuring the program. The most notorious is the Independent Payment Advisory Board, a small panel of bureaucrats directed to cut spending to Medicare providers—which will probably push more and more of them to stop accepting Medicare payments. (This is what Sarah Palin dubbed a “death panel.”)

Obama will surely be reminded of these reality checks by Mitt Romney this fall since, to a significant degree, the Romney and Ryan policy agendas have merged. And should Romney win, he will be able to argue that he possesses a mandate for the biggest changes in the U.S. welfare state since the 1960s. Should Romney lose, the inarguable justification for the Ryan budget—that chart showing Medicare swallowing up the federal government in relatively short order—will be no different the day after the election from what it was the day before.

About the Author

James Pethokoukis is a columnist and blogger at the American Enterprise Institute. His article “Let There Be Growth and/or Inflation” appeared in the January issue.




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