Ryan Pick Begins Mega-Debate Over Fiscal Policy: BGOV Insight

Ryan Pick Begins Mega-Debate Over Fiscal Policy: BGOV Insight
U.S. Republican presidential candidate Mitt Romney, right, and vice presidential hopeful Wisconsin Representative Paul Ryan wave during a campaign rally at Waukesha County Expo Center in Waukesha, Wisconsin, on August 12, 2012. Photographer:Saul Loeb/AFP/Getty Images

With his pick of U.S. Representative Paul Ryan as his running mate, Mitt Romney now agrees with President Barack Obama on at least one thing: this election is about big choices.

One set of choices involves the amount and pace of long-term deficit reduction, which Congress must decide by the end of this year for at least a 10-year period or trigger a 10-year, $1.2 trillion “sequestration” of funds for discretionary programs. About half would come from defense; the rest from domestic programs that weren’t exempted from the across-the-board cuts.

Both candidates and their advisers know that any long-term deal must somehow address the rising costs of the three big sequester exemptions -- the entitlement programs of Social Security, Medicare and Medicaid.

Restructuring Entitlements

Romney and Ryan, a Republican from Wisconsin and chairman of the House Budget Committee, share this view: They want a deal that doesn’t raise taxes as a share of the economy while fundamentally restructuring all three entitlements.

Ryan’s latest budget plan, published in April 2012 and adopted by the House, sought to cap revenue at just more than 18 percent of gross domestic product, which is its historical average.

Obama is calling for more revenue from upper-income taxpayers without far-reaching program changes. Obama’s Deficit Reduction Commission report (the Simpson-Bowles plan), published in December 2010, had revenue ultimately settling at just less than 21 percent of GDP. Although Obama didn’t endorse Simpson-Bowles, revenue under his 10-year budget released in February was projected to be close to the commission’s figures, coming in about 22 percent of GDP by 2022.

There are even larger differences on the spending side between the Ryan/House Republican and Obama budget plans.

The Ryan plan envisioned spending at about 20 percent of GDP by 2015, with a long-term target (2050) of getting spending down to 15 percent of GDP, far below the roughly 20 percent range it has been at for five decades.

In contrast, the Simpson-Bowles plan recommended a target of 22 percent of GDP for spending in 2020 and 21 percent long term. The Obama administration hasn’t projected spending beyond 10 years, but its spending numbers are just under 23 percent of GDP in 2022.

Medicare Vouchers

Ryan’s signature proposal is to overhaul -- in his words “save” -- Medicare by turning the benefit into a voucher averaging $8,000, but that would vary with an individual’s health status and income. Beneficiaries would use the voucher to buy health insurance in the private market. The Ryan plan wouldn’t go into effect until 2022, and would grandfather those who receive benefits under the current Medicare reimbursement system up until that time. The voucher amounts would escalate over time.

The Ryan pick will be used by team Obama as evidence for an argument that Republicans not only want to unreasonably shrink government in general, but to gut Medicare in particular -- despite the delay in the proposal’s effective date. The delay is analogous to the one built into the Social Security privatization plan offered in 2005 by President George W. Bush.

A big challenge for Romney and Ryan is to make voters, especially senior citizens and those about to qualify for Medicare, understand that the changes they propose won’t kick in for some time and will not apply to those 55 or older.

The voucher escalation rate also will be a flash point in the upcoming presidential contest. Given the historically rapid pace of health care inflation -- running almost twice the level of urban consumer price inflation between 1980 and 2010 --Ryan’s original proposal in 2011 to increase Medicare vouchers only at the pace of inflation over time would have severely eroded Medicare benefits.

Democratic Critique

It was largely for this reason that Democratic budget expert Alice Rivlin, who also has called for moving Medicare more toward vouchers, distanced herself from Ryan after media reports suggested that they were on the same wave-length on this issue. Other Democrats, too, seized on the penury of the Medicare escalation factor in Ryan’s 2011 plan.

Perhaps in response to these critiques, or because he had his own doubts, Ryan updated his budget plan in April 2012. A key revision was to bump up the escalation factor in the Medicare voucher plan so that costs per capita couldn’t grow faster than a rate of nominal GDP plus 0.5 percentage point.

Even then, unless health care inflation slows permanently in the future, this revision could also end up significantly reducing Medicare benefits over time, though not as much as under the initial Ryan plan.

A key challenge for the Romney-Ryan team will be to explain how their market-driven health care changes will lower health care inflation so that the real value of future Medicare benefits will not be threatened.

Bolstering Recovery

The other set of big choices, on which, so far, there is less clarity, is about the use of fiscal policy in the short run to bolster the recovery or at least keep it on track.

Although the pace of economic growth has faltered and looks uncertain even if the much-feared “fiscal cliff” of sequester and expiration of Bush-era tax cuts is avoided, neither presidential candidate has said much about renewing the Social Security payroll tax cuts that expire in December, or about adopting any other form of short-term “stimulus.”

Obama has avoided the issue due to the unpopularity of his initial stimulus plan and because even to raise the idea of more stimulus now sows further doubts about the strength of the recovery, which can only hurt him in the election.

For their parts, Romney and Ryan have made their critique of Obama’s stimulus measures a central plank in their case for unseating him.

Economic Vulnerabilities

If the economy remains weak, however, both presidential candidates will be pressed on what additional ideas they have for accelerating the recovery.

Given his support of short-term stimulus measures in the past, it wouldn’t be a surprise if Obama endorses yet another dose of tax-cutting. With the election now so polarized on fiscal issues, he may even start talking about short-run spending increases.

Of course, any hint by Obama that he is open to further temporary stimulus measures would have to be reconciled with a commitment to shrink the deficit over the 10-year budget window once the economy has strengthened.

Voters will be looking to Obama’s Republican opponents to ask what, if anything, they would do differently. Clearly, for them, stimulus spending is not an option. On the revenue side, so far, Romney has called for a 1986 tax overhaul-style revenue-neutral cut in marginal rates on individual and corporate incomes, paired with unspecified cuts in tax deductions or credits.

One open question as the campaign proceeds, and certainly if Romney and Ryan are elected, is whether a Romney-Ryan administration would back a tax cut that’s not revenue neutral and thus designed -- even if they don’t say it this way -- to stimulate the economy.

(Robert Litan is the director of research and Christopher Payne a senior economic analyst at Bloomberg Government. The views expressed are their own.)

Before it's here, it's on the Bloomberg Terminal. LEARN MORE