The Audacity of Paul Ryan

Paul Ryan, the House Budget Committee chairman, on Apr. 5 did something politicians seldom do: He stuck to principle. The fiscal conservative and Republican rising star stunned Washington with a 10-year budget blueprint that would shrink government, privatize the Medicare health program for seniors, turn Medicaid into a block grant to the states, and lower to 25 percent the top rate on corporate and individual taxes.

The plan would cut federal spending by $6 trillion over the next decade and slash the deficit to 2 percent of the economy by 2022, down from this year's 9 percent, without raising taxes. Among its weaknesses: overly optimistic assumptions, including that unemployment will be a mere 2.8 percent by 2021. By slashing money for food stamps, education, transportation, and scores of other programs, it's also politically untenable to Democrats. And despite the deep cuts, the House Republican plan would not balance the budget until 2040, largely because of offsetting tax cuts. Still, the scope of Ryan's proposal made Washington's nonstop bickering—and the threat of a government shutdown on Apr. 9 unless a deal is reached over funding levels for the next six months—seem small-bore by comparison.

Perhaps the biggest surprise is Ryan's call to convert Medicare, the $500 billion-a-year entitlement program and the biggest reason for mushrooming federal deficits, to a voucher-like system beginning in 2022. A week before Ryan presented his ideas, outside experts involved in the discussions said it was unclear whether the proposal would even cover Medicare. Along with Social Security, Medicare is a crucial part of the social safety net, one that politicians historically have been loath to tamper with, including President Barack Obama in his 2012 budget.

Democrats could hardly contain their glee, believing they'd been handed their talking points for next year's Presidential election. Politically, at least, party leaders see Ryan's proposal as a replay of former President George W. Bush's abortive 2005 plan to create Social Security private accounts, which they used to rally seniors and regain control of Congress in 2006. Senator Debbie Stabenow (D-Mich.) calls Ryan's budget a "thinly veiled attempt to dismantle Medicare" that pulls "the rug out from under seniors."

Republican ambivalence was evident. The party's House leaders, while endorsing Ryan's spending plan generally, largely omitted any references to the Medicare overhaul. The plan is a calculated risk for the GOP. While the proposal could alienate senior citizens in swing states such as Pennsylvania, Florida, and Iowa, reining in spending may help win over independent voters who gave Obama the edge in 2008. Opinion polls show that independents, who represent 29 percent of the electorate compared with 16 percent for senior citizens, now consider the deficit the most pressing issue facing the nation after jobs. Ryan's budget "is not going to have the repercussions everybody thinks it will," says former Representative Tom Davis (R-Va.), who led the House Republicans' election efforts from 1998 to 2002. "A lot of it is going to be messaging," he says, and "the election is ultimately going to be about swing voters."

Republican leaders may be betting that by embracing the broader anti-spending message of Ryan's plan without dwelling on the details, they can show voters a road map to growth that depends in part on paring the debt and controlling runaway entitlements. "This is not simply a deficit-hawk dynamic," says Republican pollster David Winston, who advises House Speaker John Boehner (R-Ohio). "This is going back to Reagan and how you create jobs."

Ryan, 41, would essentially privatize Medicare by giving those over 65, beginning in the year 2022, about $8,000 to spend on private insurance that would replace the government program. Seniors would shop for subsidized coverage in an "exchange" where the government would approve insurance companies' offerings, says Conor Sweeney, a spokesman for Ryan. The plans would compete for seniors' business, and the subsidies would be based in part on income levels. The plan would also gradually raise the eligibility age to 67 by 2033.

Economists Jonathan Gruber at the Massachusetts Institute of Technology and Uwe E. Reinhardt of Princeton say seniors would get less money to buy their coverage than under the current system. Ryan's plan would peg to the consumer price index the amount the elderly would receive to buy coverage. The CPI historically has grown more slowly than the cost of medical care. Gruber and others say any health-care plan that caps spending will end up rationing care and could leave people of modest means without adequate coverage. "Under the proposal, most elderly people would pay more for their health care than they would pay under the current Medicare system," the Congressional Budget Office said in an analysis. Joseph Antos, a health policy expert at the American Enterprise Institute who supports Ryan's proposal, says "the whole idea is to tell the health sector that the Medicare gravy train has come to a halt."

That's politically risky. In the midterm elections, Republicans used the threat of Medicare cuts under Obama's 2010 Affordable Care Act to oust Democratic incumbents. Republicans rode that message to a 21 percentage-point advantage among senior citizens. Ryan on Apr. 5 acknowledged the risk, but said reform couldn't wait. "We decided it is time to stand up and do what is necessary," he said. Republicans may hope to avert a baby boomer backlash by applying the plan only to those now under 55. "For people who are near retirement, security of what they have is very important to them," says Robert Blendon, a professor of public opinion and health care at Harvard University.

Ryan's prescription bears some resemblance to Obama's own health-care overhaul, says Gruber, who advised congressional Democrats when the law was being written. Pointing to several features of the Republican plan, including the call for a regulated market in which seniors could shop for subsidized coverage, Gruber says: "That's the Affordable Care Act." Considering that no Republican supported Obama's health plan and that Ryan's budget now calls for its repeal, that's the definition of audacious.

The bottom line: Ryan's budget shifts the debate from domestic spending minutiae to entitlements. It also provides Democrats with short-term political ammo.

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