Editorial Board

The Hidden Utility of Ron Paul’s Balanced-Budget Plan: View

American voters are adept at sending mixed messages to elected officials. None are as confusing as the signals from the heartland over how to fix the federal budget.

When told that the U.S. deficit is now $1.3 trillion, the majority of voters enthusiastically embrace the need to cut, cut, cut. But they balk when asked to name specific programs to downsize or lop off.

That’s why U.S. Representative Ron Paul, the libertarian seeking the Republican presidential nomination, performed a valuable public service this week when he unveiled a budget plan that shows exactly what balancing the $3.8 trillion budget through spending cuts would look like.

Paul’s blueprint, released Oct. 17, would balance the books in three years. Admirably, he commits real numbers to paper. He does it in just five pages. And he spares no one: the health-care industry, defense contractors, oil-and-gas companies, federal workers, homeowners, the poor, the middle class and the rich.

In broad terms, Paul (whose chances of making it to the White House are beyond remote) would force Americans to confront their contradictions by slicing $1 trillion from the budget in his first year in office. He would eliminate five Cabinet-level agencies: Commerce, Education, Energy, Housing and Urban Development, and Interior. He would end the Transportation Security Administration. He would pare back most other programs to 2006 spending levels, before the financial crisis and the recession pushed up spending by the trillions.

Block Grants

The congressman wouldn’t stop there. Medicaid would become a block grant to the states, as would food stamps, child nutrition and other income-support programs. He would, of course, zero-out foreign aid. At least he’s egalitarian about it: If elected, Paul would pay himself a salary equivalent to the median personal income of the American worker -- $39,336.

President Paul would also starve the revenue side of the ledger. Corporations would see tax rates drop to 15 percent from 35 percent. He would extend all the Bush-era tax cuts, abolish taxes on estates and investment income. He wouldn’t end Social Security, but he would let young people opt out of the retirement program. As for that $1 trillion sitting in the overseas bank accounts of U.S. corporations, Paul would allow the money to come home tax-free.

Cut the Bureaucracy

Such radical reductions in revenue would make it hard to run the vast federal bureaucracy. True to his libertarian principles, Paul takes care of that problem by trimming the federal workforce by 10 percent -- and giving it far less to do. He would, for example, seek to repeal both the Dodd-Frank financial reform law and President Barack Obama’s Affordable Care Act, along with eliminating many environmental and other federal regulations.

What’s wrong with this? It doesn’t take much work to paint a dystopian picture. Let’s begin with a simple example. Without an Interior Department, there would be no agency to oversee national parks, federal lands and offshore drilling. Land would have to be auctioned off to the highest bidders, most likely oil-and-gas, coal and timber companies. The states would inherit Teddy Roosevelt’s national parks, but imagine how Yosemite would fare if it suddenly became the ward of strapped California.

Or let’s imagine another scene from Mr. Paul’s America. Each state would have to become the regulator of its financial, manufacturing and health-care industries. A patchwork of rules would result. States might soon engage in a dangerous game of regulatory competition: Some would ease rules to attract businesses, forcing those seeking to protect the health and pocketbooks of residents to lower their standards -- or lose jobs. Illinois might choose, say, to let manufacturers dump waste in the Mississippi River. What recourse would downstream Missouri, Tennessee or Louisiana have if their drinking water became polluted?

Social Security

Or let’s simply consider what would happen if the under-30 crowd stopped contributing to Social Security: The pay-as-you-go system would dry up, depriving today’s retirees of benefits. About 25 million elderly households now depend entirely on Social Security for income, leaving them unable to buy food or pay heating bills.

Low-income families would be hit the hardest. By converting Medicaid into a block grant, Paul would freeze what is now a $285 billion program at $186 billion from 2013 to 2016. He would do the same for food stamps, now a $58 billion program; it would be downsized to $30 billion four years in a row.

We should be grateful to Paul for painting a clear picture of what so many Americans say they wish for. Our guess is that those who look at this picture will conclude that there are other, more sensible ways to restore fiscal order in the U.S.

Spend More

Why, for instance, is it necessary to balance the budget in three years? Most economists say a sounder approach would involve spending more -- yes, more -- for the next few years to keep the fragile recovery on track, and focusing on budget cuts in the medium term.

We’ve argued, for example, for a plan to reduce the deficit by $4 trillion over 10 years, much like the one endorsed by the Simpson-Bowles panel last year. Of the $4 trillion, at least $1 trillion should come from tax increases, including higher levies on households making more than $250,000 and the elimination of other Bush-era breaks. An additional $500 billion could be squeezed out of Medicare by requiring, say, pharmaceutical companies to provide rebates on purchases by the federal program, similar to the discounts Medicaid now receives, and by increasing co-payments, deductibles and other forms of cost-sharing by the affluent.

Like the congressman, we’d cut corporate subsidies and farm programs, and phase out deductions for mortgage interest and corporate-sponsored health insurance. We would ask federal workers to pay more toward their pensions.

There’s an egalitarian way for Americans to share in the burden of achieving fiscal responsibility, but there’s no reason for entire Cabinet departments, the social safety net and the economy to be crushed in the process.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

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