I’ve been heaping praise on the Ryan Roadmap because it strikes me as a serious, thoughtful response to our long-term, slow-burning fiscal crisis. But it suffers from a glaring flaw, namely it’s too-rosy revenue projections. Howard Gleckman has offered a smart critique that deserves Ryan’s attention.
But, and this caveat is a whopper, CBO assumed this wonderful outcome would occur only if the revenue portion of Ryan’s plan generated 19 percent of GDP in taxes. And there is not the slightest evidence that would happen. Even though Ryan’s plan has a detailed tax component, his staff asked CBO to ignore it. Rather than estimate the true revenue effects of the Ryan plan, CBO simply assumed, as the lawmaker requested, that it would generate revenues of 19 percent of GDP.
If the Obama White House tried to pull this, we’d rightly draw attention to it. Granted, Ryan’s office doesn’t have the same analytical resources as the OMB. But we need a more plausible solution on the revenue side. Gleckman continues.
On the tax side, [the Roadmap] would make some huge changes. Ryan would: turn the current exclusion for employer-sponsored health insurance into a refundable credit; allow people to choose to pay either under the current income tax system or a two-rate, broad-based alternative; replace the corporate income tax with a business consumption tax, and exclude from tax dividends, capital gains, interest, and estates.
We don’t have any idea what this plan would do to revenues, but in some ways it resembles former GOP presidential candidate Fred Thompson’s campaign plan. TPC figured that scheme would reduce tax revenues by between $6 trillion and $8 trillion over 10 years. Unless Ryan can achieve unrealistically large cuts in spending as well, this is not exactly a roadmap to solvency in my book.
In a follow-up post, Gleckman notes, correctly, that the Roadmap envisions a very different federal government. I consider this a very a good thing. Changing the structure of entitlement programs from defined-benefit to defined-contribution will greatly facilitate delivery-system reform by incentivizing providers to offer low-cost care. But even if we do pursue these politically difficult and wrenching reforms, as we should, we need to deal with potential revenue shortfalls. After observing that Ryan envisions a federal government in 2080 that consumes the same share of resources that the federal government consumed in 1951, Gleckman writes:
Think about what government looked like back in 1951, the year we first got coast-to-coast dial telephone service. The Pentagon still acounted for half of all spending. Social Security represented only about 3 percent of total federal outlays. Medicare and Medicaid did not even exist. In 1951, we spent nearly four times as much for veterans benefits as we did for Social Security. Sixty years ago, there were only 15 million Americans 65 or older. Half lived in poverty.
Today, there are 40 million Americans 65 and older and we spend almost one-third of the budget on seniors. By mid-century, more than 70 million will be 65-plus. There is no doubt we need to slow the growth of spending for aging Baby Boomers. But freezing programs such as Medicare and Social Security at current levels while the population eligible for benefits nearly doubles seems unrealistic at best. Ryan is absolutely right to suggest that any long-term budget deal must address these entitlements. But his plan is also powerful evidence that it must include new revenues as well.
This actually strikes me as the wrong way of approaching the problem. The world in 2080 will be radically different in many respects. One hopes that we will not become a Planet of the Apes, but we can’t rule that out. (“It was Earth all along!”) It is possible that the global and domestic economies will grow large enough that we can carry the burden of entitlement spending with relative ease. To get there, however, we need stable, growth-enhancing policies. This means encouraging spending discipline. All that said, Gleckman raises an important objection.