The Implications of the Path to Prosperity’s Long-Term Spending Trajectory

At the Washington Post, Ezra Klein notes the following about Chairman Ryan’s Path to Prosperity:

Ryan tells CBO to assume his tax plan will raise revenues to 19 percent of GDP and then hold them there. He tells them to assume his Medicare plan will hold cost growth in Medicare to GDP+0.5 percentage points. He tells them to assume that spending on Medicaid and the Children’s Health Insurance Program won’t grow any faster than inflation. He tells them to assume that all federal spending aside from Medicare, Medicaid and Social Security will fall from 12.5 percent of GDP in 2011 to 3.75 percent of GDP in 2050.

It’s that last assumption, perhaps, that shows most clearly how unlikely Ryan’s specified budget path is. He’s saying that in 2050, spending on defense, on food stamps, on infrastructure, on education, on research and development, on the federal workforce, and everything other non-entitlement program combined will be less than four percentage points of GDP. [Emphasis added]

The notion that non-entitlement federal spending could fall so dramatically as a share of GDP does seem highly implausible on political economy grounds. There are powerful constituencies pressing for the expansion of the federal role in various policy domains, thus making retrenchment on that scale very difficult. 

Ezra’s critique is particularly effective because many conservatives will balk at the notion that defense spending will or should fall below 3.75%, of GDP even in the (relatively) distant future.

There are, however, other ways of looking at the fall of non-entitlement federal spending from 12.5% to 3.75% of GDP:

(a) In a best-case scenario, GDP per capita growth might accelerate and the “decoupling” of GDP per capita growth and wage and household income growth might come to an end. As a result, the need for income support programs might decline sharply, perhaps as U.S. households come to rely more heavily on private savings. But would this be enough to account for so steep a drop? That is fairly unlikely, though I certainly wouldn’t rule out a scenario in which this contributed to a significant decline in non-entitlement federal spending with no damage to our collective well-being. Spurring wage and household income growth should be a central policy goal.

(b) It could be that state governments will pick up the slack, i.e., income security, infrastructure, education, workforce programs, etc., will be “downloaded” to the states. Some states might retain and expand policy efforts and expenditures in these domains while others will “disinvest” in them and allow private firms and other voluntary organizations to take the lead. I am broadly sympathetic to this approach, as it represents a break from cartel federalism. States that are unusually good at running efficient public services will gain a significant competitive advantage over those that do not, which might encourage a broader embrace of efficiency-enhancing policies. 

This goal, however, might be in tension with Ryan’s commitment to Medicaid block grants. A better model might involve federalizing the Medicaid program and then downloading various functions to state governments. One potential concern is that Medicaid and income security programs might be best handled at the federal level, as there is a countercyclical element to spending on social transfers that makes debt finance useful during downturns.  

Brad Plumer considers the implications of the Path to Prosperity for particular policy domains, e.g., transportation:

So how might these cuts affect the real world? Let’s take transportation as an example. Right now, the United States is facing a number of pressing infrastructure challenges. The National Highway System, first built in the 1950s, is reaching the end of its natural lifespan. Our air-traffic control system is outdated, causing airport delays around the country. About one-quarter of the country’s bridges are either “structurally deficient” or inadequate to today’s traffic needs, according to the GAO.

A variety of non-partisan think tanks and analysts have pegged the cost of fully repairing and upgrading our transportation networks at somewhere between $200 billion and $262 billion per year over the next decade. The White House’s budget envisions spending an average of about $120 billion per year. Ryan’s budget, meanwhile, allocates about $78 billion per year. In his summary, Ryan claims he can meet the country’s needs by cutting back on “imprudent, irresponsible, and downright wasteful spending,” though it’s not clear what waste Ryan has in mind, much less whether it would make up the large gap.

Upgrading our transportation networks may well cost between $200 and $262 billion over the next decade, or perhaps even more. It’s not obvious, however, that all of this money has to come from federal coffers. Other approaches might involve relying more heavily on state governments and private investors, as Edward Glaeser has suggested, and perhaps focusing federal efforts on a “fix it first” agenda. This doesn’t mean that Ryan’s approach is the only answer. But it’s worth decoupling federal spending from transportation spending — the categories do not and should not overlap, and it seems entirely reasonable to argue that the non-federal share of the transportation spending pie should grow over time. 

My view is that a 19% federal revenue cap will be very hard to achieve, and that it implies increases at the state and local level. The virtue of shifting the locus of spending to the state and local level, however, is that this de-federalization of various programs has the potential to effectively de-cartelize government. Residents “vote with their feet” in search of more cost-effective government even now, but shifting more responsibilities to the states will give the states more opportunities to pursue different strategy and to serve a wider array of preferences. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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