Thoughts on the Emerging Case Against the Ryan Budget

Ezra Klein offers a critique of the Ryan budget proposal. My sense is that it anticipates much of what President Obama will say on the campaign trail in the months to come, and is thus an invaluable guide.

He begins by embracing some aspects of Ryan’s earlier critique of the evolution of the U.S. welfare state:

Ryan’s presentation was persuasive. He’s right that the growth of social spending on the elderly is crowding out spending on the poor. And he was more convincing because he seemed to admit a hard truth that Republicans often deny: that government programs for the poor are a crucial way of ensuring income mobility, and as they get squeezed, so, too, do the life chances of those born at the base of the income ladder.

But it is difficult to believe that Ryan’s budget was written by the same guy who wrote this paper. Because in Ryan’s budget, Social Security is untouched. The cuts to Medicaid and other health programs for the poor are twice the size of those to Medicare. The cuts to education, to food stamps, to transportation infrastructure and to pretty much everything else besides defense are draconian. As for the tax reform component, it cuts taxes on millionaires by more than $250,000, but it doesn’t name a single loophole or tax break that Ryan and the Republicans would close.

A few first-cut thoughts:

(1) One assumes that Ryan doesn’t oppose reforming Social Security; rather, he chose to devote more effort to addressing Medicare reform, which makes intuitive sense given the scale of the problem posed by health entitlements as opposed to retirement security programs. As Andrew Biggs has argued, reforming Social Security will require more than means-testing as it is most commonly deployed. Some scholars, including Biggs, have recommended embracing the New Zealand superannuation approach, in which Social Security evolves into a universal flat benefit that is more generous to low lifetime earners and using opt-out universal retirement savings accounts that are automatically annuitized on retirement to better protect the interests of the elderly. Others, like Johns Hopkins political scientist Steven Teles, have suggested that this approach suffers from serious political economy problems, and that we’d be best served by a more generous version of the existing program that shifts resources from the tax expenditures devoted to encourage retirement savings to creating a higher minimum benefit, among other things. 

But the core issue is this: Medicare, and not Social Security, is the main reason why federal transfers are less redistributive than they were two decades ago, so Ryan’s decision to focus on Medicare seems entirely reasonable, if incomplete.

(2) There is an interesting conceptual question implicit in this debate: are medical expenditures mobility-enhancing? Measures that make young and poor people healthier are undoubtedly mobility-enhancing. But is that how Medicaid dollars are most commonly deployed? Ryan could make a convincing case that the mobility-enhancing potential of public institutions isn’t best measured by direct spending — recall that K-12 per pupil spending has increased three-fold in inflation-adjusted terms since 1970 with no appreciable improvement in graduation rates — but rather by other metrics.

If champions of public integrated providers on the left like Phil Longman are right and the VHA and Britain’s NHS are superior to the U.S. model, perhaps we could have deep cuts in medical expenditures while offering a public service that, by virtue of keeping the young and the poor healthier than they’d otherwise be, would actually be more mobility-enhancing than the status quo. If champions of consumer-directed medical care and the emergence of private integrated providers are right, than the same would be true, i.e., we could spend less at the federal level than we would on the current trajectory and nevertheless get a more mobility-enhancing health system. 

I would argue that not all public expenditures are mobility-enhancing, and indeed that not all public expenditures on social services are mobility-enhancing. Providers with market power will extract rents, either directly or indirectly in the form of featherbedding and the diversion of funds to non-core missions. Ryan has a different view than some of his critics regarding how we might enhance the efficiency of the U.S. health system. His view (roughly) is that a defined contribution approach will encourage constructive competition among providers that will tend to lower prices. Another view is that administrative price-setting and a broader centralization of the health system are the only way to tame the beast. It is implicit in Ryan’s view that restraining spending levels, i.e., imposing financial discipline on medical providers, is the best way to enhance efficiency. 

So if Ryan is right — and he may well be wrong — spending less could over time make the system more mobility-enhancing, whereas spending more will make it less mobility-enhancing because more taxpayer money will be finds its way into the hands of rent-extracting providers with market power. Once we understand the reasoning behind Ryan’s defined contribution approach, the locus of the debate shifts to whether or not the defined contribution approach is sound.

But the debate shouldn’t be about whether or not Ryan cares about poor people. He simply thinks that growing the budget for programs devoted to helping the poor doesn’t necessarily translate into poor people being better off, particularly if the design of these programs exacerbates medical cost growth across the health system.

(3) It is certainly true that Ryan doesn’t provide a detailed account of which tax expenditures he would eliminate. It remains to be seen if the House Ways and Means Committee will offer more detail. It has been reported that Ryan would like to serve as chairman of Ways and Means in the future, assuming we see a major tax overhaul come 2013. My sense is that Ryan won’t be reluctant to dive into tax expenditures once he has the opportunity and the authority to do so.

(4) Do cuts to the federal budget for education, food stamps, and transportation infrastructure imply that Ryan thinks that the United States should spend less on education, food, and transportation? Another view is that Ryan believes that as the U.S. grows more affluent, a larger share of total expenditures on education, food, and transportation infrastructure should be paid for by some combination of the private sector and state and local governments drawing on their own resources. As a safety net program, the cost of food stamps varies with the business cycle. Our sense of what constitutes poverty evolves over time as we grow richer. But it seems plausible that if we do manage to increase economic growth and household income growth — Ryan’s stated goal — that we’d have less need of food stamps over time. (One could go further and argue that food stamps should be eliminated and replaced with cash transfers.) Transportation infrastructure is a special case, in which the role of private investment has been restrained, the federal government has been divided over the extent to which it should permit road pricing, and the case for greater decentralization is, as Edward Glaeser and Tyler Duvall have argued, fairly strong. 

I should stress that my views aren’t identical to Ryan’s. My vision for the budget is somewhat different. But it is useful to approach this issues through Ryan’s lens, and then focus on which of his assumptions are plausible and which are less so.

Ezra’s post continues:

Bob Greenstein, director of the Center on Budget and Policy Priorities, points to Ryan’s cuts to education: “Lower-income students are more likely to go to public universities and community colleges. But lately, state budget cuts are leading to tuition increases. The Ryan budget would further decimate state budgets, because one of the areas of the budget he hits the hardest is ‘non-security discretionary spending,’ of which 35 to 40 percent of that category is aid to cities and state governments. Normally, you would increase Pell grants to help with this. But he’s slashing Pell grants, too!”

To put it slightly differently, no millionaire’s child will find that Ryan’s budget ends her hopes of a college education. But plenty of lower-income children will. And in the long run, that’s bad for mobility, bad for growth and bad for the country. “If you don’t have a society that allows non-elites to have a serious shot of sharing in economic prosperity, there’s a huge untapped potential for economic growth,” Hacker says.

Vance Fried and I offer a different account of how to understand cost growth in higher education in a recent article. Jason Delisle has also addressed this subject as it relates to subsidized student loans. One of my favorite education thinkers, who would presumably be very critical of the Ryan approach, has done a great deal of deep thinking about the issues Greenstein describes. Consider the following from an article Carey published in The New Republic in late January:

When the federal government first got into the business of providing need-based grants and loans in the 1960s, it gave only a small fraction of the money that colleges received to educate their students. But the federal role grew over time. In 2001, federal grants, loans and tax credits provided higher education with about $64 billion a year in inflation-adjusted 2010 dollars. By 2011, the sum had grown to $167 billion, a 164 percent increase in just ten years. As states have cut higher education budgets and stagnant middle-class wages have left students with less money to pay for college out-of-pocket, the federal government has stepped in as the funder of last resort–federalizing the American higher education system by default.

Those dollars, however, have come with few strings attached. The market was trusted to ensure quality and the market didn’t work very well—there are, today, hundreds of public and private non-profit colleges with poor graduation rates, rising tuition, and worsening student loan default rates. Meanwhile, recent research suggests that the government is subsidizing a great number of universities at which students aren’t learning much. Now, President Obama has decided to use the leverage created by increased federal funding to fix these problems.

Notice what Carey doesn’t say — that increasing Pell grants to help with what is a structural problem is a permanent, sustainable solution. Ryan, like Carey, believes that the absence of cost control is problematic. But of course these issues are the purview of the Education and Workforce Committee. 

There is much more to discuss, but we’ll leave it there for now. 

To emphasize: (1) the Ryan budget proposal is a broad outline that is missing many crucial details — it aspires to chart a course for how the federal government will operate for the next few decades, and that’s an ambitious undertaking given the uncertainty involved and the dangers of treading on the legislative turf of other committees;

(2) many of the assumptions that undergird Ryan’s proposal are contested, and involve making big bets regarding how individuals and institutions would respond to changed incentives in the health system, in education, etc.;

(3) it’s tough to make generalizations about programs for the poor. Some involve direct transfers (conditional or unconditional, cash or in-kind) while others are spending programs that hire civil servants, for-profit firms, charities, etc., to deliver services. Spending programs of the latter kind help shape a broader ecology that can either work well or work badly. Many believe, as James Capretta and others have argued, that the Medicare and Medicaid programs have stymied the emergence of high-quality, cost-effective integrated medical care; if that is true, high spending levels have actually exacerbated the challenge of offering high-quality, cost-effective care to poor people. Again, this is a contested view. But the debate is not over whether or not we want to help poor people. It’s about how we should go about doing it, and whether or not the dominant approach has actually proven counterproductive. 

I consider myself fairly open-minded about these questions. I will say that there is a strong status quo bias that shapes thinking in these domains, and there are powerful heuristics at work that lead people to interpret proposals from Ryan or for that matter from President Obama in particular ways that aren’t conducive to mutual understanding.

Thanks to Ezra for offering a lucid distillation of the emerging case against the Ryan budget.

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

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