The Agenda

Is Paul Ryan’s Gamble Paying Off?

Robert Pear had a story over the weekend about the growing support for Medicare premium support:

Members of both parties told the panel that Medicare should offer a fixed amount of money to each beneficiary to buy coverage from competing private plans, whose costs and benefits would be tightly regulated by the government.

Republicans have long been enamored of that idea. In the last few weeks, two of the Republican candidates for president, Mitt Romney and Newt Gingrich, have endorsed variations of it.

The idea faces opposition from many Democrats, who say it would shift costs to beneficiaries and eliminate the guarantee of affordable health insurance for older Americans. But some Democrats say that — if carefully designed, with enough protections for beneficiaries — it might work.

This is obviously good news. It also seems to vindicate Paul Ryan’s Medicare reform strategy. After Ryan released his controversial Medicare reform proposal, many conservatives argued that it was politically suicidal and a non-starter. Others (rightly, in my view) argued that its growth rate was unrealistically ambitious. Yet there was another view — mine at the time — that though the growth rate was unrealistically ambitious, the core goal of the proposal was to unite congressional Republicans behind a shared vision for Medicare reform. The growth rate had to be unrealistically ambitious to be compatible with a policy of no net revenue increases. To concede on revenue at that stage would be for conservatives “to negotiate with themselves,” i.e., to make a significant concession on an issue of core concern without extracting a commitment on structural entitlement reform (as opposed to something comparatively trivial, like increasing the Medicare eligibility age, which by definition removes the youngest and healthiest beneficiaries from the system). 

The gamble Ryan was making, if this theory is correct, is that while there would be short-term political costs, a Republican presidential candidate would embrace a position on Medicare somewhere between the House budget proposal and the status quo, e.g., the tentative proposals from the Romney and Gingrich campaigns. Centrist wonks like Alice Rivlin and the staff at the Bipartisan Policy Center would continue to push for a more realistic and palatable version of the proposal, which they are now calling “Defined Support.” For Ryan, something like Defined Support would represent a victory, even if it meant net revenue increases, because it addresses the underlying driver of increased federal expenditures.

This, in turn, leads us to the Toomey proposal. CBPP and other left-of-center groups have attacked the Toomney tax proposal on at least two grounds: (1) it is not sufficiently progressive, because capping the value of tax expenditures would have a heavy impact on middle-income households that benefit for the tax exclusion for employer-provided health benefits, and (2) it might lead to more revenue loss than Toomey assumes by virtue of its MTR cuts. Another critique, from Jed Graham, is that the Toomey proposal would trigger increased health expenditures as more families join the PPACA insurance exchanges. This might tend to make the proposal somewhat more progressive in its impact, though it might also shift it from revenue positive to revenue negative. As Graham observes, Republicans want to repeal PPACA, so it is perhaps reasonable that they wouldn’t take this into consideration. But he also argues that PPACA will have to be replaced by some kind of subsidy.

Can we imagine a scenario in which Republicans advance a modified version of the Toomey proposal and Defined Support? Because Defined Support assumes a higher growth rate than the House Budget Committee proposal, it will need some increase in tax revenue — which a measure to curb tax expenditures per Toomey could deliver. The evidence for this scenario comes from Jeb Hensarling’s eye-opening characterization of the Super Committee’s deliberations:

Republicans on the committee also offered to negotiate a plan based on the bipartisan “Protect Medicare Act” authored by Alice Rivlin, one of President Bill Clinton’s budget directors, and Pete Domenici, a former Republican senator from New Mexico. Rivlin-Domenici offered financial support to seniors to purchase quality, affordable health coverage in Medicare-approved plans. These seniors would be able to choose from a list of Medicare-guaranteed coverage options, similar to the House budget’s approach—except that Rivlin-Domenici would continue to include a traditional Medicare fee-for-service plan among the options.

This approach was also rejected by committee Democrats. …

In the midst of persistent 9% unemployment, the committee could have enacted fundamental tax reform to simplify the tax code, help create jobs, and bring in over time the higher revenues that come with economic growth. Republicans put such a plan on the table—and even agreed to $250 billion in new revenue by eliminating or limiting most of the deductions, credits, loopholes and tax expenditures mainly enjoyed by higher-income Americans. We offered this to avoid the even larger tax increases already written into current law that will intensify the pain Americans are feeling during these difficult economic times.

Republicans were willing to agree to additional tax revenue, but only in the context of fundamental pro-growth tax reform that would broaden the base, lower rates, and maintain current levels of progressivity. This is the approach to tax reform used by recent bipartisan deficit reduction efforts such as the Bowles-Simpson fiscal commission and the Rivlin-Domenici plan.

The Democrats said no. They were unwilling to agree to anything less than $1 trillion in tax hikes—and unwilling to offer any structural reforms to put our health-care entitlements on a permanently sustainable basis. [Emphasis added]

Keith Hennessey describes the significance of this strategic shift:

The most significant element of the failed Super Committee negotiation is that Republicans offered to cross the no-net-tax-increase line in exchange for structural entitlement reform or structural tax reform and a permanent answer on tax rates. The six Super Committee Republicans proposed a deficit reduction package that would increase net income taxes by about $250 B, plus another $40ish B in higher revenues that would result from correcting the way that inflation is measured. When you add in other “receipts” (which are technically different from tax “revenues”) from auctioning telecommunications spectrum, raising defined benefit pension fees, and asset sales, plus the dynamic effects of high revenue resulting from greater GDP growth (as scored by CBO) that would result, the “tax” (technically, non-spending) component of the Super Committee Republican offer was in the $500 B ballpark. …

This is a stunning move, as almost all Congressional Republicans had previously been unwilling to increase net taxation. Speaker Boehner signaled his willingness to cross the line in his Grand Bargain negotiations last summer with the President. Senator Tom Coburn proposed something similar over the summer, and first crossed the line when he tried to repeal/dial back the ethanol tax credit without using the revenues raised to cut other taxes. Now the rest of Congressional Republicans (or at least the six key Rs on the Super Committee) have joined them. That is a fundamental shift in the budget debate. …

This Republican shift means that the earlier narrative that deficit reduction is impossible because Republicans refuse to raise taxes is now invalid. It also invalidates the argument that Congressional Republicans refuse to cross Grover Norquist and Americans for Tax Reform. As best I can tell, the Republican offer is inconsistent with ATR’s position.

The notion that Republicans will fight every net tax increase, or every net tax increase on $200K+, can no longer be sustained. As Hennessey goes on to observe, the critique from Democrats now has to be somewhat different: it’s not that Republicans refuse to raise taxes or that they refuse to raise taxes on the rich; rather, it is that the refuse to raise taxes enough. This changes the political terrain considerably. 

Paul Ryan, often condemned as an extremist — not just by critics on the left but by presidential candidate Newt Gingrich, who (rather bizarrely) condemned his Medicare reform proposal as “right-wing social engineering” — seems to have maneuvered the GOP into embracing a more politically viable and indeed centrist approach to achieving long-run fiscal sustainability. 

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