Mitt Romney And Extreme Fiscal Policy

As the presumptive Republican vice presidential candidate, Representative Paul D. Ryan of Wisconsin and his plans for the federal budget are drawing increasing interest. Mr. Ryan has been chairman of the House Budget Committee since the Republicans took control of the House of Representatives in the 2010 midterm elections and has articulated a vision for federal public finances that is quite different from what other prominent Republicans have been advocating – including Mitt Romney.

The contrast between Mr. Romney and Mr. Ryan tells us a great deal about the competition among fiscal ideas within the Republican Party. It also highlights the challenge Mr. Romney will face in November, if he is shifting rightward toward Mr. Ryan’s approach to budget policy, away from independents in the center of the political spectrum.

The budget ideas of Mr. Romney and the other Republican presidential candidates in the primaries mostly focused on proposals to cut taxes. The Committee for a Responsible Federal Budget assessed Mr. Romney’s specific ideas as likely to increase national debt to close to 100 percent of gross domestic product by 2021, using net federal debt held by the private sector, which is currently around 75 percent of G.D.P. (I use the high debt scenario when thinking about any political candidates’ proposals; in my experience, something almost always goes wrong with more rosy forecasts.) Mr. Romney has mentioned cutting tax expenditures – i.e., ways in which the government spends through giving various kinds of tax breaks – but so far he has been very vague on the details. To date, Mr. Romney has stood for cutting taxes and therefore increasing the deficit and debt relative to what it would otherwise be. (He embraces the widely optimistic notion that such cuts would stimulate investment and lead to job creation, which in turn would increase tax revenues; previous tax cuts have not accomplished this.)

Mr. Ryan is different. Rather than just wanting to cut taxes, he definitely and very specifically wants to reduce government spending. Mr. Ryan’s proposals are phased in – and in some versions debt would increase a great deal before it stabilizes. The difference between his approach and Mr. Romney’s is fundamental and clear: Mr. Ryan tells you what he would cut.

His Medicare proposals have received the most attention. Two Ryan variants have been placed on the table. In the first, he would phase out Medicare and replace it with a voucher program. The Congressional Budget Office does not generally score budget resolutions, as these are not detailed enough to be amenable to their calculations; the resolutions are more of a framework than legislation. But this Medicare proposal, part of Mr. Ryan’s 2011 budget, was scored by the C.B.O. at Mr. Ryan’s request. (I’m on the C.B.O.’s Panel of Economic Advisers, though I’m not involved in any of its budget work.)

Mr. Ryan must have been surprised and disappointed when the C.B.O. determined that changing Medicare in this fashion would actually increase total health-care costs (as a percentage of the economy).

The reasoning is straightforward. At present the federal government buys health care for about 100 million Americans. Buying at scale and pooling risks, the government can get lower prices than you would get on your own.

Medicare is also highly efficient in terms of its administrative costs, which are about one-fifth of what it costs to run leading private insurance companies.

Mr. Ryan’s second and more recent proposal involves offering a voucher program but also continuing traditional Medicare – a kind of “public option” that was derided by many on the right during the health-care debate of 2009-10. This plan has not been scored by the Congressional Budget Office – it would be too much of a stretch using the standard budget methodology. But it’s clear that under the voucher plan, the risk of higher health-care costs, now covered by the government, would be transferred to the individuals.

If you believe in the magic of the market under all circumstances, then Mr. Ryan’s plan has appeal. But we have had a great deal of market competition for decades in health care – look at the insurance plans and hospitals around you – and health-care costs have not been brought under control.

It is hard to see how any version of his proposals would reduce health-care costs, although he could certainly cap what the government pays for health care. Would that really lower costs or just shift more risks onto retired people?

The more dramatic part of Mr. Ryan’s budget is for government spending other than on Medicare, Medicaid, CHIP (a health program for children), Social Security and net interest payments (this is close to what is known as discretionary spending). My colleague James Kwak calculates that Mr. Ryan would bring this spending down from its likely medium-term projection of 8 percent of G.D.P. toward 4 percent of G.D.P. (or even lower).

Given Mr. Ryan’s other pronouncements, it is reasonable to assume that he would not want military spending below its post-World War II low point, which was 3 percent of G.D.P. If you factor that into the projections – see the second chart by James Kwak on the previous link – non-defense discretionary spending would fall below 1 percent of G.D.P. (from its average since the 1960s of 6 to 7 percent of G.D.P.).

Mr. Ryan stands for substantially phasing out not just Medicare but also the federal government. This may help boost turnout among the conservative base, but will this extreme vision really help Mr. Romney win over independent voters or disaffected Democrats?

This post was originally published at Baseline Scenario (cross-posted from the NYT.com’s Economix blog) and is reproduced here with permission.

One Response to "Mitt Romney And Extreme Fiscal Policy"

  1. L. Walker   September 10, 2012 at 10:21 am

    No one is mentioning the reason for increased health care premium costs over time? Does not the government mandated procedures cause the premium to escalate automatically year over year? Someone mentioned a couple of months back that government madated proceedures have risen to over 2500 is that true and a factor no matter the number?
    LC