The Ryan Game

Rep. Paul Ryan (R-WI) Announces the GOP Budget Plan

This week, Representative Paul Ryan (R-WI) published a budget proposal called “The GOP Path to Prosperity.” As I mentioned on Monday in “Shutdown Showdown,” the proposal neither addresses the issues in the 2011 or 2012 budgets, nor makes realistic assumptions about the expected economic impacts of the proposed changes.

But that was a really hand-wavy, dismissive aside to the now-almost-certain shutdown. Today, I’d like to elaborate further on Ryan’s proposal.

First, he proposes dramatic cuts to social services. With Medicaid, the cuts are both overt and covert. The cuts are overt, in that the outlay would be reduced to 2008 levels, even though far more people are in the program now than were in 2008 because of the high unemployment caused by the recession. They’re covert, in that it shifts the money to block grants. By doing this, the federal government washes its hands of any responsibility over matching the expenditure to the needs of the citizens. That is, if the needs rise, the money available remains unchanged, and thus more people are sharing the same sized pie. Absent some other source of funding, or an external force to change the rate of increase of the per-capita cost of health care, I fail to see a means by which this program would be able to remain solvent.

With Medicare, the cuts are similarly overt and covert. Here, the overt cut is a form of means-testing, where the federal subsidy drops as the covered person’s income rises. The covert cut here maintains solvency, unlike the Medicaid cut, but it does so only by forcing the covered person to pay an ever-increasing portion of the costs. In other words, over time, Medicare would be covering smaller and smaller portions of seniors’ care, effectively causing the program to wither away. And any savings that can be achieved in the meantime phase in gradually, since people who are already qualified for Medicare would remain in the current program.

Ryan also proposes changes to the income tax, reducing the upper two brackets to 25%, and making the immediate result revenue-neutral by eliminating nearly all deductions. While I agree that many of the deductions are market-distorting, taxation itself is inherently market distorting. As I’ve noted a few times before, the goal is a “fair” application of government rules…but “fair” depends on perspective. Deductions are one means by which the inherent market distortions of taxation are adjusted in the interest of fairness. That’s not to say that all such rules are fairly applied; many are forms of quid pro quo for campaign donations. But it would be better to apply a razor to fix those, rather than a chainsaw.

An example of the Laffer Curve

Finally, Ryan claims that the top marginal rate reduction would lead to a reduction in unemployment, which would result in a net increase in tax revenues (shades of Laffer), which would ultimately pay off the national debt. But as I demonstrated in “Take 2: Could Employing Tax Cuts Tax Employment?,” at the top income brackets for rates below 50%, there is a positive relationship between the tax rate and the employment rate. That is, for the upper quintile of earners, employment rises when the marginal tax rate rises, and falls when the marginal tax rate falls.

Yet the entire foundation of future government solvency is dependent upon a negative relationship between the tax rate and the employment irate. In fact, it depends upon a strongly negative relationship.

Ultimately, there is little reason to view this proposal any differently from its cousins over the past three decades. It’s a plan to undo government safety net programs, decrease taxes for the wealthy, and claim that this combination will make government more solvent. Over the past three decades, this combination was applied repeatedly, and our government has consistently become less solvent with each new application. It’s time for us to stop playing this game.

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