Discussion: (13 comments)
Comments are closed.
A public policy blog from AEI
View related content: Economics
After the Obama White House released its 2013 budget plan last month, U.S. Treasury Secretary Timothy Geithner went to testify before the House Budget Committee. He told the committee’s chairman, Republican Paul Ryan of Wisconsin, the following: “We’re not coming before you to say we have a definitive solution to that long-term [budget] problem. What we do know is we don’t like yours.”
Let me remind Team Obama of a favorite Geithner aphorism: “Plan beats no plan.”
Barack Obama doesn’t have a long-term, debt-reduction plan. Paul Ryan does. So under the Geithner formulation, Ryan wins by default.
But the latest version of Ryan’s Path to Prosperity, released today, does far more than defeat a rival who’s decided to forfeit the field. It presents a bold and sweeping solution to America’s twin problems: too much debt and too little economic growth.
— By 2022, under the Ryan Path, debt as a share of GDP would be 62.3% vs. a projected 73.2% in 2012. Under the Obama budget, debt as a share of GDP would be 76.3% in 2022, according to the Congressional Budget Office. Over that period, the Ryan Path would spend $5.3 trillion less than the Obama budget by, in large part, axing Obamacare and block-granting welfare programs—including Medicaid—to the states.
— Longer term, the differences between the Ryan Path and the Obama budget are even starker. By 2030, debt-to-GDP would be 53% under Ryan, 128% under Obama. By 2040, debt-to-GDP would be 38% under Ryan, 194% under Obama. By 2050, debt-to-GDP would be 10% under Ryan, over 200% under Obama—assuming that under the Obama scenario, the economy hasn’t collapsed.
How does Ryan do it? Medicare reform is at the heart of the Path to Prosperity. Where Obamacare relies on unelected bureaucrats to keep costs down, the Ryan path uses competition. Under Ryan’s revised “premium support” plan—essentially the Wyden-Ryan proposal—seniors beginning in 2023 could use their Medicare dollars to choose from a menu of private plans, along with Medicare’s traditional fee-for-service system. Every year there would be a competitive bidding process among all plans to determine the dollar amount of the federal contribution that seniors would use to purchase coverage. (The benefits in the private plans would have to be as least as good as Medicare.) The second least-expensive approved plan, or Medicare, whichever is least expensive, would establish the benchmark that determines the premium support amount.
Seniors who prefer pricier plans would have to pay the difference between the premium subsidy and the monthly premium. Seniors who choose a less expensive plan could pocket the difference. As a backup—and so CBO could score the plan—per capita costs could not exceed nominal GDP growth plus 0.5%.
The Ryan Path reforms the tax code by creating a two-rate system—25% and 10%—for individuals, while lowering the corporate rate to 25% and moving to a territorial system. Now, because of CBO budget rules, the Ryan Path assumes tax reform doesn’t boost growth, though it almost assuredly would. So when you factor in faster growth, Ryan’s budget numbers look even better. By contrast, Obama would take the top income tax and dividend tax rates to 45%, capital gains to 24%. Talk about austerity.
The Ryan Path isn’t perfect. It takes a pass on Social Security reform and fails to specify what tax breaks would be scaled back or eliminated. A comprehensive alternative to Obamacare would also be nice. But even with those flaws, the Ryan Path presents a vivid contrast with the Obama budget. One leads to prosperity and solvency, the other leads to a debt crisis—with the likely response being massive tax increases and healthcare rationing by Washington—and decline.
As Ryan puts it:
“The choice of two futures presented in this budget is premised on the wisdom of the American people to build a prosperous future for themselves and for generations of Americans to come.”
Comments are closed.
1150 17th Street, N.W. Washington, D.C. 20036
© 2015 American Enterprise Institute for Public Policy Research