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The Ryan Budget: The Real Choice We Face

Charles Blahous | 04/07/2011 |

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Yesterday’s release of the draft Ryan budget offers a vision for repairing the federal budget. Thus far, this vision for fiscal repair remains the only serious legislative alternative to fiscal catastrophe. President Obama’s submitted budget, by contrast, contains no significant effort to repair the federal fiscal outlook. The Congressional Budget Office (CBO) has shown that it would leave federal finances on a clearly unsustainable trajectory. Health care reform, long touted by some as being the real key to fiscal reform, turned out to mean expanding federally-subsidized coverage rather than fiscal correction. Last year the Congressional Democratic leadership declined even to pass a budget at all. If there is a responsible left-of-center alternative to the Ryan proposal, we have yet to learn what it is.

Some have criticized the Ryan budget as lacking the political and substantive balance of the Simpson-Bowles fiscal commission’s work. And indeed, the Ryan proposal would attack federal deficits solely by constraining spending growth without raising taxes. This approach reflects the subjective views of House Republicans, just as the Administration budget proposal reflects the President’s. This of course is how the legislative process works. Each player in the process comes forward with their preferred approach. The main difference between the two approaches is that Ryan’s budget would actually begin to repair the fiscal outlook.

It is especially disingenuous for some to be invoking the Simpson-Bowles plan as the “balanced” alternative so as to reflect unflatteringly on Chairman Ryan’s proposed budget. Few people have written as extensively in support of the Simpson-Bowles efforts as I have. But let’s review what happened upon the release of the Simpson-Bowles commission recommendations. First, the White House conspicuously declined to incorporate them into their budget or to give them rhetorical support. 64 Senators had to write to the President just to urge his support for his own commission, which has yet to come. We have since been treated to a procession of comments even from within the Senate’s bipartisan “Gang of Six” as to why key components of the Simpson-Bowles recommendations (for example, its Social Security plan) should not be passed. Unless and until a bill based on Simpson-Bowles can start moving through the Senate, the Ryan plan is the only serious game in town.

The other critical thing to understand about the Ryan budget is that it is just that: a budget. Extensive coverage has been given to the policy choices implicit in that budget, including for example far-reaching health care reforms. But while a budget may implicitly assume the enactment of certain policies, the budget is really just a set of fiscal targets for other congressional committees to meet.

Thus if we want to really understand the Ryan proposal, we need to examine its broader fiscal contours: its targets for spending, tax revenues, deficits and debt, relative to current law and relative to President Obama’s submitted budget. These comparisons can be made most thoroughly over the next ten years when we have the greatest level of analytical detail about each framework.

This analysis shortchanges the long-term fiscal improvements envisioned under the Ryan framework, which compound enormously over time as CBO’s long-term analysis shows. By 2050 under the Ryan plan public debt would be just 10% of GDP, in comparison with 344% of GDP under CBO’s most realistic long-term baseline. But even just a ten-year view nevertheless illuminates the fundamentally different approaches to fiscal management.

Spending: Over the last couple of years federal spending as a percentage of the economy (GDP) has soared above historic norms. Much of the new spending is related to the recent recession. Some happened automatically as certain categories of spending (e.g., Social Security disability claims) always rise whenever the economy is weak. But much of the spending increase was undertaken deliberately, for example via the TARP and 2009 stimulus laws, in an effort to bolster economic growth.

As the graph below shows, under current law future federal spending would remain permanently elevated from historic levels. This is due largely to projected cost growth in areas such as Social Security, Medicare, the new federal health care entitlement and interest on the federal debt. Instead of ameliorating this sustained spending growth, the Obama Administration budget would add somewhat to them. The Ryan budget would instead return spending levels to historic norms within the ten-year budget window.

Taxes: Tax collections are now depressed due to the recent economic downturn. Without legislative action, taxpayer burdens would soar when current income tax rates expire after 2012 and greater numbers of Americans are also caught up in the Alternative Minimum Tax. President Obama’s budget would prevent these sudden tax increases for some but not all Americans. Overall tax burdens would still rise and remain permanently at levels only previously experienced briefly during the height of the 1990s dot-com bubble. Under the Ryan budget, tax collections would recover with the economy but after that would continue to remain near historic norms.

Deficits: Annual federal deficits surged to historic highs during the recent recession. Again, some of this increase happened automatically as tax collections were depressed and federal benefit claims increased. But some of the deficit increase was by design, through the enactment of deficit-financed stimulus measures.

CBO projects that these annual deficits will subside somewhat as higher tax burdens kick in under current law. The President’s budget would eliminate some of these tax increases while leaving spending growth unrestrained, resulting in higher deficits. The spending constraints in the Ryan plan would result in deficits significantly lower than under current law, and much lower than under the President’s budget.

Public debt: The end result is that under the Ryan budget, the growth of federal debt would be stabilized and begin to decline as a fraction of the overall economy. Under current law, and even more so under the President’s budget, debt would continue to rise, ultimately heading toward a situation where it exceeds our total economic output.

This is perhaps the clearest distinction between the Ryan budget and the alternatives now before us. The Ryan budget would turn around the deficit situation so that our current debt would become gradually more affordable over time. Under the President’s approach, the debt would ultimately exceed our ability to finance it.

Thus at present this is not a debate about how to fix the fiscal situation on behalf of our kids and grandkids. It’s still a debate about whether we will do it. If the Ryan plan is taken off the table, the answer to that question remains “no” until someone produces a credible legislative alternative.

Left of center, it is an article of faith that the public would prefer to see taxes raised than to countenance the cost containment measures in the Ryan plan, especially in politically sensitive health care entitlements. The behavior of political actors belies this thesis. Chairman Ryan and his compatriots on the House Budget Committee have been willing to stand up and to defend their plan for fiscal correction. Across the aisle, meanwhile, both the White House and Congressional Democrats are less willing to be publicly associated with a tax-increase alternative than with even the ultimate fiscal collapse that is publicly projected under the President’s budget framework. Only the conservatives seem to be sufficiently confident of public support to present their substantive case in detail.

For whatever reason, we do not yet face a choice between two alternative visions for fiscal repair. Legislatively, we have just one: the Ryan plan. Opportunistic criticism of the plan thus serves little useful purpose unless it leads to the enactment of a better one.

Charles Blahous is a research fellow with the Hoover Institution and the author of Social Security: The Unfinished Work.


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