I posted initial reactions to the Ryan plan a few days ago. To recap, I said it was a good starting point for discussions, although I have problems with the lack of defense cuts (they need to be significant in my opinion), the lack of attention to eliminating tax expenditures (I would eliminate ALL tax expenditures benefiting corporations and the top half of the income distribution and would not turn to a discussion of rate cuts until debt was reduced to levels comparable to 2000 levels), and the rosy economic assumptions.
I have problems with Bowles/Simpson as well. But I would sign on to the core message of the letter recently written by ten former chairs of the Council of Economic Advisors regarding Bowles/Simpson: “It is tempting to act as if the long-run budget imbalance could be fixed by just cutting wasteful government spending or raising taxes on the wealthy. But the facts belie such easy answers.”
Grover stirred the hornet’s nest over at Lawyers, Guns and Money by reporting the core message of my post. Thankfully, the responses have helped clarify what an alternative plan would look like. In Scott Lemieux’s words: “Here’s my alternative plan — let the Bush tax cuts expire; already, we’re ahead of the Ryan plan.”
Here is my plan- I AM NOT CUTTING TAXES BY TRILLIONS FOR RICH PEOPLE, AND THE TAX CUTS WE JUST EXTENDED WILL EXPIRE. Voila! We are automatically better off than we would be under the GOP Ryan plan. This GOP/RYAN plan is so ridiculous, so transparently absurd and based on flawed assumptions, magical thinking, and cheap parlor tricks that if you are really concerned about the debt and the status of our fiscal well-being, DOING NOTHING is a better option by light years.
See update below on placing Cole in context.
So, just to get things straight: to return to a course of fiscal balance, all we need to do is eliminate the Bush tax cuts?
Let’s check the math (2011-2012). The OMB projection of deficits=$2.75 trillion. The cost of extending the Bush tax cuts = $544.3 billion. Two-year deficit without extension of Bush tax cuts=$2.2 trillion
Now, I understand that these are extraordinary years and the deficit is projected to decrease after 2012. But then it is projected to explode as a product of entitlements and interest payments on the debt. Clearly, doing nothing is not an option.
Given that a few of the LG&M consumers read my post and went on point out that Ryan’s plan does not do what I think is needed (a point I led with), let me pose a set of questions and answers.
Q1. What is the problem you are trying to solve?
A1. The growing debt burden being faced by our nation. Between the end of World War II and the end of the Carter presidency, we reduced debt from around 121% of GDP to 33% of GDP. At that point, a combination of tax cuts and expanded spending (thank you Reagan revolution) almost tripled our debt in three decades. As entitlement spending increases in the future, we can expect the debt to continue to grow to an unsustainable level. At some point, debt markets will no longer support our debt. Don’t believe me, ask the OMB, the CBO, and the former chairs of the CEA.
Q2. Do you really believe that we can address this problem through tax cuts? Are you going to rely on the Laffer Curve to solve our national problems?
A2. No, quite the opposite (you can see my critique of Reaganomics here). In my perfect world we would eliminate all of the tax expenditures that deliver benefits to corporations and the top half of the income distribution (this does not include the Earned Income Tax Credit but does include sacred cows like the mortgage interest deduction, employer provided health care, and literally all corporate welfare delivered via the tax system). This would significantly raise the stream of revenues at current rates. If the increase is insufficient, a return to Clinton era rates seems quite reasonable as a first response.
In my perfect world, I would also press for a carbon tax, devoting the revenues to support existing entitlement programs while addressing long-term problems of climate change and dependence on foreign oil (you can see my earlier post on this issue here).
Q3. But shouldn’t we cut defense?
A3. Absolutely. With annual defense spending in excess of $700 billion, it is essential. I don’t know what the correct number is, but I could imagine a 50% cut as a reasonable target.
Q3a. But we are currently involved in two wars and something close to a war in Libya. We have international security commitments that must be honored.
A3a. Yes, as a result, we should begin a withdrawal from Iraq and Afghanistan before sundown and be out by the end of 2011. We should begin systematically closing bases across the globe, beginning in Europe. These bases are largely an inheritance of the Cold War.
Q4. What about corporate welfare?
A4. Eliminate it in all of its forms. Public Citizen claims that we spend some $125 billion a year on corporate welfare. My guess is that this is a gross under-estimate, particularly when you consider tax expenditures.
Q5. Do we have to reduce the growth rate of Social Security?
A5. Yes. I would cut benefits for high earners through progressive indexing and increase revenues into the system by raising the earning base or income cap well above current levels. I would not cut expenditures by increasing the retirement age given that life expectancy varies by race nor would I change the indexing formula for low wage earners who are far less likely to have personal savings.
Q6. Do we have to reduce the growth rate in Medicare?
A6. Absolutely. I am not an expert in health policy so you will have to excuse the lack of a detailed program. But a first step to reducing growth in Medicare is to apply a means test to make certain that the cuts that occur fall on wealthier recipients. Obviously, you would need to phase in the changes so that individuals could adjust their savings patterns.
Q7. What about Medicaid?
A7. If we address Medicaid, it should be as a last resort. Current plans to block grant Medicaid seem to be primarily an exercise in cost-shifting to the states. There is evidence that Medicaid is relatively efficient when compared with alternatives. But more to the point, I do not think that means-tested programs should be targeted for reform when the largest beneficiaries of the welfare state are found in the top half (and in the case of tax expenditures, the top quintile of the income distribution).
Q8. But Paul Ryan’s Plan for Prosperity does not do all the things you think must be done! In fact, in many cases it is silent on some of these issues or proposes to do the opposite!
A8. Yes, this is why the Ryan Plan–like the Bowles/Simpson plan–should be used as a starting point for a serious debate rather than being viewed as a take-it-or-leave-it proposition. In the areas where these plans fall short, we should search for serious alternatives. By the way, I would have the same response to a Pelosi-Reid plan.
Q9. Do you think any of this will happen?
A9. In the long run, we are going to have to make significant changes. If we start earlier, we can make changes through a process that is informed by data, reasonable economic assumptions, and sober deliberations. Anyone who believes that the solution can be found in cutting spending OR raising revenues may have to concede that both will be necessary and neither will be pleasant or politically palatable. It would be best if they came to this realization before debt markets collapse and crisis forces rash decisions that we might not have made under better circumstances.
The bottom line: there are good reasons to challenge the recommendations of the Ryan Plan and Bowles/Simpson. There are good reasons to challenge the underlying assumptions. These are weighty issues that demand serious deliberation and engagement. There are no simple answers.
Update: John Cole reports in the comments that I have mischaracterized his position and that this quote should be understood in the broader context of a debate he has been having with Sullivan. When I read the quote, I took it in the context in which it was being deployed on LG&M. Mea Culpa. Readers interested in placing Mr. Cole’s situating Mr. Cole’s quote in the context of the larger debate should go to his blog, Balloon Juice.