Tag: paul ryan

Bending the Cost Curve: Ryan’s Roadmap Would Succeed Where ObamaCare Fails

From my oped in today’s Investors Business Daily:

Rep. Paul Ryan’s (R-Wis.) “Roadmap for America’s Future” proposes even tighter limits on Medicare’s growth, leading columnist Bruce Bartlett to opine, “the Medicare actuaries have shown the absurdity of the Ryan plan by denying that Medicare cuts already enacted into law are even worthy of projecting into the future.”

On the contrary, experience and public choice theory suggest that the Ryan plan has a better shot at reducing future Medicare outlays than past efforts, because the Roadmap would change the lobbying game that fuels Medicare’s growth.

For more on Ryan’s Roadmap, click here.  For more on Medicare, read David Hyman’s Medicare Meets Mephistopheles.  For more on public choice economics, click here.

Economics 101

Today POLITICO Arena asks:

In his speech in Ohio yesterday, did President Obama draw a stark enough contrast with House Minority Leader John Boehner, whom he attacked by name eight times, to help his party in November?

My response:

The contrast the president drew was clear enough. His problem is that the people aren’t buying what he’s selling – and for good reason. His ideas, far from being new, have been tried countless times, both here and abroad. They don’t work. And they undermine basic American principles about individual liberty and free choice.

So when Obama says that Boehner and the Republicans have no new ideas, he’s partly right. (They have new ideas about how to address unsustainable entitlement programs – ask Rep. Paul Ryan.) At least in their rhetoric – their behavior in office, alas, is too often another matter – Republicans stand in substantial part for old ideas that work and conform more closely to the nation’s first principles, starting with lower taxes, less regulation, and less government management of the economy. That contrasts sharply with Obama’s countless “programs” to “stimulate” the economy, his targeted tax and spending schemes to create “green jobs,” to sell cars, and on and on. Listening to him, you’d think the economy would collapse were it not for Washington’s management of it.

The truth is quite the opposite, of course, as Americans are coming increasingly to appreciate. Economies prosper when entrepreneurs with ideas and capital are able to employ both for profit. But they won’t do that when conditions are uncertain, as they are when government meddles recklessly and uncertainly at every turn. How often have we heard entrepreneurs in recent months saying that they’d like to hire more people, but with the uncertainty of ObamaCare and so much else coming out of Washington, they’re sitting on their capital? And who can blame them?

So the answer is, get out of their way and let them do what they do best. But that’s not the Obama way. This “community organizer” – who organized people to demand more from government – seems to have no grasp of how economies work, beyond the failed command-and-control model. Even Fidel Castro has just now admitted that a government run economy doesn’t work. So either Obama smells the coffee coming now even from Cuba, or elections will take care of the matter.

Paul Ryan’s Roadmap, and the Difference between Costs and Spending

Rep. Paul Ryan (R-WI) ably defends his “Roadmap for America’s Future” in today’s Washington Post.  He doesn’t mention Paul Krugman’s attacks thereon, nor should he.  (To read why, consult The Atlantic’s Megan McArdle and Ted Gayer of the Tax Policy Center.)

I haven’t officially weighed in on the health-care aspects of the Roadmap, but hope to do so in the near future.  For the moment, I’ll use Ryan’s oped to stress a distinction that is crucial to thinking clearly about health care costs.

Ryan writes of the dangers of an un-reformed Medicare program (emphasis added):

Under an ever-expansive, all-consuming central government, costs will be contained with Washington’s heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors’ care.

While those forms of government rationing may reduce spending, that’s not the same as reducing costs.  On the contrary, those rationing measures may increase health care costs.

Suppose Medicare set its prices for hip and knee replacements so low that no medical-device manufacturer would provide the hardware and no surgeon would perform the procedures.  Medicare spending on hip and knee replacements would fall.  But costs may rise: more seniors would be walking around — or not walking around — in severe pain.  Pain and reduced mobility are costs, even if they don’t show up in the federal budget or household budgets.  (Indeed, those costs would be so severe that overall Medicare spending could rise as seniors bought more wheelchairs, sought treatment for pressure sores, etc.).  This is the main reason conservatives criticize Canada’s Medicare system and the British National Health Service: reducing health care spending often increases costs.

I therefore request universal compliance with Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.

‘YouCut’ Spending by 0.017%

House Republicans unveiled a bold strategy to cut 0.017 percent from the $3.7 trillion federal budget this week. Republican Whip Eric Cantor unveiled the GOP’s “YouCut” website, which includes five possible spending cuts for citizens to vote on. Mr. Cantor promised to take the favored cut to the House floor next week for members to consider.

The basic idea of YouCut is a good one — getting citizens actively involved in solving the government’s giant deficit problem and focusing congressional attention on cutting the bloated budget.

But the GOP leadership make themselves look silly by offering such small cuts. The suggested cuts on the new website average just $638 million in annual savings, which is just 0.017 percent of total federal spending. Put another way, it is just $1 of cuts for every $5,800 of federal spending. The average YouCut savings idea is just 0.04 percent of this year’s federal deficit of $1.6 trillion. So we would need 2,500 cuts of this size to balance the budget.

It’s a mystery why the Republican leadership can’t offer more than tiny spending reforms. They’ve got lots of sharp staffers who know how wasteful many large programs are and understand the need to terminate whole agencies. It’s true that YouCut will offer new cuts every week, but so far the cuts are very timid.

The second-largest YouCut idea this week is to refocus “community development” spending on those cities that are the most needy. But the whole idea of the federal government spending money on local projects such as parking lots is both economically absurd and an obvious violation of the Tenth Amendment.

Come on Republicans, you can do better. Terminating all of HUD’s $13 billion in annual community development spending, for example, ought to be an easy vote for any member claiming to be a fiscal conservative.  

Some Republicans do understand the nation’s fiscal emergency and the need for bold action. Paul Ryan, for example, has his excellent roadmap proposal. But thus far with YouCut, we have the Empire State Building engulfed in flames and Mr. Cantor sending in a toddler with a squirt gun to solve the problem.

Still, the House Republicans have created a tool that citizens can use to get the message across about the need for much larger reforms. The YouCut website encourages people to send in their own budget-cutting ideas. I’ll be sending some in, and folks, feel free to borrow ideas from the “Spending Cut” tables on www.downsizinggovernment.org.  

I don’t think conservative voters, tea party activists, and other citizens concerned about the nation’s economic future want to cut 0.017 percent from the budget. I think they want to cut 10 percent, 20 percent, 30 percent, or more. So send your suggestions into YouCut, and we will see whether the GOP puts away the squirt guns and pulls out the fire hoses.

The Four Congressmen of the Cotton Subsidy Apocalypse?

Yet another show of that rare commodity, bipartisan efforts to reduce the size of government today. Four members of the House—two Republican and two Democrat—have sent a letter to President Obama, calling on him to reverse the insane policy of bribing Brazilian farmers with subsidies in an attempt to correct, in accordance with the perverse two-wrongs-make-a-right school of logic, for  illegal U.S. subsidies. (There were other questionable parts of the deal with Brazil).

Barney Frank (D, MA), Ron Kind (D, WI), Paul Ryan (R, WI) and Jeff Flake (R, AZ) make compelling arguments for finding a better and more permanent  solution to the dispute than the current (dodgy) deal with Brazil, including arguments about fiscal responsibility, the adverse effects of distorting markets in this way, and the implications for the U.S. economy of continuing to operate the cotton program in its current form.

They also cleverly allude to President Obama’s emphasis on enforcement in his trade policy, pointing out that enforcement runs two ways:

Should we fail to effectively reform [the cotton] program now, American businesses and workers wil pay the price because we refused to write a law that complies with our international obligations. We cannot expect our trading partners to play by the rules if we are not willing to do the same. [emphasis added]

The press release from Rep. Flake’s office contains some great quotes, too. Flake, for example, says, “This proposal takes our federal farm subsidy policy from the impractical to the absurd.” 

But I’ll give the last word to Rep. Frank, who has this gem to offer:

[T]he Obama administration apparently feels compelled to preserve our right to subsidize American cotton farmers by extending that subsidy to Brazilian cotton farmers.  People looking for an illustration of the meaning of the phrase, ‘from bad to worse,’ need look no further.

Wyden-Gregg Tax Plan

Senators Ron Wyden and Judd Gregg recently introduced the “Bipartisan Tax Fairness and Simplification Act.” There is a lot of interest in this plan, so I’ve put together some “pros” and “cons” from my small-government, flat-tax perspective.

INDIVIDUAL TAX CHANGES - PRO

  • Scraps the alternative minimum tax.
  • Cuts the number of rates from six to three.
  • Reduces the tax subsidy for municipal bonds.
  • Creates Lifetime Savings Accounts (LSAs)–like Roths IRAs except better because all withdrawals are tax-free. This is a very important reform, and by the way, one that Canada has enacted already. See here.

INDIVIDUAL TAX CHANGES - CON

  • Keeps the top tax rate at 35 percent, which is quite a bit higher than the 28 percent acheived by the Tax Reform Act of 1986.
  • Increases the top capital gains and dividend tax rate from 15 percent to 23 percent.
  • Triples the standard deduction, which would likely take more people at the bottom end off the income tax rolls. That would simplify the code, but at the expense of increasing the demand for big government.
  • Repeals the exclusion on income earned abroad by U.S. citizens, which would likely damage the operations of U.S. multinational companies.
  • Retains all the most distortionary tax breaks under the individual code, including the mortgage interest deduction.

CORPORATE TAX CHANGES - PRO

  • Cuts the top corporate tax rate to 24 percent. This is a crucial reform.
  • Cuts corporate welfare spending, which Wyden-Gregg notes is about $90 billion a year, based on a Cato Institute analysis.

CORPORATE TAX CHANGES - CON

  • Subjects the foreign income of U.S. multinational companies to immediate taxation. That tax approach is not followed by any major advanced economy, and it would put U.S. firms at a disadvantage in global markets.
  • Broadens the business tax base in other ways that move in the wrong direction, such as repealing the expensing of energy exploration and development costs. Note that some of the plan’s corporate base broadening ideas make sense–such as reducing the value of interest deductions–but only if the revenue raised is used to reduce the statutory rate (which it does seem to be here).

Overall, I would take the Wyden-Gregg plan over the current code. But Wyden-Gregg is a very limited reform compared to the Paul Ryan two-rate individual tax or the recent National Academy of Sciences tax plan, which features individual rates of 10 and 25 percent and a corporate rate of 25 percent.

Wyden-Gregg is a start, but it hardly simplifies the tax code at all and it doesn’t reduce individual rates. However, it does cut the corporate rate and it includes LSAs, which would revolutionize personal savings. So we can take heart that supply side tax policies still garner some support on Capitol Hill.

For more on tax reform, see here.

A Value-Added Tax Is Not the Answer…Unless the Question Is How to Finance Bigger Government

While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.

Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.

I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.

But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.

Our side (broadly speaking) wants to solve the budgetary situation by restraining the growth of government. One proposed solution is Congressman Paul Ryan’s Roadmap Plan, which would reform entitlements and curtail other programs so that the long-term burden of federal spending is reduced to less than 20 percent of GDP. Since long-term federal tax revenues under current law - even if the 2001 and 2003 tax cuts are made permanent - are expected to be about 19 percent of GDP, this solves the budet problem  (the tax reform component of the Roadmap includes a VAT, which is a poison pill in an otherwise excellent plan, but let’s set that aside for another day).

The left, by contrast, generally wants to let federal spending consume ever-larger shares of economic output, and they believe that increasing the tax burden is the right way of keeping the deficit from getting too large. No statist has put forth a detailed plan to match Rep. Ryan, but several high-ranking Democrats have made no secret about their desire for a VAT (see here, here, and here). And everyone agrees that a VAT is capable of extracting a lot of money from the productive sector of the economy.

These two visions are fundamentally incompatible, which helps to explain why there is a standoff. The bad guys do not want to control the size of government and the good guys do not want to raise taxes. But now we have to add one more piece to the puzzle. While gridlock normally is a good result, inaction to some degree favors the other side because entitlement programs automatically expand. The helps to explain why Tyler (with reluctance) thinks that it may be best to acquiesce to a VAT now rather than to wait for a fiscal crisis.

Now, let’s explain why Tyler is wrong. First, it is far from clear that surrendering to a VAT now will result in better (less worse) policy than what will happen during a crisis. It certainly is true that some past crises have led to terrible policy, such as the failed policies of Hoover and Roosevelt in the 1930s or the more recent Bush-Paulson-Obama-Geithner TARP debacle. But at other points in time, a crisis atmosphere has paved the way for better policy, with Reagan’s presidency being the most obvious example.

The wait-for-a-crisis strategy clearly is a bit of a gamble, but even if we lose, we get a VAT in the future rather than a VAT today. So what’s the downside? Tyler and others might say that the future legislation in the midst of a crisis could be a vehicle for other bad provisions, but he offers no evidence for this proposition. And it may be the case that the other side would be forced to add good provisions instead. Moreover, the lack of a VAT in the period between today and the future crisis might help lead to some much-needed spending restraint.

What about Tyler’s argument that the good guys could extract some concessions from the other side by putting a VAT on the table. This is horribly naive. Even though George Mason University is less than 20 miles from Washington, and even though Tyler is a renassaince man with many talents, he does not understand how Washington really works.

Imagine there is a budget summit where politicians from both sides get together to work on this supposed deal. Here are the inevitable ground rules - and the consequences they will produce:

1. The deal will be 50 percent spending cuts and 50 percent tax increases, but the supposed spending “cuts” will be nothing more than reductions in already-legislated increases. The tax increases, by contrast, will be on top of all the additional revenue that is already exepected under current law (not a trivial matter since receipts will be $1.5 trillion higher in 2015 than they are today according to OMB). For proponents of limited government, using the “current services baseline” as a benchmark in budget negotiations is like playing a five-minute basketball game after spotting the other team a 20-point lead.

2. All spending and revenue decisions will be examined through the prism of CBO income distribution tables, and the left will successfully insist that nothing is done to make the tax code less progressive. But since a VAT is a proportional tax, the only way of preserving overall progressivity is to raise tax rates on those wicked and evil rich people and/or to massively increase “refundable” tax credits (what normal people call income redistribution). Any proposal to lower income tax rates or eliminate the corporate income tax, as Tyler envisions, would be laughed out of the room (though Democrats will offer a fig leaf or two in order to seduce a sufficient number of gullible Republicans into supporting a terrible agreement, and that might include a cosmetic change to the corporate tax regime).

3. Many of the supposed spending cuts, for all intents and purposes, will be back-door tax increases on saving and investment. More specifically, a big chunk of the supposed spending cut portion of a budget deal will be from means-testing entitlement programs. This sounds good. After all, who wants to send a Social Security check to Bill Gates when he retires? But consider how such a system actually will work. The government will say that people with income (and/or assets) above a certain level are ineligible for some or all of the benefits available to less-fortunate retirees. From an economic persepective, this is very much akin to a higher tax rate on people who save and invest during their working years. And since means testing would only generate substantial budgetary savings if it applied to millions of regular people in addition to Bill Gates, we would wind up with a system that created big penalties on middle-class families who were dumb enough to save and invest.

I’ve already pontificated enough for one blog post, so let me summarize by stating that Tyler’s approach, while not unreasonable, is about how to lose gracefully. Even if his strategy works perfectly, the result is bigger government. I’d much rather fight. If you want some inspiration for the battle, watch this video. If you haven’t had enough of me already, here’s my video explaining why the VAT is a horrible idea.

Update: Tyler has emailed to object to how his position is being characterized. He writes, “I am asking anti-VAT forces to strengthen their argument and am very clearly agnostic and certainly not calling for a VAT today.” Everyone I’ve spoken with has interpreted his post as pro-VAT, and that’s certainly how I read it, but I want to add this addendum to my post so people can see Tyler’s response in case I’m not being fair.