The Ryan Budget Plan

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The House budget plan introduced by Rep. Paul Ryan who heads the House Budget Committee is hitting the press. The plan will not be passed by the Senate so the real value in analyzing the plan lies in understanding the GOP's vision for the country. The plan is not specific about many details but the broad outline and direction is clearly visible.

The Ryan plan reduces taxes by $4 trillion over the life of the plan. Ryan proposes many changes to tax law to reach this goal but the part that stood out to me is that it reduces taxes on unearned income (interest, dividends and capital gains) to zero. This means that the super rich who receive the greatest share of their income from interest, dividends and capital gains will be the primary beneficiaries of the tax cuts.

One might ask how taxes can be cut by $4 trillion while simultaneously reducing budget deficits. The conservative Heritage Foundation provided much of the analysis that supports the Ryan proposal. They claim that unemployment will fall to 4% by 2014 and it will continue to drop to 3% by 2018. In other words, the economy will grow dramatically, and well beyond any economy that we have had in the past. What will produce this remarkable growth? They assume that the confidence fairy will stimulate investment. Residential construction will boom and rise at a $100 billion per year rate above current CBO projections.

The Ryan plan does cut spending to contribute to the deficit reduction. It reduces non-defense discretionary spending by a factor of 3 but around 50% of the spending cuts are used to pay for the tax cuts that go primarily to those with high levels of unearned income.

The Ryan plan also proposes big changes in entitlement programs. Social Security will be privatized over time and Medicare will also transformed into a subsidized private insurance system over time. Since these changes have little impact in the near term, most of the immediate impact is in Medicaid. The federal government would provide block grants to the states and they will decide how to spend the state and federal money on Medicaid. Its not hard to imagine what will happen to Medicaid if it is left entirely to the states. We just have to look at what states have done during our current downturn. Texas and Arizona, for example, have reduced benefits dramatically. They have refused to pay for certain life saving procedures and they have let sick people die because of tax revenue shortfalls.

The Ryan plan may be viewed as a deficit exploitation plan as opposed to a deficit reduction plan since the deficit reductions in the plan are based on unrealistic forecasts of economic growth provided by the Heritage Foundation. It can be viewed, however, as a vision of the kind of America that the GOP believes in. It is a plutocratic America that effectively transforms the programs introduced in the New Deal and by Johnson's Great Society Program, into market based systems that assume efficiencies that are highly unlikely.

The big question that remains is how the Obama administration will react to the plan. Will it decide to exploit the opportunity to attack the conservative vision that has been made apparent by the Ryan plan, or will it make further attempts at compromise in order to convince swing voters of its bipartisanship?