Friday, August 17, 2012

According To The CBO Review Of Ryan's Budget It Does Not Reduce Budget Deficits

Paul Krugman cuts through a lot of detail in the Ryan budget and uses the CBO projections to comment on the Ryan plan.  Its important to look at the Ryan plan in two parts.  In the first 10 years no changes are made to Medicare.  That is for political reasons.  Those who are currently on Medicare will not be affected by the plan.  A lot of pundits are reporting that the Ryan plan does not alter Medicare based upon what happens in the first 10 years.  After the first 10 years Medicare changes to a voucher plan.  Senior citizens will receive vouchers that they  can use to purchase insurance from private companies.  The very efficient government payment system is replaced by a large number of insurance companies.  The GOP argues that competition between insurance companies will drive costs down.  That is what we have today, and competition between insurance companies has not reduced costs.  Private insurance company premiums have risen faster than the CPI.  Moreover, since the value of the government provided vouchers increases with the CPI, senior citizens will have to pay, out of pocket, for premium increases that are greater than the general rate of inflation (CPI).  Ryan argues that his plan is like the plan that members of Congress have today.  They receive vouchers that can be used to purchase private insurance.  Their vouchers increase in value at the rate of healthcare price inflation and not the CPI.

The Ryan plan also repeals Obama's healthcare plan.  The ACA has several features in it that are designed to reduce healthcare price inflation.  The Ryan plan has no specific features in it that will affect price inflation. The cost of healthcare price inflation is shifted away from government to senior citizens.  Insurance companies love the Ryan plan because it expands their market enormously and healthcare providers have no incentives beyond what they have today to reduce provider price increases.

The Ryan plan changed Medicaid dramatically.  The government will give block grants to the states and they can do as they wish with Medicaid.  Many states will cut back on Medicaid.

The bottom line on the Ryan budget, however, is that it does not reduce budget deficits.  It cuts taxes for the wealthy, and for corporations, but the CBO concluded that the plan does not specify actions that will compensate for the tax reductions.  The Ryan plan cuts discretionary spending to 3.5% of GDP  in the out years.  Discretionary spending today around 8% of GDP, and the defense budget is at 4% of GDP.  The CBO concluded that there is no path specified in the plan that  can achieve those results.

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