Grasping Reality For Real

| Wed Apr. 6, 2011 12:16 PM EDT

Ezra Klein makes an important but wonky point today about Paul Ryan's plan to cap Medicare costs: instead of capping growth at GDP + 1%, it caps growth at the rate of inflation:

Here’s the catch: The way GDP gets calculated includes inflation. So think of GDP+1% as the rate of inflation plus the rate of productivity growth plus one percentage point. With me so far?

....So let’s say that in 2024, inflation was 2 percent, productivity growth was 2 percent, and health-care costs grew at 6 percent. Under Ryan-Rivlin, Medicare and Medicaid would grow at 5 percent — a bit less than health-care costs in general, but not that much less. Under Ryan, Medicare and Medicaid would grow at 2 percent — beneficiaries would have to make up the difference.

This can all seem like so much gobbledygook, so here’s the bottom line: it’s totally unrealistic — and I say that as a cost control optimist. Look at the other health-care plans that have been proposed: none of them suggest they can get the growth of Medicare or Medicaid down to inflation*. But that’s where a lot of Ryan’s savings come from. Which is to say, either those savings aren’t real or we’re assuming America is going to abandon seniors and the disabled in a way that has no recent precedent.

This is all in service of Ryan's real goal. His document isn't primarily concerned with the federal deficit or with Medicare reform. The key goal in his budget is to reduce federal spending to 18% of GDP. Everything else is simply shoehorned in to meet that goal.

But it's an absurd goal. Over the past 30 years, federal spending has averaged about 21% of GDP. And since America is aging, even if we control costs carefully we're going to need to spend more money on the elderly. This isn't because we're being wildly generous toward them, it's simply because there are going to be more of them. So any realistic budget needs to assume that spending will slowly increase over time, ending up at maybe 25% of GDP a couple of decades from now. Ryan's 18% goal is just pie in the sky pandering to his tea party base.

Matt Yglesias agrees, "But I think it does set the stage in which the White House or someone in congress ought to produce a pie-in-the-sky counter budget." But why follow Ryan's pie-in-the-sky approach? Call me a crazy idealist, but why not propose something genuinely serious instead? Start with letting the Bush tax cuts expire. Add in Social Security reform that increases payroll tax revenue by about 1% of GDP and trims benefits by about 1% of GDP. Set a goal of cutting defense spending to 3% of GDP. Federalize Medicaid. Build on the reforms of ACA to rein in Medicare growth in a reasonable way starting now, a la Ryan-Rivlin. Raise additional revenue via a carbon tax and revenue positive tax reform. Agree on some genuinely bipartisan program cuts in areas like ethanol subsidies, farm support, and some of the least effective social programs. Keep PAYGO in place to restrain the growth of discretionary spending.

Something along these lines would be a genuine proposal. It takes from both left and right, it's not balanced entirely on the backs of the poor, and it deals realistically with the needs of an aging nation. And there are plenty of blueprints to pick and choose the details from. Politically it might be wiser to either stay quiet or else just throw out a Ryanesque piece of PR bait. But it would be more responsible to actually tackle the problem. If not now, when?

UPDATE: Ryan's plan caps Medicare growth at the rate of inflation, not inflation + 1% as I originally wrote. I've corrected the text.

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