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Paul Ryan Budget Gets Mixed Review From Congressional Budget Office

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WASHINGTON -- The Congressional Budget Office on Tuesday laid out the pros and cons of Rep. Paul Ryan’s (R-Wis.) budget proposal in clinical, detached terms. Its analysis: The plan would bring the nation’s debt under control and significantly reduce the threat of sudden economic crisis and gradual decline, but would also increase health care costs for the poor and elderly in the future.

The CBO made two caveats to its analysis of the burdens being placed on society's most vulnerable in Ryan’s plan. First, the report said that the way the House Budget Committee chairman’s plan was structured, U.S. economic growth and national incomes “would probably be higher in the long term.” Second, it said that Ryan’s restructuring of incentives for health care purchasing through an overhaul of the Medicare system could lead to “restraining health care costs and insurance premiums.”

But the CBO made no bones of the fact that seniors under Medicare and the disadvantaged under Medicaid would have to absorb more of their health care costs under Ryan’s plan than they do in the current system. The CBO analysis allowed that Ryan’s plan would give smaller benefits to the top 8 percent of earners among Medicare recipients and distribute that money to poorer participants, partially through setting aside accounts to pay for up front costs.

The 29-page report was not a “score” of actual legislative language, since Ryan’s 73-page “Chairman’s Mark” was not a bill but rather an outline of priorities, in the same way that the president’s budget is. Ryan requested the analysis by CBO director Doug Elmendorf.

It laid bare one of the crucial quandaries that has lain at the heart of Ryan's approach to solving health care since he first proposed his "Road Map" a few years ago: He wants to bring down costs by placing purchasing power back in the hands of individuals, but projections of what those individuals can purchase in the context of current cost curve models makes it look like he is throwing them to the wolves.

Few can say with certainty whether he would or wouldn't be in the long run in a debate where assumptions about the future boil down to fundamentally different opinions about the efficacy of government and the impact of behavior science on markets.

To the matter of Ryan's main goal -- deficit and debt reduction -- the CBO report laid out in detail the “several negative economic consequences” for the U.S. of the “persistent deficits and continually mounting debt” that it is forecasting under current economic conditions.

Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that 'crowding out' of investment would lead to lower output and incomes than would otherwise be the case. In addition, if the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates could discourage work and saving and further reduce output; alternatively, the growing interest payments might force reductions in spending on government programs. Moreover, rising debt would increasingly restrict the ability of policymakers to use fiscal policy to respond to unexpected challenges, such as economic downturns or international crises.

Beyond those gradual consequences, a growing federal debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors’ confidence faltered, giving legislators warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. Indeed, because interest rates on Treasury securities are unusually low today, such a crisis does not appear imminent in the United States. But as other countries’ experiences show, investors can lose confidence abruptly, and interest rates on government debt can rise sharply and unexpectedly.

The exact point at which such a crisis might occur for the United States is unknown, in part because the ratio of federal debt to GDP is climbing into unfamiliar territory and in part because the risk of a crisis is influenced by other factors, including the government’s long-term budget outlook, its near-term borrowing needs, the amount of private saving, and foreign investors’ willingness to invest in U.S. assets. Thus, there is no way to predict with any confidence whether and when such a crisis might occur.

Ryan’s changes to Medicare and Medicaid, the report states, are “the fundamental reason why CBO projects that deficits and debt will be much smaller” under his plan than under the current fiscal path the U.S. is on.

“The proposal would change the nature of the entitlement under Medicare and Medicaid. Current law prescribes the health care benefits to which people are entitled, and the federal government pays whatever is needed to honor those entitlements. The proposal changes that entitlement to a fixed federal contribution: For Medicare, that contribution would be in the form of per capita payments; for Medicaid, the federal government would provide annual block grants to states that would grow from year to year on the basis of changes in prices and population. Those features of the proposal make future federal health care spending easier to model and would make such spending less uncertain.”

The current outlook, the CBO states, is bad or worse, depending on a number of variables, such as whether the 2001 and 2003 Bush tax cuts are extended permanently, whether carve outs from the Alternative Minimum Tax are continued, and whether physicians continue to receive extra money from Congress to help them avoid much greater payment rates for treating Medicare recipients.

If all three of those things happen, as expected, then the current debt held by the public –- which is not even the entire national debt because it excludes the $5 trillion owed to trust funds for Social Security and other government accounts –- would hit 95 percent of the economy by 2022. It is currently at 62 percent of Gross Domestic Product (GDP). By 2030, the debt held by the public would be 146 percent of GDP. Ten years after that, the debt would be 233 percent of GDP.

Ryan’s plan –- though it would not achieve a balanced budget year to year until 2040 and would allow the debt to rise to 70 percent of GDP by 2022 –- would bring the debt down to 64 percent, just above its current level, by 2030, down to 48 percent by 2040, and then dramatically down to 10 percent by 2050.

Ryan believes tough choices have to be made now rather than under duress in the midst of a crisis. But he was roundly criticized from the left Tuesday for not raising taxes; he would lower the top income and corporate rates from 35 to 25 percent. The White House said the plan “fails” the test of “fairness and shared sacrifice.” Ryan’s counterpart on the Budget Committee, Rep. Chris Van Hollen (D-Md.), called it “lopsided.”

The Wisconsin Republican believes higher taxes “slows down economic growth,” as he said on CNBC Tuesday.

But the CBO was clear about what happens under the Ryan plan for seniors, starting in 2022: “Under the proposal, most elderly people would pay more for their health care than they would pay under the current Medicare system.”

“A typical beneficiary would spend more for health care under the [Ryan] proposal than under CBO’s long-term scenarios for several reasons. First, private plans would cost more than traditional Medicare because of the net effect of differences in payment rates for providers, administrative costs, and utilization of health care services,” the report says. “Second, the government’s contribution would grow more slowly than health care costs, leaving more for beneficiaries to pay.”

Those who are 65 or older in 2022 would remain in the current Medicare system, though Ryan's plan would increase the eligibility age to 67 by 2033.

As for Medicaid recipients, state governments would likely be forced to reduce the size of their programs.

“If states reduced spending for their Medicaid programs, there would be a number of potential implications for both providers and beneficiaries. Given that payment rates for providers under Medicaid are already generally lower than they are under Medicare and private insurance, if states lowered payment rates even further, providers might be less willing to treat Medicaid enrollees. As a result, Medicaid enrollees could face more limited access to care. If states reduced benefits or eligibility levels, beneficiaries could face higher out-of-pocket costs, and providers could face more uncompensated care as beneficiaries lost coverage for certain benefits or lost coverage altogether."

The report provides two modicums of silver lining to cushion the blow of its analysis of the impact of Ryan’s plan on seniors and poor Americans. First, it says Ryan’s plan will boost the economy and increase earnings for American workers.

Ryan came under fire Tuesday for citing in his proposal a study by the conservative Heritage Foundation that predicted his plan would net one million new private sector jobs next year, an average of $1,000 per year in higher incomes for the average family, and would bring unemployment down to four percent by 2015.

The Heritage projections were rejected by numerous economists. Even Douglas Holtz-Eakin, a former economic adviser to John McCain’s presidential campaign who consulted with Ryan on the budget proposal, told The Huffington Post that the Heritage study was “implausibly optimistic.”

But Holtz-Eakin, now the president of the American Action Forum, said the Heritage study should not taint the budget numbers in Ryan’s plan and the impact of his proposal on the nation’s finances. Further, he pointed to a section of the CBO report that predicted a far more modest version of the economic growth described in the Heritage Study.

“To the extent that marginal tax rates on labor and capital income would be lower as a result, future output and income would be greater in the long term, all else being equal. Moreover, because the proposal would reduce federal debt relative to the extended-baseline scenario, less private saving would be absorbed by federal borrowing -- which would also tend to boost future output and income. Therefore, GDP and national income would probably be higher in the long term under the proposal than under the extended-baseline scenario. Compared with the alternative fiscal scenario, the proposal would put total revenues at roughly the same share of GDP, but it would lower federal debt by a huge amount. Therefore, in the long term, GDP and national income would be higher under the proposal than under the alternative fiscal scenario.”

The second silver lining in the CBO report was that Ryan’s restructuring of Medicare from a defined-benefit plan to a defined-contribution plan could bring down health care costs.

“Future developments under the proposal might be quite different from those under CBO’s long-term scenarios. Private insurers would have flexibility -- to limit benefits, change co-payment arrangements, manage utilization, and control provider networks -- that does not exist in traditional Medicare, and such steps could serve as alternatives to limiting payments to providers in restraining health care costs and insurance premiums. But the significant increase in payments by Medicare beneficiaries under the proposal might also affect the quality of care that they would obtain. For example, beneficiaries’ greater cost-sensitivity could result in a slower introduction or less frequent use of new, costly, but possibly beneficial, technologies and techniques than would occur under current law. Instead, technological innovation might focus increasingly on cost-saving rather than cost-increasing technologies.”

If nothing is proposed or done, the CBO report said, health care costs under the current system are set to create scenarios that are “difficult or impossible to sustain.”

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