Ryan's budget plan would destroy the middle class

Paul Ryan's budget plan would destroy the middle class
Michael Hiltzik
August 15, 2012
http://www.latimes.com/business/la-fi-hiltzik-20120815,0,1949780.column

It certainly hasn't taken long for the blue-eyed, smiling visage to be scrubbed off Paul Ryan's putative policy masterwork, a federal budget proposal that supposedly would cut the government deficit to a shadow of its former self, as if by magic.

Within hours of the Wisconsin congressman's anointing as Mitt Romney's vice-presidential running mate, the budget plan's salient features were being widely publicized: It would deliver a handsome tax cut to the richest Americans while eviscerating the programs and services the rest of the country depends on. These include healthcare services, banking and clean water regulations, road repair and education assistance.

Yet all the discussion has overlooked the real damage the Ryan budget would do to an important segment of the American public. We're not talking about the very poor and the near poor. Their lives would be made immeasurably worse, to be sure, by a budget that would shrink Medicaid and force cutbacks in food stamp, educational and law enforcement services, among so many other things. Ryan at least pays lip service to maintaining the national safety net, ineffective as his proposals to do so may be.

But the middle class would be destroyed. The Ryan budget's impact on middle-income Americans comes in many forms, some of them exceedingly disingenuous. Let's look at a few.

Start with the revenue side. Here, as in other respects, the Ryan plan is silent on specifics, beyond asserting that "the key to pro-growth tax reform is lowering tax rates while broadening the tax base."

Ryan advocates cutting the top income tax rate to 25% (from 39.6%, the pre-Bush top marginal rate scheduled to take effect Jan. 1).

The only way to do so while keeping overall tax revenues at 19% of gross domestic product, Ryan's stated goal, is to eliminate a wide range of tax breaks. On the surface, this might look palatable to a middle-class taxpayer convinced that the fat cats get all the breaks anyway. In fact, the most popular breaks save billions for the middle class.

More than 70% of the mortgage interest payments claimed as deductions ($240 billion) appear on returns filed by people in the income range of $60,000 to $200,000, according to the IRS. Many of these middle-class homeowners base their annual financial planning on tax breaks such as the mortgage deduction. Only about 1.4% of the total is claimed by taxpayers earning $1 million or more.

This is among the reasons that, as the nonpartisan Tax Policy Center recently calculated, sharply lowering marginal rates while cutting out the most popular tax breaks results in net tax cuts for the wealthy and increases for everyone else. (This is what Ryan means by "broadening the tax base" — it means he's coming for you.)

The more insidious assault on the middle class comes from program cuts. Most of the commentary on Ryan's budget has focused on his master plan for Medicare and Medicaid, both of which he would gut. But it's a mistake to think the burden would be shouldered exclusively, or even chiefly, by the poor.

Ryan would replace the existing Medicare system of guaranteed treatment (with a nominal individual premium) with one providing vouchers for service through private commercial insurance plans. By design, the vouchers wouldn't cover all costs, and because their value would rise in accordance with a standard inflation measure, not with medical inflation, the gap would widen over time.

The Kaiser Family Foundation calculated that in 2022, the out-of-pocket medical expenses of the typical 65-year-old would come to half his or her Social Security income — double the level under traditional Medicare. There are two reasons. First, private insurers would deliver benefits at a higher administrative cost, and second, the vouchers would low-ball the retirees' real costs.

As a device to reduce the growth in healthcare costs, which is the principal component in government spending going forward, this is pure sleight of hand. Costs will keep rising, and at a faster rate than before (Ryan would also repeal the healthcare reform act, including its cost-reducing provisions). Less of the increase would show up on the government's ledgers only because more would show up in family budgets. The average American would be poorer for it.

Ryan contends that shifting the delivery of care from the Medicare bureaucracy to private insurers will wipe out waste. Everyone who has contact with Medicare, his plan states, "has stories about waste in the system — unnecessary tests, redundant treatments, and the cost ... of mistaken billings and misplaced records." Now, I've never come directly in contact with Medicare, but I've experienced all those things — at the hands of the private insurers Ryan thinks have the magic answer to rising medical costs.

Who are these Medicare beneficiaries? For the most part, their economic status tracks that of America's elderly as a whole (as it should, as the program is open to almost all Americans over 65). Some 60% get sizable portions of their income from private pensions, more than a third get at least 10% from investment income. On average they get 39% of their income from Social Security.

What happens if medical costs start taking up half their Social Security? Much of the burden might shift to their children and grandchildren. Keeping in mind that Social Security and Medicare always have aimed to remove this burden from the next generation, that's a real leap backward.

A tsunami of pain for the middle class comes from the Ryan plan's treatment of Medicaid. (In California, this joint federal-state program for the infirm and destitute is known as Medi-Cal).

Ryan would push more of the expense of Medicaid onto the states. Repealing the Affordable Care Act would remove funding for a Medicaid expansion that would have covered 17 million people. It would also replace the current open-ended federal subsidy to states with block grants keyed to population growth and standard inflation. In other words, completely unconnected to the real drivers of healthcare costs, which are the aging of the population and medical inflation.

States will be able to relieve the resulting pressure on their budgets only by cutting Medicaid enrollments, providing enrollees with fewer services, raising taxes or covering the shortfall out of budgets straining to keep up with road repair, K-12 education and public safety.

The Ryan budget won't do much to help states with those other items; his insistence on reducing non-defense federal spending outside the health programs and Social Security by more than one-fifth starting in 2014 implies unprecedented cuts for state and local governments, which today get one-third of those dollars. That's money spent today on education, law enforcement, roads, clean air and water programs, and disaster response.

When payment for those services is demanded at the point of sale, as in a post-Ryan world, it's the middle class that will pay. They've reached into their pockets to pay for school arts and enrichment programs lopped out of state budgets and carried the burden of tuition hikes at state universities. Teachers of middle- class students — stalwart members of the middle class themselves — will lose their jobs by the thousands. Under Ryan's budget, they'll pay higher federal taxes for the privilege.

What accounts for the Washington establishment's tolerance for policymaking that delivers so little of what it claims? For no one impolite enough to examine the Ryan plan's assumptions and numbers, as opposed to taking Ryan's word for it, believes that it would cut the budget deficit, either according to its own terms or in the world of practical politics.

Perhaps it's that American politicians have become so notorious for dodging tough questions that in a hick town like Washington anyone who produces a plan, no matter how nebulous and flawed, will be hailed as an intellectual giant. ("At least it's something," goes the refrain.)

Now that Ryan's in a national race, his budget will get nationwide scrutiny. It's about time. People will learn that the strangest thing about Paul Ryan's vision of America is how distant it is from the reality they face on the ground.

Ryan calls for eliminating consumer-friendly financial reforms enacted after the 2008 crash, removing environmental oversight of oil and gas production, and eroding legal protection for unionized workers. With a straight face, he lists these initiatives under the heading, "Ending Cronyism and Corporate Welfare." The original version of his plan envisioned the national economic safety net as "a hammock that lulls able-bodied citizens into lives of complacency and despondency." (He removed this Ayn Randian phrase from the 2012 revision.)

What's frightening about the rise of Ryanesque policymaking isn't merely that in today's Washington, the man with the plan is supposed to have credibility even if the plan is incoherent and destructive. It's that Ryan has credibility because he's amiable and earnest.

In a recent article, Peter Orszag, the former Obama budget director and current executive at Citigroup, dismantled the Ryan plan but felt constrained to mention, twice, "I like Paul Ryan."

How very Washington of Orszag. Outside the beltway, no one is talking about Paul Ryan because he's likable. They're talking about him because he is now up for an important national office, and he got there by promoting a vision of policy that the average American should find repellent.