After Bowles-Simpson, House Budget Chair Paul Ryan Comes Forward With a Serious Fiscal Reform Plan

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by Paolo von Schirach

April 4, 2011

WASHINGTON – While the silly posturing on budget cuts to non defense discretionary spending –a small fraction of Uncle Sam’s bill– drags on, (and this is about last year’s budget, not yet approved, mind you), thankfully we begin to see some signs of intelligent life in Washington.

Representative Paul Ryan, a Wisconsin Republican and Chair of the important House Budget Committee, just came forward with a budget proposal for Fiscal Year 2011-2012 that squarely deals with entitlement reform. And we all know that rapidly rising entitlement costs are at the core of our fiscal conundrum. Unless we change the entitlement parameters regarding eligibility and amounts paid out, this spending alone will kill America.

It may not work

Let’s be real. Ryan’s plan may not work out at all. The House may pass it. But the Senate controlled by the Democrats may reject it. And, even if it passed the Senate, president Obama may veto it. Still, although it comes along in a poisonous political environment, Ryan’s effort should be supported. This is an honest attempt to put the cards on the table and propose drastic actions that will make a real difference. And precisely because it will be politically unpopular, Ryan’s budget proposal should be praised. It is a real plan, as opposed to a negotiating ploy.

Bowles-Simpson started the conversation

I discussed in earlier pieces Erskine Bowles, (Democrat) and Alan Simpson, (Republican), the co-chairs of the “debt commission” who were gutsy enough and determined enough in their December 2010 Report to president Obama to lay out a serious, credible, and of course painful, taxing and spending overhaul plan. Their plan focuses on real entitlement reform, (meaning less money paid out to Americans), spending reductions across the board, including defense, and a welcome tax simplification plan, plus some tax increases.

With much regret I noted that president Obama chose not to embrace this plan and lead the policy fight on fiscal reform. Therefore, with lukewarm political backing and no White House involvement, the Bowles-Simpson plan, I thought, was as good as dead.

Enter Warner-Chambliss

But then came some hope from the Senate side with the efforts still very much underway promoted by two centrists, Senator Mark Warner, Democrat of Virgina, and Senator Saxby Chambliss, Republican of Georgia. These two law makers, (now known as the leaders of the “Gang of 6″, since others joined in), seeing a complete impasse on meaningful fiscal reform, are trying to build a bipartisan coalition that might advance politically a plan aimed at real spending reductions, based in large part on the Bowles-Simpson 2010 Report.

And now House Budget Committee Chair Paul Ryan comes along

And now we have House Budget Chair Paul Ryan salvo. Agree with him or not, I do believe that no one should question his sincerity. Mr. Ryan sees this train wreck coming –this would be America’s fiscal collapse– and at least he has put on the table a comprehensive budget proposal for 2011-2012 that rises to the occasion by addressing the real spending issues: entitlements.

Entitlement reform is the real issue

And, within entitlements, his proposal focuses on Medicare (health care for seniors), and Medicaid (health care for the poor) spending. These programs’ rates of growth outpace inflation and all other federal spending. Some of the Medicare reform provisions come from earlier work that Mr. Ryan did in conjunction with Alice Rivlin of the Brookings Institution, a Democrat and a recognized budget expert.

No reform means bankruptcy

Whatever one might say in support of the existing programs that pay for medical care for America’s seniors and for the poor, Medicare and Medicaid costs grow at a completely unsustainable rate. Within current trends, it is estimated that total federal spending on Medicare alone will double between 2002 and 2016. How do you fix that? Well, who knows what is the best approach.

A new system for Medicare

In his budget blueprint, Mr. Ryan proposes a new system, to be applied to future retirees, (those now under 55), that will provide vouchers to seniors instead of direct payments, encouraging competition among providers aimed at reducing costs. Many critics strongly disagree with this approach, claiming that the vouchers will be not be nearly enough to cover real costs, essentially leaving many seniors to pay out of pocket, something that can be ruinous for many low income people.

Will it work?

Well, who knows really; and debate is legitimate. Yet, the fact is that right now we have a system in which doctors provide and the federal government pays, even if not for everything and with limitations on what is reimbursable. Still, under the current system there is very little incentive to economize and institute even elementary checks on spending on widely proliferating unnecessary procedures and prescriptions.

Federal health programs parts of a national health care mess

The problem is that Medicare and Medicaid exist within a flawed US medical care delivery system. We have created a mess in which we deliver ”more, and more”, without any guarantee that more is also “better”, and we have no way to make sure that any reasonable cost-effectiveness criteria regarding types and cost of treatments can be created, let alone enforced.

As a result of all this, unfortunately in America we have the incongruous picture of by far the highest medical care costs in the world with mediocre health outcomes. Federally funded Medicare and Medicare are huge pieces of this gigantic spending yielding poor outcomes.

A new look for health care focusing on real prevention

Beyond federal spending, it will be very hard to reconfigure the entire health care equation, starting with “wellness education”, followed by proper nutrition and healthy life style, so that people will have an incentive to stay healthy and doctors will not have a perverse incentive to over prescribe, creating unnecessary costs that in the case of Medicare and Medicaid the taxpayers end up absorbing.

Dealing with programs designed for seniors, much more complicated

If any cost reduction plan is complicated enough as a general proposition, certainly dealing with federally subsidized health care for seniors is a lot more difficult, because the overall health conditions of many elderly people cannot be magically turned around via “wellness programs” that will make them stay healthy, thus diminishing demand and consequently cost for services.

Ryan plan or another plan, something serious needs to be done

Nonetheless, the current system is completely unsustainable. Medicare and Medicaid, along with Social Security, as currently designed, will bankrupt the Federal Government. This is a fact. I have no idea as to whether the Ryan Medicare reform proposal can do the magic of providing adequate care at the same time drastically reducing costs. But I do believe that it is high time to seriously join him in having an honest debate about entitlement reform, while keeping the promise to deliver care in the best possible way.

Ryan budget includes tax reform

There is a lot more in the Ryan budget proposal, including tax reform that would begin with simplification. Thank you! Not a moment too soon. It is indeed remarkable that America, the self-proclaimed champion of unfettered capitalism, can even survive (let alone prosper) when corporations and individuals have to walk through an essentially impenetrable maze of tax provisions, with hundreds of exceptions, loopholes, waivers, riders and ad hoc measures that have a way of changing every year.

This tax jungle is good for accountants; but bad for people, bad for businesses and bad for the economy. Those who can usually tweak their business decisions with a focus on avoiding unwanted tax liabilities, as opposed to devoting their energies to maximize growth and new employment. Tax simplification would make choices clearer and it would encourage investments and economic expansion.

Other veterans say that we have reached the limit: this is the time for serious fiscal reform

In a forum organised by The American Enterprise Institute for Public Policy, a conservative Washington think tank, former Congressmen Vic Fazio, (Democrat) and Vin Weber (Republican) agreed that the time of endless posturing on fiscal issues should be over, given the reality of the crushing federal debt burden. There was a time in which elected leaders could proclaim generic fiscal goals that sounded good, essentially do nothing to implement them, and still get away with it.

Now, say Fazio and Weber, politicians cannot keep kicking the can down the road, just hoping to survive the next elections cycle. The realities of trillion dollar plus annual deficits are sinking in, even among the most jaded who used to think that there could be a way to avoid making unpopular decisions for a little bit longer.

So, encouraging signs?

Well, we have heard it from Bowles-Simpson; and we see the efforts of Warner-Chambliss and friends. And now House Budget Committee Chair Paul Ryan comes forward. If we take all this together, the message from responsible leaders is that it is time to abandon ideological posturing and wishful thinking about transforming the basic dynamics of public spending by eliminating this or that line item, or the bad practice of congressional earmarks.

Reform the welfare state, good if president Obama would join in

While all spending cuts are useful, none of these actions would make a real difference. Entitlement reform is what we need. We all have to come to grips that America, much like other mature industrial democracies in Europe and Japan, in very different times, created a welfare state whose (then unforeseen) rising costs are now unsustainable. Unless, of course, we want to be suffocated by an avalanche of public debt that will prevent any public investments, while debt service requirements will syphon off liquidity that should otherwise used to invest in our future.

Time to start the serious talk. And, of course, it would be nice if the president of the United States who just announced his 2012 re-election campaign would care to join in.

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