Assume a Can Opener
Word is getting around that CBO has blessed a major budget reform plan proposed by Representative Paul Ryan (R-WI) as, in the words of National Review Online, “a roadmap to solvency.” It isn’t true.
Even Washington Post blogger Ezra Klein, who normally does a terrific job with this stuff, reports Ryan’s plan “erases the massive long-term deficit.” That’s not true either. All this confusion is due to a letter written on Jan. 27 from CBO director Doug Elmendorf to Ryan. In that 50-page document, CBO suggests the plan could eliminate the deficit in 50 years and, even more impressively, eliminate the debt by 2080.
But, and this caveat is a whopper, CBO assumed this wonderful outcome would occur only if the revenue portion of Ryan’s plan generated 19 percent of GDP in taxes. And there is not the slightest evidence that would happen. Even though Ryan’s plan has a detailed tax component, his staff asked CBO to ignore it. Rather than estimate the true revenue effects of the Ryan plan, CBO simply assumed, as the lawmaker requested, that it would generate revenues of 19 percent of GDP.
You know the old joke: Two economists are stranded on a desert island with only canned food to eat. But they have no way to open the containers. What do we do,” asks one. “Assume a can opener,” replies the other.
When it comes to Ryan’s plan, CBO has, in effect, assumed the can opener.
That’s not all. CBO does not actually analyze many of the specifics of Ryan’s plan. Rather it looked only at what Doug called a “highly stylized” version of Ryan’s tax and Medicaid reforms.
In fairness, the CBO letter is filled with such disclaimers. In the second paragraph, it says, “This analysis does not represent a cost estimate for this legislation.” It couldn’t be more clear, but this is Washington, where nobody ever gets to the second paragraph. And, despite the caveats, the CBO letter does include a table that shows what would happen to the deficit, given all the heroic assumptions it made.
I have written before that Ryan deserves kudos for thinking about deficit reduction so broadly. In his “roadmap,” Ryan bravely tackles entitlement spending and recognizes the need for tax reform. I disagree with most of the details of what he’d do, but he gets a shout-out for trying.
Ryan would reduce future Social Security benefits and create voluntary private accounts, much like the old Bush plan; turn Medicare into a voucher program starting in 2021; and cap spending for Medicaid, now an open-ended entitlement.
On the tax side, it would make some huge changes. Ryan would: turn the current exclusion for employer-sponsored health insurance into a refundable credit; allow people to choose to pay either under the current income tax system or a two-rate, broad-based alternative; replace the corporate income tax with a business consumption tax, and exclude from tax dividends, capital gains, interest, and estates.
We don’t have any idea what this plan would do to revenues, but in some ways it resembles former GOP presidential candidate Fred Thompson’s campaign plan. TPC figured that scheme would reduce tax revenues by between $6 trillion and $8 trillion over 10 years. Unless Ryan can achieve unrealistically large cuts in spending as well, this is not exactly a roadmap to solvency in my book.