Obama, Ryan, and the Parameters of the Budget Debate

By :: April 13th, 2011

Imagine for a moment you walk into a dealership to buy the vehicle of your dreams. The salesman asks what you want to pay. You say $50. He counters with $50,000. The good news is you have begun a negotiation. The bad news is, you’ve got a lot of talking to do before you can drive that honey off the lot. 

Thanks to President Obama’s speech this afternoon, we have a pretty good idea of the parameters of what promises to be an historic fiscal debate. Yet, like our friends at the car dealer, a chasm separates the two sides. This is a battle that is likely to continue beyond the 2012 elections and the offers will constantly shift. But at least we know where everyone is starting. 

In a sense, Obama has given us the high water mark for government spending going forward, and Ryan has provided the floor for tax revenues. Interestingly, the middle-gound may well end up being something like the plan offered by the chairs of Obama's fiscal commission, Erskine Bowles and Alan Simpson.  

But unlike most budget debates, more than dollars are at stake. As Obama himself noted today, this fiscal confrontation represents a profound disagreement about the nature of government. With that in mind, here are the opening bids on the big issues. 

Taxes: Obama actually moved from past positions in a couple of key areas. For the first time in a major budget speech, he said nothing about never, ever raising taxes on people making less than $250,000. Walking back this ill-advised campaign promise is a necessary first step for him. He also seems to have backed away from his interest in addressing corporate tax reform separately from individual reform. Now, Obama wisely vows to do both by lowering rates and trimming (unidentified) tax preferences, both goals also supported by the GOP. 

The critical difference, of course, is that Obama would use tax reform to raise taxes by about $1.3 trillion over 12 years. By contrast, in what has to be a classic only-in-Washington moment, Ryan opened his deficit reduction plan by proposing to cut taxes for the highest-income families and corporations, thus adding $2.9 trillion to the deficit over 10 years. 

Medicare: Obama vows to maintain the existing government-run Medicare program, although he promises to run it more efficiently. His goal; Reduce projected Medicare costs by an additional $500 billion by 2023 by cutting overall health costs. The main mechanism: strengthening an independent panel that would reduce Medicare payments for ineffective care. When Obama included this commission in the 2010 health law, some in the GOP derided it as a “death panel.” Rather than fine-tuning Medicare, the House Republicans would replace the program with private insurance subsidized by government vouchers.    

Medicaid: The House GOP would reduce planned Medicaid spending by almost $800 billion by capping the federal contribution to this joint state/federal program that provides health care for poor families as well as long-term care services for the disabled and the frail elderly. The Republican plan would also grant states maximum flexibility in running the program. Obama opposes the cap and would retain existing cost-sharing, but he’d reduce projected federal spending on the program by $100 billion. 

Overall deficit reduction: Obama would reduce the deficit (including interest payments) by $4 trillion over 12 years. One-third would come from taxes, one-third from spending, and one-third from interest. The House GOP would cut the projected deficit by about $6 trillion--$5.5 trillion from spending, $500 billion from interest. Less than nothing from taxes, which he's cutting.  

Based on where Obama and the House Republicans are today, this will be a long and arduous negotiation. But at least they’ve started to talk.

3Comments

  1. Sid F  ::  9:43 pm on April 13th, 2011:

    Taxes

    No Republican controlled House will vote for any tax increase for any reason at any time. A tax increase requires 60 votes in the Senate. So increased revenues from tax increases are off the table. At the end of 2012 or the beginning of 2013 the House will pass legislation making all of the Bush tax cuts permanent. Obama, if he is re-elected will sign on. He did it before, he will do it again in order to avoid the blame for raising taxes on those making less than $250,000. The only thing left for Obama and the Republicans left to negotiate are budget cuts and cutting tax rates of high income taxpayers. The 2011 FY budget cost $39 billion in cuts. The debt ceiling will probably cost between $50 and $100 billion in cuts plus cuts in the top corporate and individual rates. FY 2012 budget, maybe another $50 to $100 billion in cuts. The race to the bottom has begun.

    Medicare

    Despite an aging population and an ever increasing inefficient medical sector, Obama will cut and control Medicare expenses without affecting the level of care or the access to care. It’s like a game of poker, in this way he sees Ryan’s fantasy, and raises it to a higher level.

    Medicaid

    See Medicare

    Overall Deficit Reduction

    The Ryan Plan does not reduce the deficit by $6 trillion, it cuts spending by $6 trillion. Because it cuts taxes for the wealthy high income group, deficit reduction is less than the spending reduction. Take the tax increases and interest savings out of the Obama plan and all we have left is a war by the well off on the poor, the old, the sick, the student and the disabled. It will be a long and arduous negotiation. Under the Ryan Plan those people will suffer from devastating cuts. Under the Obama Plan the cuts will only be disastrous.

    Deflating the Economy

    No one seems to understand that you cannot reverse the laws of economic behavior. Contractionary fiscal policy leads to contraction. Check in with Ireland and Greece, and soon to be Portugal. How’s that austerity thing working out for them?

  2. Michael Bindner  ::  4:51 pm on April 14th, 2011:

    Medicaid should be federalized, as Len Burman and I both suggested, in trade for ending the deductibility of state income and sales taxes. It could then be split into a plan for the working and dependent poor and for seniors – with the latter becoming part of Medicare.

    Medicare, as Social Insurance, needs no more cuts on the spending side. It needs revenue. After 2013, we will be able to get some – or as part of a comprehensive tax reform, with medicare fully funded by a business receipts tax of 33% before exclusions, 27% after (essentially a hidden VAT with deductions) and rates going up to match spending. The BRT should also fund costs associated with health care reform and have employer credits related to it where required – as well as an expanded Child Tax Credit of $500 per child per month (paid for by ending mortgage and property tax deductions).

    Education aid should also be employer based and a credit to the BRT. Let states cover all costs through Grade 14 and employers pick up the frieght after that, including living expenses. Get a job first, then declare your major.

    There should be a 13% VAT to cover discretionary spending (defense and civil) in the states, with the exception of strategic defense. Raising this tax will be the incentive needed to start identifying cuts and restraining the urge to demand pork.

    Cut income tax rates by 21% on all income over $150,000, with only a 15% cut to the top rate and an additional 27% rate on income over $600,000 (since income over that point is likely not spent, so there needs to be adjustment for loss of VAT revenue).

    This proposal should not only stabilize the debt, it should achieve debt reduction – as it must to begin paying back the Social Security Trust Fund.

    Speaking of Social Security, take off the cap and credit the employer contribution equally, applying some of it to employer voting stock in employee personal accounts. This can be done either quickly or gradually, depending on willingness of employers to convert current retirees to such a plan and the willingness of current retirees to get some of their benefit from an old fashioned pension. Insure these funds by diversifying a third of such shares in a mutual insurance pool of similar employers. Non-stock firms would also buy shares in this fund.

    Will the GOP sign off on this last one? The voters will, but the politicians won’t, since it essentially ends capitalism in a generation.

    Please score this plan.

    Good ideas are not dependent on credentials.

  3. Evening Fix | Progressive Fix  ::  5:31 pm on April 14th, 2011:

    […] Howard Gleckman offers a handy guide to the parameters for the budget debate: “Thanks to President Obama’s speech this afternoon, we have a pretty good idea of the parameters of what promises to be an historic fiscal debate. Yet, like our friends at the car dealer, a chasm separates the two sides. This is a battle that is likely to continue beyond the 2012 elections and the offers will constantly shift. But at least we know where everyone is starting. […]