The importance of Ryan's proposal is in the out years
Rep. Paul Ryan, chairman of the House Budget Committee, roiled the already muddy political waters this week with the much-anticipated release of his federal budget proposal. "The Path to Prosperity: Restoring America's Promise" has been hailed by fellow Republicans and conservatives as the wake-up call to the looming fiscal crisis. Democrats and liberals deride it as a sop to the wealthy and corporations, punishing to the middle class and the elderly.
The nonpartisan Congressional Budget Office provides predictions of how alternative budget scenarios will affect the economy. It feeds into its statistical models the assumptions of a certain program and produce deficit projections into the future. Asked to conduct such an objective analysis of the Ryan proposal, here is, in brief, the outcome.
First let's look at the CBO's projections made in August 2010, based on expected changes in current law, to gain some perspective. Total revenues as a percent of GDP increase from 15 percent in 2010 to a little over 19 percent by 2022 and remain there as far out as 2050. These percentages are within historical norms.
The spending projections are what's alarming. The CBO sees federal government spending increasing to 26 percent in 2022 from about 23 percent of GDP in 2010. That may not seem like much, but by 2030 spending increases to 32 percent of GDP, jumping still further to 45 percent by 2050.
This increase in out-year spending stems largely from skyrocketing costs associated with the three big social-welfare programs: Social Security, Medicare and Medicaid. While these programs consume a lion's share of future government expenditures, they are not the only sources of rising federal spending.
Based on this scenario, the CBO's deficit projection is chilling. Although the deficit drops slightly, from 9 percent of GDP to about 7 percent between 2010 and 2022, it rises sharply thereafter. By 2030 it doubles to 13 percent of GDP; by 2050 it is 26 percent.
How does the Ryan plan stack up? The most controversial aspect of the Ryan plan is how it re-engineers the federal government's role in providing public welfare. It reduces the government's funding of Medicare and Medicaid programs. It leaves Social Security as it is under current law. And it lowers the growth in discretionary government spending.
The key is that Ryan's plan slows the growth of government spending. His proposal reduces spending from 23 percent of GDP in 2010 to 20 percent in 2022. The CBO projects that under his plan tax revenues will be very similar to their scenario: revenues increase to about 18 percent of GDP by 2022. This combination lowers the deficit to 2 percent in a decade.
What really makes Ryan's proposals worthy of discussion is its out-year effects. The deficit falls to less than 2 percent of GDP in 2030, compared to the CBO's alternative deficit which increases to 13 percent of GDP. The impact on the government's outstanding debt is even more dramatic: The debt in 2050 is projected to be only 10 percent of GDP under the proposed plan compared to the alternative forecast which puts the debt at more than GDP.
Nobel Laureate Friedrich Hayek wrote more than 60 years ago that the first principle to building a new future is "to free ourselves of that worst form of contemporary obscurantism which tries to persuade us that what we have done in the recent past was all either wise or inevitable. We shall not grow wiser before we learn that much that we have done was very foolish."
The time has long passed to foolishly think that maintaining current government programs is economically viable. Let's hope that our leaders have the collective courage to consider Rep. Ryan's proposal and forge changes necessary to improve the well being of future generations.
R.W. Hafer is a research professor of economics and finance at Southern Illinois University Edwardsville and a research fellow at the Show-Me Institute. To reach him, contact Beacon features and commentary editor Donna Korando.