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The Republicans' economic plan

Ryan to the rescue?

A Congressman with a brave vision

Feb 11th 2010 | WASHINGTON, DC | From The Economist print edition

IF REPUBLICANS are displeased with their image as the party of “No”, few of them have done much about it. One notable exception is Paul Ryan, a congressman from Wisconsin whose “Roadmap for America’s Future” offers an ambitious alternative to the Democratic agenda.

Mr Ryan’s roadmap takes as its starting point the CBO’s long-term budget forecast. By 2080 federal deficits are projected, if current policies continue, to grow to nearly 50% of GDP, while debt held by the public would rise to over 700% of the country’s annual output (in reality, of course, America would face bankruptcy long before the debt hit such levels). The red ink is driven by growth in entitlement spending, most of it on Medicare, the government’s health scheme for the elderly. Mr Ryan’s plan seeks to tackle the deficits produced by the growing health and pension costs of an ageing population, while limiting government spending as a share of the economy. He accomplishes the task by dint of a broad simplification of America’s tax code and health-care system.

The plan replaces the current tax exemptions for employer-provided health insurance with a refundable tax credit, while Medicare benefits would ultimately be set aside in favour of a system of vouchers for private insurance. The aim is to invigorate the health-insurance market by drawing more people into it and by removing hidden subsidies. Social Security (pensions) benefits would be cut back for today’s younger workers, who would then be allowed to divert a share of their payroll-tax contributions (which go to finance Social Security) into private retirement accounts. In general, the CBO concludes, total benefit levels should be higher under the plan, but also somewhat less certain.

The income-tax code is cut down to two brackets, and corporate income taxes are replaced with a corporate consumption tax of 8.5%. Capital-gains taxes are eliminated entirely. And Mr Ryan places a ten-year nominal freeze on non-defence discretionary spending (meaning that the real value of spending declines over time, assuming there is inflation). He caps federal government outlays at 19% of GDP; this year, they are running at around 25%.

As promised, the plan ultimately moves the government budget into surplus and reduces the federal debt (see chart). And during the first ten years, according to the CBO’s analysis, the number of people enjoying health-care coverage should increase, thanks to the refundable health-care tax credit. Mr Ryan’s scheme, which is committed to reducing the growth of government and increasing the role of markets in the social safety net, is the apotheosis of a conservative approach to fiscal sustainability.

It also has significant problems. It achieves its huge health-care savings by indexing the tax credits and vouchers to a measure of inflation smaller than the estimated growth in health costs over recent decades. Over time, this will mean that an increasing share of medical expenses is paid out of individuals’ pockets. The CBO thinks this will probably lead to reduced consumption of health-care services and reduced access to advanced technology. The balancing of the budget removes the crippling macroeconomic burden of debt, but in the meantime federal investments in transport, education and energy would have to be squeezed. Not even a perfunctory attempt is made to cut America’s defence spending. Mr Ryan is a Republican, after all.

He deserves credit for an honest and daring proposal. Tellingly, his plan has faced criticism from both parties. Republican leaders have been careful to distance themselves from the slashing of programmes dear to one of their core constituencies. If nothing else, Mr Ryan has reminded everyone of the hard choices that will soon have to be made.

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He has definitely peaked my curiosity.