Where to Cut

This morning the GOP will release its budget proposal for 2012.  When I heard last week that it would propose $1 trillion in cuts to Medicaid, I was troubled.  If you ask me were to start to cut $1 trillion, it wouldn’t be at healthcare for the poor and disabled.  It would be at the Defense Department.  We spend more on defense than the rest of the world combined and nearly 7 times more than the next-highest spender.  Obviously, we have security concerns and challenges that can’t be met without a strong military, but we could could spend hundreds of billions less per year and and still far outspend anyone else.  It doesn’t seem wise to me to continue such extravagant levels of military spending.

Then yesterday I learned that the Medicaid cuts would be accompanied by drastic changes to Medicare (elimination of Medicare as we know it).  Joshua Michael Marshall writes:

The Medicare system has been in place in the United States for a bit more than 40 years. The premise is simple: once you hit retirement age you move into a single payer health care insurance system in which Medicare takes responsibility for your care, regardless of the state of your health or income level. There are copays. No one's crazy about exactly how much is covered. Some doctors opt out. You've probably heard all of this at one point or another. But the key is that you're in the program. And for the rest of your life you're out of the private health insurance system. You're covered. Permanently and on the same terms as everyone else.

What Ryan is proposing is something different.  Ezra Klein summarizes:

Paul Ryan’s plan for Medicare and Paul Ryan’s plan for Medicaid rely on the same bait-and-switch: They use a reform to disguise a cut.

In Medicare’s case, the reform is privatization. The current Medicare program would be dissolved and the next generation of seniors would choose from Medicare-certified private plans on an exchange. But that wouldn’t save money. In fact, it would cost money. As the Congressional Budget Office has said (pdf), since Medicare is cheaper than private insurance, beneficiaries will see “higher premiums in the private market for a package of benefits similar to that currently provided by Medicare.”

In Medicaid’s case, the reform is block-granting. Right now, the federal government shares Medicaid costs with the states. That means their payments increase or decrease with Medicaid’s actual rate of spending. Under a block grant system, that’d stop. They’d simply give states a lump sum at the beginning of the year and that’d have to suffice. And if a recession hits and more people need Medicaid or a nasty flu descends and lots of disabled beneficiaries end up in the hospital with pneumonia? Too bad.

In both cases, what saves money is not the reform. It’s the cut. For Medicare, the cut is that the government wouldn’t cover the full cost of the private Medicare plans, and the portion they would cover is set to shrink as time goes on. In Medicaid, the block grants are set to increase more slowly than health-care costs, which is to say, the federal government will shoulder a smaller share of the costs than it currently does.

Needless to say, I’ve got serious concerns about what Ryan’s plan would do to our social safety net.  However, it is quite unusual in that it actually proposes cuts at a level that would have a significant impact on the deficit.

Up until this point, the “cut or shut” discussion has been focused on non-defense discretionary spending…that is, the more minor parts of the budget.  Military and entitlements (Medicare, Medicaid, and Social Security) are the big ticket items.  All of the usual targets for cuts are small in comparison (and, therefore, of little impact): things like subsidies to oil companies ($4 billion/yr), corporation for public broadcasting (NPR, PBS, etc. $0.5 billion/yr), agricultural ($20 billion/yr), ethanol ($2.5 billion/yr), Planned Parenthood and the rest of Title X ($0.3 billion/yr), renewable energy ($5 billion/yr), National Endowment for the Arts ($0.2 billion/yr). TARP and the auto bailout draw much criticism too.  However, TARP is on target to cost less than $50 billion in total, a bargain for avoiding a total collapse of the global economy.  The auto bailout will cost less than $25 billion.  These are all large numbers, but even added together they are small relative to defense and entitlements.  To have a significant impact you have to address defense and/or entitlements and/or significantly increase revenue (e.g. allowing Bush tax cuts to expire would cut the deficit in half).  Focusing on "non-defense discretionary spending" cannot solve the problem.

Unfortunately, it sound’s like the GOP’s “Path to Prosperity” will go aggressively after entitlements but treat the Defense Department with kids gloves by merely “…accepting Defense Secretary Robert Gates's plan to target inefficiencies at the Pentagon.”  It also goes after some of those items I listed above such as agricultural subsidies and renewable energy.  Tax reform is in there too:

This budget would focus on growth by reforming the nation's outdated tax code, consolidating brackets, lowering tax rates, and assuming top individual and corporate rates of 25%. It maintains a revenue-neutral approach by clearing out a burdensome tangle of deductions and loopholes that distort economic activity and leave some corporations paying no income taxes at all.

Simplifying the tax code and getting rid of some of the deductions and loopholes sounds good to me.  However, federal taxes as a percentage of GDP are currently at their lowest level in the last 60 years.  If the debt is really such a crisis level, it would seem prudent to reform the tax code in a way that isn’t revenue-neutral and helps pay off the debt (at least until we are back on a more sustainable course).  Unfortunately, a significant portion of the GOP cares more about reducing the size and scope of government and making sure taxes are never increased than they do about actually reducing the debt.

Updated 2011-04-05:
Changed the CPB funding link and clarified that taxes as a percentage of GDP (i.e. taking into account the effect of the recession on the economy) are at historically low levels.