A Plebiscite on the Role of Government

August 11th, 2012 at 2:54 pm

In choosing Rep Paul Ryan for his running mate, Gov. Romney has helped to clarify a big part of what this election is about: the role of government in our lives, our economy, our future and that of our children.

This is largely a day for politics and I’ll leave that to others.  What I’d like to begin to offer here is a perspective on the presumptive ticket’s vision of the things I write about here at OTE and we analyze at CBPP: tax policy, retirement security, the safety net/poverty, inequality, mobility, investment in public goods, market failures, health care.

At least, that’s what I’d like to write about over the next few days…I know this announcement is a big deal, but it’s still Saturday and there’s a lawn to mow, etc…so I’ll just get started in this post.  The full CBPP low-down on Rep Ryan’s proposals is here.  And just last week, I wrote this take on a detailed profile of Ryan in the New Yorker.

Before diving into the weeds, and with the strong caveat that, believe me, I know today’s political debates are very far from the up-and-up — let me assert that this is, in fact, the debate we need to have.  Again, whether we actually have it will be up to the candidates, the media, the fact-checkers, and analysts like those of us at CBPP who try to break things down in ways they can be understood.

But when I heard about this pick, my first thought was for all the challenges we face that simply will not be met by “market forces” — two words we’re all going to be hearing a lot over the next few months.   And when you hear those words, remember that history is very clear on these points:

–such forces cannot provide the public infrastructure — the public goods, from roads to schools to safe water, food, and air travel — that the private sector needs to achieve its productive potential.

–such forces cannot efficiently provide income and health security for retirees, particularly those with low incomes and savings.

–such forces fail, and when they do, an ample government sector must be there to temporarily pick up the slack.

–such forces cannot self-regulate, particularly in financial markets, which have proven to be prone to bubbles that burst at great cost to everyone else.

–such forces have, in recent decades, led to high levels of economic inequality and poverty, and these problems are now leading to less opportunity and diminished mobility.

–from the railroads to the internet to new clean energy technologies, market forces cannot be counted upon make the innovative investments that are beyond the scope and breadth of individual firms in market economies.

–such forces cannot adequately protect the environment from destructive externalities that affect all of us, most prominently, climate change.

Let me be very clear: I’m by no means claiming that the federal government we have now  —one I’ve consistently criticized as dysfunctional — is adequately performing these functions that are either outside the purview of market forces or necessary when markets fail.  But they are some of the functions it must efficiently and effectively perform if we want ourselves, our children, and ultimately, America, to realize its potential.

That’s what I think this election is about.

OK — here are a few quick takes of policy stances by our new presumptive VP candidate, with a lot more to come.

Tax Policy

There are many ways in which Rep Ryan’s ideas point directly in the wrong direction regarding the policies noted above: toward diminished retirement security, a more porous safety net, larger budget deficits, and greater inequality.  And his tax policies are at the heart of his agenda.

It’s the supply-side, trickle-down approach, based on the notion that large tax cuts for the wealthy would incent them to create more economic activity than under the current tax structure, and that this activity would create more opportunities for everyone else.

The historical record, as I’ve written many times over, dramatically fails to support trickle-down in terms of growth and jobs, but here let me emphasize  that our tax policy reset — and we deeply need a reset — needs to accomplish these goals: medium-term deficit reduction without exacerbating inequality or poverty.

We cannot achieve the first part of that goal without some new revenues and the right place to start is allowing the sun to finally set on the high-end Bush tax cuts.  Yet, as my colleague Chuck Marr points out:

The budget from House Budget Committee Chairman Paul Ryan goes in exactly the opposite direction — it would cut taxes deeply at the top and raise even less revenue than if we continued all of President Bush’s tax cuts, leading to bigger deficits and worse income inequality.

That last part is the clincher.  As does Gov. Romney’s, Ryan’s tax plan both extends the Bush tax cuts (at a cost of around $4 trillion over 10) and adds another $4.5 trillion over ten years on top, with more than a third of the benefits going to millionaires and up.  So, yes: bigger deficits and worse inequality.

We’ll continue to hear a lot about ways to offset these large cuts by closing loopholes to be named later, but as was widely publicized over the last few weeks, the numbers just don’t fit together.  The only way tax cuts of these magnitudes achieve revenue neutrality — and we actually need to do better than revenue neutrality — is by raising taxes on middle-class and low-income households.

It’s implausible that anyone — D or R — running for office would admit to that, so they’ll be a lot of contortions to convince voters that we can cut close to $9 trillion in revenues over the next decade and reduce the budget deficit.  But we’ve been here before and it can’t be done.  Instead, that kind of tax policy puts tremendous pressure on spending cuts, and thus on the rest of government.

Everything Else…And Medicare

As CBPP’s President, Bob Greenstein, has often noted, the long-term implication of the Ryan budget is what I suggested above: a much diminished role for government.

Specifically, the Ryan budget would impose extraordinary cuts in programs that serve as a lifeline for our nation’s poorest and most vulnerable citizens, and over time would cause tens of millions of Americans to lose their health insurance or become underinsured. It would also impose severe cuts in non-defense discretionary programs—much deeper than the across-the-board cuts (“sequestration”) that are scheduled to take place starting in January — thereby putting core government functions at still greater risk. Indeed, a new Congressional Budget Office analysis that Chairman Ryan himself requested shows that, after several decades, the Ryan budget would shrink the federal government so dramatically that most of what it does outside of Social Security, health care, and defense would essentially disappear.

A key dimension of this is his support for turning Medicare into a voucher program where the value of the voucher grows more slowly than the price of health coverage, implying a) cost savings through cost shifting: the government spends less on retiree health care as recipients either pick up the slack or go without, yet total health costs actually go up, and b) the ultimate weakening of the program through adverse selection as the Medicare beneficiary pool is increasingly less healthy and thus more expensive relative to those who opt for private plans (see Paul Van de Water’s take here).

More to come…

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9 comments in reply to "A Plebiscite on the Role of Government"

  1. pjr says:

    We had a similar stark choice, between the far-right agenda and purported Dem incompetence and failure, in 1980. How did that turn out for America? I do think this time the electorate will reject the far-right agenda and its candidate, but it will take more to achieve some redirection of policy (or, if you prefer, “transformational” change you can believe in).

    What Obama perhaps can use from economists is a positive vision of what is achievable. Not what is politically feasible; what is economically possible if we reject the future implied by Ryan’s Ayn Rand Roadmap and instead earnestly seek a better future for our country. Dems need to stop playing pure defense and give the voters some concept or dream to vote FOR.

  2. jo6pac says:

    Hell even the people at zero hedge think his plan is NUTS. I don’t have much trust in demodogs if the win big doing the right thing, they’ll mostly do what their puppet masters want and it won’t be good for Main Street.

    Off to wine, conversation about this I’m sure and then dinner.

  3. jo6pac says:

    On another note what happen to the music? What kind of place are you running here. In times like these a little music helps;)


  4. Rima Regas says:

    Fine, fine piece, Jared. One very small quibble… It’s mostly a day for reteaching the meaning of the Social Contract. So, it’s not as much politics as it is philosophy and social ethics. You’re really good at that, Jared. As good at Paul K. So, go out! Preach!

  5. readerOfTeaLeaves says:

    … let me assert that this is, in fact, the debate we need to have….

    I concur with this analysis.
    It feels as if this election of 2012 is actually turning out to be more important than the election of 2008. This nation is long overdue for a serious conversation about ‘what an economy is‘.

    Many in my extended family are ‘praying for Romney to win’. But if I ask them about how he made his money, their eyes glaze over. Apparently, they want to believe that all his millions in the Caymans derive from business masterstrokes. They are not receptive to suggestions that perhaps too much of the ‘foreign investment’ touted by the GOP is actually coming from offshore tax havens, with limited economic value for the underlying economy.

    Which only reinforces my sense that this is the debate we (as a nation, as well as within my own extended family) NEED to have. It also suggests that there is a tremendous amount of misinformation over the very simple question: “what creates wealth?”

    What we truly need in this debate are f-a-c-t-s, clearly explained for those of us who don’t spend our days in think tanks, nor pouring over economic tomes.

    I hope to see a lot of revisiting of Graph #6 on the CPBB ‘Best of the Graphs’ list. Along with Graph #7.
    If my relatives are any barometer, a lot of Americans still don’t grasp the role of the Bush tax cuts in accelerating the federal deficits. Until they do, Paul Ryan’s siren song will continue to appeal to them.

    And if a few of my (aging) cousins saw the impact of Paul Ryan’s proposed changes to Medicare (see Graph #10), they might start to ask a few more questions about the economic value of tax cuts, and ponder whether all Romney’s off shored millions in the Caymans are really a fair trade off for their being saddled with increasing health care costs.

  6. frank says:

    with the Federal budget shrunk so much, would not there be much less room for countercyclical activity during downturns.

  7. Dave Thomas says:

    Mr. Bernstein writes as if Americans voted for Obamacare in 2008. He writes as if Americans voted for a takeover of General Motors, a massive stimulus plan, green energy crony capitalism, and massive annual $1 trillion dollar deficits.

    If he wants to call 2012 a plebiscite on the role of the federal government in American society then what does he call the 2010 mid term election, nothing? Mr. Bernstein must completely ignore the 2010 mid term because he doesn’t even mention it.

    The American people never voted for what President Obama, Speaker Pelosi, and Majority leader Reid implemented because none of them told the American people the truth in the 2008 election.

    This was evident in the 2010 mid terms when the voters rejected the liberal agenda now out in the open with the worst interim election defeat in 80 years.

    The 2012 election is about rejecting a lurch to the left that would take us back to the failed Welfare State of LBJ. Nothing more.