Monday, April 11, 2011

The Ryan plan offers a serious benchmark for deficit reduction

April 7, 2011

The Ryan plan offers a serious benchmark for deficit reduction

by Richard J. Grant

During the entirety of 2010, Democrats held majorities in both houses of Congress. Nevertheless, they failed to pass a budget for the 2011 fiscal year. Then, earlier this year, when the newly elected Republican majority in the House of Representatives tried to remedy this by passing HR1, the Democrat-controlled Senate voted the bill down.

Now we witness the spectacle of a series of continuing resolutions to keep the government funded for just a few weeks at a time, with a recurring threat of a government “shutdown.”

HR1 was intended to reduce government spending closer to 2008 levels. Instead, the continuing resolutions have been bringing down spending a few billion dollars at a time. These cuts are helpful, but are a tiny percentage of the total budget, and will have a barely perceptible effect on the projected budget deficit of $1.65 trillion.

With the FY2011 drama still playing out, House Republicans have proposed a budget for FY2012. Under the name “The Path to Prosperity,” it was presented this past week by Congressman Paul Ryan (R-WI), chairman of the Budget Committee.

This new budget plan cuts $6.2 trillion from the president's proposed budget over the next 10 years. Given that spending for the current fiscal year is expected to be “only” $3.6 trillion, the size of the proposed cuts shows the magnitude of spending increases projected in the president's budget.

The Republican plan would reduce spending on domestic government agencies below 2008 levels and hold it at pre-stimulus levels for five years. This would be good for economic growth. It would free up resources for private sector use and it would mean less money with strings attached.

More unhampered private investment is needed if we are serious about job creation. Government attempts to substitute its judgment for that of the private sector have proven disruptive and have slowed recovery from the resulting recessions. Whenever government tries to create jobs artificially through so-called “stimulus” programs that redistribute income from our successes to our failures, it ensures that the jobs we have are less productive and fewer than they would have been.

If carried out, the reduction of business subsidies and the size of the federal bureaucracy, including cuts already proposed by the defense secretary, would allow a better use of resources and rising personal incomes. The shrinking and privatization of Fannie Mae and Freddie Mac would also reduce the future burden on the federal budget; and the phase-out of government mortgage guarantees would reduce taxpayer risk and remove some of the recklessness from the housing market.

The Republican plan takes the lead on long-term reforms to head off the breakdowns in the healthcare and income-security systems. Medicaid would be funded through block grants to the states, and the states would have greater authority in how they serve the needs of Medicaid patients.

Anyone who enters the Medicare system before 2022 would be covered by the current program. But anyone who enters the system after 2022 would be able to choose their own plan from a list, and the premium for that plan would be subsidized by Medicare.

Tax reform proposals would reduce the top marginal personal and corporate tax rates to 25 percent but also remove some of the complex deductions that distort economic activity.

We have a serious spending problem; and now we have a serious plan to deal with it.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

Copyright © Richard J Grant 2011