The Ryan Budget: A Test of Character for Obama

It was fateful that Paul Ryan released his budget plan the same week Barack Obama launched his re-election campaign — because we will now see what matters most to Obama.

The President has talked passionately and consistently about the need to tackle the country's problems, act like grownups, do the hard things and win the future. But he has also skipped every opportunity to say how he'd tackle the gigantic problem of entitlements. Ryan's plan is deeply flawed, but it is courageous. It should prompt the President to say, in effect, "You're right about the problem. You're wrong about the solution. And here's how I would accomplish the same goal by more humane and responsible means." That would be the beginning of a great national conversation.

The liberal establishment is in full fury over Ryan's plan. From the New York Times to the influential website TPM (Talking Points Memo), all quickly denounced it. And it is an odd proposal from a man who seems genuinely committed to a comprehensive solution to the U.S.'s fiscal crisis. Ryan makes magical assumptions about growth — and thus tax revenues. He tells us that once his policies are enacted, unemployment will decline to 4%, a rate that the U.S. has not seen for nearly half a century. The plan does not touch Social Security, and it does not specify the actual programs it would cut. So for all its supposed radicalism, it's actually quite weak at outlining reductions in government spending. The bulk of the deficit reduction — which allows for the large tax cuts in Ryan's plan — would come from changing American health care. But there, too, Ryan's plan is highly unrealistic.

Over the past two years, Ryan has used the Congressional Budget Office's analysis of Obama's health care plan to criticize it relentlessly. Now the CBO has scored Ryancare, and it is a devastating critique. The main mechanism by which Ryan would cut costs on health care is to limit payments for Medicare and Medicaid. This would save money for the federal government, but it's not clear at all that it would lower health care prices for seniors or the poor. In fact, last year the CBO studied Ryan's voucher plan and concluded that it would raise costs because "future beneficiaries would probably face higher premiums in the private market for a package of benefits similar to that currently provided by Medicare." In other words, Medicare — the Walmart of American health care — can bargain for lower prices than an individual can.

The theory behind Ryan's health plan is that if individuals have to pay for their health care, they will shop carefully and drive down costs. But health is an unusual economic good and is unlikely to follow the usual market pattern. (Look at higher education: consumers pay for a large share of the total, and costs still rise at three times inflation every year.) In health care, a huge part of the expense relates to a small percentage of sick patients and to the last year of life (and those two categories overlap). Eighty-five percent of Medicare costs are generated by just 25% of patients. Even in the most conservative health care plan, the health savings account, people buy catastrophic insurance. Well, that sick 25% of the patient population would have catastrophic insurance, which would still explode the Medicare budget.

So why do I applaud the Ryan plan? Because it is a serious effort to tackle entitlement programs, even though any discussion of cuts in these programs — which are inevitable and unavoidable — could be political suicide. If Democrats don't like his budget ideas, they should propose their own — presumably without tax cuts and with stronger protections for Medicare and Medicaid and deeper reductions in defense spending. But they, too, must face up to the fiscal reality. The Government Accountability Office concludes that America faces a "fiscal gap" of $99.4 trillion over the next 75 years, which would mean we would have to increase taxes by 50% or reduce spending by 35% simply to stop accumulating more debt. Medicare, Medicaid and Social Security will together make up 50% of the federal budget by 2021.

For liberals, the long-term fiscal crisis should seem devastating. If entitlement programs continue to grow, they will soon crowd out almost all other government spending. Washington Post blogger Ezra Klein has pointed out that the federal government is now an insurance company with an army. This means that there will be little money left for programs to address income inequality, poverty, education, infrastructure, science and technology, research and all the other purposes of active, energetic government.

Liberals fear an attack on the welfare state, so they have become unthinking defenders of every aspect of that state. Consider Social Security. The left doesn't seem to understand that it has won the war. Conservatives long tried to turn Social Security into a set of individual retirement accounts. That failed, and now they propose means testing and other changes that are highly progressive. This is a deal worth making.

Perhaps most important, American entitlement programs are actually not that progressive. The number of people eligible for Social Security and Medicare will double by 2030. Sustaining these programs in anything like their current form will mean cutting deeply or eliminating most other government programs. Why has the care and feeding of America's elderly become the only cause of American liberalism?

Obama has an obvious script in front of him. He could turn every item in Ryan's plan into an attack ad, scare the elderly and ride to victory in 2012. But that would probably mean we had pushed off reform of entitlement programs one more time, hoping that someone sometime in the future will lead this country.