Saving Chairman Ryan

Thursday, 21 April 2011 01:00

On April 5, Rep. Paul Ryan, chairman of the House Budget Committee, announced a proposed 2012 budget resolution. An unusual aspect of this proposal is that it addresses long-term budgetary issues, not merely those of the coming fiscal year. The chairman’s proposal advocates long-term spending cuts of about $5.8 trillion, with a reduction in federal revenues through tax cuts and other measures of $4.2 trillion, for a net projected budget reduction of about $1.6 trillion. Ryan’s proposal includes significant cutbacks in the Medicare and Medicaid programs, while skirting the needed changes in our Social Security System.

Liberal economist Paul Krugman has excoriated the Ryan proposal as “ludicrous and cruel” for its cutbacks to socially beneficial programs. Krugman also alleged that the proposal represents “more voodoo economics,” as its projections presuppose the doctrine that lower federal tax rates will stimulate economic activity greatly, creating more than enough tax revenue to offset the lower marginal rate of taxation.

On the conservative side, David Brooks gave credit to Ryan for moving us off “unreality island.” While imperfect and incomplete, the proposal forces Americans to confront the choice between much higher tax rates or cutbacks in the welfare state edifice.

I agree with David Brooks in this respect. We can no longer afford to treat massive entitlement programs like Medicare, Medicaid and Social Security as sacrosanct. Our population is aging, health care costs are escalating, and something has to give. It has been said that demography is destiny. The United States, owing to an influx of immigrants with higher than native-born fertility rates, is not experiencing zero or negative population growth (compare, say, Italy or Japan). Nevertheless, we are an aging society. Demographers project that the proportion of our society 65 years and older will increase from 12.4% in the year 2000 to 19.6% in 2030, according to Public Health and Aging: Trends in Aging, United States and Worldwide. Although Medicare and particularly Medicaid face earlier insolvency risk, the Social Security system is also unsound from an actuarial point of view.

Therefore, we need to get away from the temptations of demagoguery. We face difficult social choices and there is undeniably a potential element of conflict between the generations. For this reason, it is heartening to hear that that a bipartisan “gang of six” in Congress may propose changes to the Social Security system and other serious deficit-reducing policies, including tax policy. Gang member Senator Mark Warner (D-Va.) said to Bob Schieffer on the CBS program, “Face the Nation”: “You know, part of this is just math — 16 workers for every one retiree 50 years ago, three workers for every retiree now.”

I don’t expect that the current budget dilemmas will be resolved by statesmanship in Congress. Instead, the presidential candidates will take their positions to the voters in the next presidential campaign, which is likely to focus heavily on domestic issues: The budget, the public debt and the economy.

Andrew Szabo CFA is managing director of NewOak Financial Solutions LLC. Questions, please contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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