On today's edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca and Congressman Paul Ryan to discuss the latest in the debt ceiling negotiations, the Senate's Gang of Six plan, and the need to means test entitlement reform.
Paul Ryan: The Gang of Six Budget Effort
Why I oppose the Gang of Six plan
Boehner and Obama Nearing Deal on Cuts and Taxes
Paul Ryan: Debt Negotiations and Taxes
At 15 Federal Agencies, Death More Common Than Job Loss
Congressman Paul Ryan
Jackson: Congressman, thanks so much for taking the time to be here. It’s really a pleasure to have you on the show.
Ryan: Yeah. My pleasure. Good morning.
Jackson: I thought we’d start off with a question, what’s the likelihood that you think of actually coming to a debt deal and if not, what are you going to tell your constituents back home should that not materialize?
Ryan: I think it’s a high likelihood that something will be done before August 2nd. We want to cut spending, it’s just that clear. And we’ve always said, you know, look for a dollar of raise you need to cut at least a dollar in cuts. And that’s what we’re holding out for. Now, is there going to be a big deal agreement? I’ve never been enthusiastic or let me just say, I’ve never really expected a high likelihood of a big deal, because the President really wants a big tax increase. And I have yet to see ideas that actually bend the curve on Government spending.
Look, as a conservative I want to reform the Tax Code and I do believe through reforming the Tax Code and better economic growth, you’ll have higher revenues. But I also think you have to be as equally vigilant on the size of Government. Government is already at 24% of GDP and it’s going up to 40 and then 60% over the course of this century. 40% by the time my kids are my age. I have yet to see any idea put on the table that actually brings Government back down toward its historic size of 20% of GDP. And until you see Government spending coming down in its size, back toward at least its historic rate, why on earth would we want to start chasing a large Government spending number with higher taxes? That to me is just a fool’s errand.
What I want to see are spending cuts. And I do believe we’ll get a package of spending cuts. What exactly they will be, and what size, and shape and form, I’m not sure. But I do believe there will be some kind of an agreement on spending cuts that will raise the debt limit for some period of time. And I don’t know exactly what that period of time is, because I don’t know how big the spending cuts will be.
Domenech: Congressman, you had a pretty forceful reaction to the Gang of Six plan that ran through a number of your problems with it. I wonder if you could summarize for us some of your reactions to that plan and your thoughts on reading it. Obviously it doesn‘t have the sophistication or the detail of others that have been put out there --
Domenech: -- but just from what you know if it what your reactions were.
Ryan: Well, it six pages of talking points so it’s tough to really analyze it. There are no, for people like us who get into the budget stuff there are no tables, so there’s no real specifics. What we’ve seen, the good thing, first of all I understand why senators are frustrated. They haven’t passed a budget in over 800 days, so it’s been two years since they’ve even bothered trying to pass a budget in the Senate. So, I can share in the frustration with the Senators, the six or seven who are for this. So, I’m glad people are putting ideas on the table. And the one thing I like about this plan is it purports to want a lower tax rate. Lower the tax rates across the board for businesses and individuals, that’s really good.
Ryan: That’s necessary for economic growth. Having said that, they seem to have numbers that I just can’t see how they add up. Three different baselines. It looks like they want to lower tax rates, keep a bunch of big loopholes, you know, expenditures and then raise revenues. Those are conflicting goals, so how they achieve that is beyond me.
The other thing is the spending cuts they claim just are sort of not there. They’re just basically commitments that other Senators in Congressional committees later in the year will come up with a plan and the details. So, it’s really not an actual plan. It’s sort of a plan to have a plan. And I would just say, a plan to have a plan is not really a plan. And so, you know, it’s pretty clear on the revenue numbers it wants, but it’s not clear on how they get to the spending savings that they’re claiming. And I don’t think you ever get spending cuts unless they’re actually specific. Unless they’re actually detailed. Unless you know you’re getting them.
Cianfrocca: Well Congressman, in terms of what you just said, you’ve earned a reputation for domesticating ideas that no one else is willing to touch. And I’ve got one of those for you. What do you think about --
Ryan: Okay. Let’s hear it.
Cianfrocca -- means testing entitlements? And it’s a dirty word. I know there’s --
Ryan: It’s been in every one of my bills I’ve been doing for a decade.
Cianfrocca Well, I’ve heard some very interesting proposals for inducing current and soon to be retirees who have significant income and/or wealth to participate in funding their own benefits. And from where I sit, out of all the ideas out there, this is really the only credible way to bend the curve on deficits.
Ryan: No. I think it’s a very good idea. We did increase Part D means testing. That is now occurring, I’m talking about Medicare. Part B means testing was introduced in 2003. Our budget introduces means testing across the board for Medicare. I have introduced many Social Security bills that means test the benefit increase for affluent individuals. I really do believe that you can’t have a cradle the grave welfare state where you subsidize everybody at the same rate in a society, especially when you have 10,000 baby boomers retiring a day and far fewer workers following them into retirement. The easiest and best place to get savings is from the people who have the most money who don’t need all these subsidies. And so I agree with that. I think means testing, as soon as you can get means testing is one of the smartest first best easiest ideas we could pass.
Cianfrocca: And do you believe that, you know, you’ve done an awful lot of fighting over this and your plan --
Cianfrocca: -- what do you think the prospects are politically for getting something like this, looking beyond the current debt ceiling debate?
Ryan: Well, I do think means testing is coming around. Now, what liberals don’t like about means testing is they believe it loses this sort of universal social insurance feel --
Ryan: -- of a program where --
Cianfrocca: I don’t have insurance any more.
Ryan: Yeah. Right. Exactly.
Cianfrocca: Well, it never was.
Ryan: It’s not really technically insurance. These programs are made to look like insurance.
Ryan: They’re pay as you go programs so they’re not prefunded programs. But nevertheless, there’s only so much money to go around. We have a $99.4 trillion unfunded liability in which basically revolves around Medicare, Medicaid and Social Security. The Government is making so many unfunded promises to people that it’s, there’s no way the Government can keep these promises. And so to me the best way to do, to wipe out these unfunded liabilities is not to subsidize people who can subsidize themselves. That’s just the smartest easiest way to go. I believe we ought to have a safety net, and that means you target your support in society to the people who cannot help themselves or the people who fall through the cracks, but don’t subsidize everybody else. What you end up doing in that kind of a society because of the taxes that you would have to raise to fuel that is you’ll have managed decline. You’ll have a stagnant society, a slow growth European like society and you’ll end up moving toward a tipping point where the majority of Americans become that dependent upon Government then upon themselves.
Well, that changes the character of our country. That saps and drains people of their incentive and their will to make the most of their lives, and it raises the barriers against people becoming independent. Against people climbing the income ladder of upper mobility and having a society based on equal opportunity. It moves us toward a society where the Government necessarily has to be so large that it sees its role as equalizing the results of our lives instead of promoting equal opportunity which has been historically the American idea.
Cianfrocca: Well, do you think that in thinking about revenue, and there’s a lot of discussion at this point about changing the Tax Code in such a way that incentives are improved without, you know, and they’re also talking about raising revenue at the same time. And you mentioned the Gang of Six stuff. But here’s my question --
Cianfrocca: -- can higher taxes or a higher tax rate, is there anything we can even do right now to raise revenue levels, because they’re very depressed levels.
Ryan: Sure. So, look at the CBO baseline. The CBO is already telling us that the current taxes we have right now in place will recover back to their historical level and go beyond that.
Cianfrocca: I don’t believe that.
Ryan: So well, I’m just telling you the --
Cianfrocca: They’re like at 1948 levels right now and not increasing.
Ryan: Right. But here’s why, the economy is terrible. So that’s the issue. What I’m trying to get to is if you look at the chart of revenues over time, it is less dependent on tax rate levels than it is on economic growth. If the economy grows, revenues grow. If the economy grows, revenues grow as a share of GDP.
Cianfrocca: I disagree (unintelligible).
Ryan: And so let’s have an efficient tax system that maximizes incentives, makes it easier for businesses to be formed, makes it easier for businesses to compete internationally, so we can have more jobs, more growth, more prosperity. And then you will have more revenues and you’ll get more revenues as a share of GDP. That’s the holy grail of tax reform.
So, I fundamentally believe you can get more revenues to the Government, but the key way to do that is to do it in a way to get economic growth. If you just simply raise tax rates, like current law is showing it’s going to be in 2013, like President Obama really wants to fight for higher tax rates, you will take it away from growth.
Cianfrocca: Yeah. That’s exactly right.
Ryan: And you will be getting more revenues from a shrinking pie. Look, I just don’t --
Cianfrocca: I don’t (unintelligible).
Ryan: Go ahead.
Cianfrocca: Even if we do get a certain amount of growth back, I mean we’re below 2% trend line right now which is --
Cianfrocca: -- about the same as population growth. It’s not anything like the 3% that’s baked into the CBO’s estimates.
Ryan: That’s right.
Cianfrocca: What worries me is because of zero interest rates, that’s the other piece of this. And that’s --
Ryan: That’s exactly right.
Cianfrocca: -- that’s a Fed thing, and I don’t see that tax revenues can get anywhere near to 18% of GDP. Right now they’re at 16.4.
Ryan: Yeah. Larry Lindsey has done some pretty good work on this and he’s got a blog that puts a lot of this stuff out. He’s a pretty good economist.
Cianfrocca: He was Bush’s economist secretary.
Ryan: Yeah. He knows his stuff pretty well, and what I would say is I think CBO is underestimating future interest rates definitely in their baseline, because of the Federal Reserve’s activities. Also, if we don’t get spending under control, meaning get our fiscal policy under control, when you’re putting it directly on a collision course with their monetary policy which, to cut to the chase means we’re going to have higher interest rates. Because of our spending and because of what the Fed is doing. The other thing is, we will have slow growth if we go down this tax rate increase route. And so what do we want to do?
Cianfrocca: Absolutely right.
Ryan: The reason we call our budget the path to prosperity is because we believe it’s the best way to get economic growth, prosperity, and get lower interest rates because we cut spending, we put in place a plan to pay off the debt, we get the debt levels down away from that dangerous 90% level that every economist warns us about, and we get rid of tax loopholes, we simplify the Tax Code, bring tax rates down, we target the same level of revenues that we have today, and I would argue we would get higher revenues, because it will produce faster economic growth. The Heritage Foundation ran numbers on our budget and they claim that we’re going to get much higher revenues because we’ll get a lot more job creation and economic growth.
Domenech: Congressman, I know you’re time is short. Let’s go out on this. When it comes to the people who are back in your district and who you are talking to in sort of the normal American experience, obviously their minds are on the economy.
Ryan: Very much so.
Domenech: Obviously their minds are focused on the challenge of unemployment, the people within their families and their friends who can’t find jobs. I wonder if you could speak directly to that issue, which is so tangible for so many Americans, and how the sort of solutions that you’re proposing will have a different effect than the ones that the President is putting out there?
Ryan: Yeah. I have family members, and friends, and neighbors who are looking for jobs. I live in Janesville, Wisconsin and our town was hit really hard. We lost our big employer, you know, a couple years ago and we haven’t recovered since. So, believe me, I live in a community that is just like you described. What is not working is what we’ve been doing. What the President has been doing with policy. All this borrowing and all this spending is actually hurting the economy. It’s injecting more uncertainty in the economy.
I basically think there are four things you need to do and it’s basically get back to the foundations. Get back to basics. Number one, cut spending. Get spending under control so that we’re getting our debt under control. That removes future tax threats, future interest rate increase threats. Number two, tame the Regulatory state. You can’t underestimate how dangerous and harmful this whole new slew of regulations in energy, in financial services and healthcare are putting a chilling effect on capital, on risk taking, on job creation.
Jackson: You’re absolutely right.
Ryan: Number three, monetary policy. I think you need to go back to a policy of sound money. We don’t have anything but right now. People are really worried about the future of prices, the soundness of the dollar. That’s a big, big, big problem. And look four, you can’t ignore these explosions of spending that are coming. Like healthcare and all these other issues. You’ve got to deal with these issues. Healthcare and the entitlements. They are just massive future tax increases or inflation, and so just the foundations of growth. Get your spending under control. Get your debts under control.
Reform your tax system, that’s the fourth one I was going to say. Reform your tax system so it’s pro-growth, internationally competitive, tame the regulatory state so we stop playing crony (phonetic sp.) capitalism and stop putting a chilling effect on hiring, and get back to a policy of sound money. Those are the macro-economic foundations, the basic building blocks to an economic growth. They all revolve around one thing, if the economy the small business person, the entrepreneur, the individual who is the economy, it is not Washington, stop trying to play puppet master in Washington with the economy and release Americans to do what they do best, which is go out and work, innovate, invest, take risks, and produce. And we are stopping that with the policies that are coming out of this town today.
Jackson: Congressman, thanks again for taking a break from your busy D.C. schedule to join us today.
Ryan: You bet guys. Take care.
Domenech: Thanks so much.
(End of Podcast)