The 3 Worst Assumptions in Paul Ryan's Budget


As expected, Paul Ryan's budget is not fairing well as it passes through the liberal blogosphere's bilious digestive tract. Some of Ryan's ideas are reasonable-sounding, but not particularly convincing. For example, if we stop telling seniors the government will pick up their health tab, that just might cut down on some superfluous spending. But should we expect seniors to accept soft rationing in 2020 even when their medical bills exceed their "premium support"?

While some of these ideas are strong-sounding, but weak in substance, others have a distinctively false taste. Here are three:

1. Job Growth Will Double Next Year If We Fire Hundreds of Thousands of Government Workers, Contractors Today

Goldman Sachs and other independent economic teams have estimated that cutting $30-$60 billion this year will result in hundreds of thousands of lost jobs. These jobs loses will happen not only within government, but in the private sector as a shrinking Uncle Sam dries up contractor positions and other jobs. But Ryan's analysis predicts the pace of job growth next year to double -- yes, double -- its current pace despite $72 billion in cuts. I don't know of a precedent for this: a historic explosion of jobs growth coinciding with historic spending cuts without something else historic happening, like export growth. It's a remarkable projection.

2. Tuition Costs Will Slow If We Stop Writing $3,000 Checks to Needy Students

Paul Ryan's budget insists that slowly rising federal Pell grants are behind rising college costs. The typical Pell grant is around $3,000. The typical cost for a four-year private university is ten times that figure.

Here's a graph from College Board economist Sandy Baum, comparing federal Pell grants to total college costs. The relationship between rising Pell grants and rising college costs is unclear, to say the least.

Pell Grants

Meanwhile, we know that college is an appreciating asset whose cost is flying away from affordability. Are Pell grant cuts really a sensible addition-by-subtraction?

3. We Can Trust Private Insurance Companies Alone to Rein in Medical Inflation

To debunk this claim, I'll turn the stage over to health care economist Uwe Reinhardt, who looked at the private insurance market in Oregon:

The chart below shows the average payments made by the nine largest private health plans to Oregon hospitals for a set of fairly standard medical procedures. The average payment for a vaginal delivery, for example, rose to $6,424 in 2009 from $3,805 in 2005, and the payment for a knee joint replacement to $28,682 from $19,866. Data for California hospitals shown in the report are just as alarming.

Evidently, private insurers have not been able to prevent these significant price increases. The question is whether they would be able to keep premiums quoted Medicare enrollees under the Rivlin-Ryan plan to anything as low a growth rate as G.D.P. plus one percentage point. If not, the ever-growing gap between the annual growth of the Medicare voucher and the premiums quoted Medicare enrollees after 2021 would become a major burden on the elderly and, under our democratic system, would lead to vehement political opposition to the Rivlin-Ryan plan.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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