Paul Ryan Means Romney is Serious

Two days have passed since Romney tapped Paul Ryan to be his running mate, and I am very happy with the pick. It sends a clear message to the electorate, to the Democrats, and to the Republicans. The message is this: It's time to get serious about this nation's problems.

The most notable thing about Ryan's career is his budget, entitled "A Roadmap For America's Future", which is his attempt to change the national conversation about the problems that the Federal government faces. His "Roadmap" specifically addresses Medicare and Medicaid, the two fastest growing Federal programs over the past 20 years.

Specifically, he wants to block grant Medicaid to the states (giving them a blank check). For Medicare, he wants to subsidize private health insurance plans ("premium support" or "insurance vouchers") by the amount that we currently spend per Medicare enrolled (about 16k last year). Both the block grant and the insurance voucher would be capped to grow at no more than inflation plus economic growth per year (4.5-5% in normal years).

If we continue on autopilot absent major reform, we will face a fiscal crisis directly on the scale of the Great Depression within a generation. And it's no longer alarmist to say it. In 20 years (or less), this country could easily find itself in the same hopeless situation that Greece is currently embroiled in.

Here is why:

 

Source: 1996 Federal Budget and 2013 Federal Budget

Over the past 20 years (for which official spending figures are available), Medicaid has grown at an annual rate of 9.62%. Over the same time period, Medicare has grown at an annual rate of 9.06%. Those are eye popping numbers considering that, between 1991 and 2007 (I'm purposely excluding 2008 and onward due to the steep decline in Federal revenue because of the recession), Federal revenues have only grown by 5.7% per year. Remember, that's cherry picking the statistics to exclude the precipitous decline in Federal revenue caused by the recession in 2008 and 2009.

Let's put that in perspective. In 2011, Medicare and Medicaid combined to 5% of GDP. Over the past 10 years, Medicare and Medicaid have grown by about 8% on average. Let's extrapolate and assume that it will, barring any meaningful reform, continue to grow at 8% per year while the economy grows at 3% per year (our historical average from 1950-present). Where do we stand in year 2031?

At that point in time, Medicaid will cost us 1.3 trillion dollars while Medicare will cost us 2.2 trillion dollars. Our economy at that point in time will (excluding any negative impact that high health spending could have on the rest of the economy) stand at 27 trillion dollars. Combined, they'd eat up 13% of national GDP, roughly 3 times as much as what we currently spend on national defense. Our current national government spends about 25% of GDP. So those two programs alone (to say nothing of Social Security, which is currently 50% larger than Medicare, although it grows at a slower rate of 5% per year) would total up to more than half the size of our current government.

Remember, that's excluding any negative economic effect that we'd incur by spending so much money on public healthcare. This is why Republicans keep repeating that Medicare and Medicaid represent "the most predictable economic crisis in history". Because if we don't enact any meaningful reform now, the next generation will be completely screwed. The Federal government simply can't pay out those obligations in the future, not without draconian tax hikes or spending cuts in other crucial areas of government (like Social Security, national defense, infrastructure).

The Democrats are determined to demagogue this issue ("Mediscare") to win the next election cycle. They figure they'll kick the can down the road until entitlements reform becomes absolutely impossible to ignore. This is the surest path to fiscal destruction. And unlike the situation in Greece, there is no EU-like entity that we can count on to bail us out. 

Ryan's roadmap budget is why I like him as the VP nominee for the GOP. Because you can't tap Paul Ryan as vice president without debating Medicare and Medicaid. And that's a debate that this country sorely needs.