From the Media Lounge

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Research in Focus

Telling it Like it Is on Medicare

Medicare has become the pivotal political issue in Washington, not just in the deficit debate, but in the Republican 2012 election as well. GOP primary candidate Newt Gingrich has spent his week furiously backpedalling from his observation on Meet the Press last weekend that Paul Ryan’s Medicare plan amounts to “right wing social engineering.” The incident shows that a willingness to gut Medicare has become the price of acceptance into the Republican Party.

Finally, however, Democrats look to be stepping up to the plate to match Republicans’ fury to gut Medicare with an equal fury to save it, a position likely to have far more sway with the 84 percent of voters who oppose changes to the program. This afternoon, Nancy Pelosi drew the line in the sand the left has been clamoring for, promising “no benefit cuts.” Democrats have also enlisted Health and Human Services Secretary Kathleen Sebelius to spread the message on Capitol Hill today that proposals within Ryan’s plan will cut the benefits of current seniors, despite the fact that full Medicare privatization only begins in 2022. For instance, by undoing the prescription doughnut hole benefits of the Affordable Care Act, the plan would leave seniors to cover a huge tab on their medication. For the 150,000 seniors in Rhode Island, this would amount to an additional $9.5 million annually.

Democrats are also circulating disturbing projections from the Center for Economic and Policy Research that projects an adult currently between the ages of 45 and 55 will have to pay $182,000 extra for health insurance under Ryan’s plan, despite having paid into Medicare for a half decade or more. This extra burden won’t just stretch budgets. $180,000 is more than a minimum wage earner would make in five years, let alone save. It shows once and for all that the Ryan plan doesn’t save Medicare, it ends it, and it doesn’t help the seniors of today or the next generation.

Unexpected Tax Revenues Lead to Unexpected Tax Cuts

As Jamelle described yesterday at The American Prospect, California just cut its deficit in half, not through dramatic spending cuts but through an unexpected tax windfall, the result of improved economic growth in the state. It’s not unique in experiencing this – Michigan and New Jersey also reported higher-than-expected tax revenues this week. Jamelle rightly says that these windfalls show that the state and federal deficits aren’t the result of rampant government spending in the last two years but were instead generated by lower revenue from flagging tax receipts in the recession (along with the Bush tax cuts and two ongoing unfunded wars).

In Michigan, which was facing a $1.4 billion deficit prior to receiving an unexpected $429 million this week, Republicans are already calling for additional tax cuts to business, which they say will strengthen the state’s nascent economic recovery. State Senate Majority Leader Randy Richardville called for cuts to the taxes that businesses pay on machinery and capital while Rep. Tom McMillin suggested cutting the personal and corporate income tax rates to 4.25 percent from 4.35 percent. This comes only a week after the Legislature passed a $1.7 billion tax cut to businesses.

There are two dangers in these proposals. The first is that they assume tax cuts for business will generate more economic growth than would restoring spending on the social programs cut to deal with the deficit. Michigan cut its unemployment insurance in March to help it deal with its deficit. Unlike businesses, which could potentially stash their tax breaks away in savings accounts, the unemployed can be pretty much guaranteed to inject benefits they get back into the economy, providing a direct stimulus with a multiplier of up to $1.90 for every $1 spent. The state also cut its K-12 education funding by $1.6 billion to deal with its deficit (although some of the funds were redirected toward higher education). If that funding was restored, the better-educated workforce it would generate would have a long-run stimulus effect of up to $13 for every $1 spent.

The other danger is that by lowering tax rates so much, Michigan will set itself up for indefinite deficits in the future. The reason the state received this windfall is that it had a reasonable tax rate. If it cuts business out of its revenue base, the damaging cuts it made to education and elsewhere will become permanent.

It’s great news that states aren’t struggling as much as we once anticipated and that their economies are recovering. As Jamelle said, deficit reduction ultimately comes down to economic growth, and these states would be wise to remember that there are ways to keep the recovery going while also undoing some of the sacrifices they forced on social programs during the budget squeeze.

Did the Budget Debate Just Swerve Left?

Despite the fact that a deficit-reduction deal probably won’t be reached through the adoption of a comprehensive budget package, lawmakers continue to produce them, tweaking the available deficit-reduction mechanisms to just their liking. So far this week, Sens. Pat Toomey and Kent Conrad have both released budgets, although Conrad’s has yet to go public. What they both show is a response to the backlash to Paul Ryan’s budget and the GOP’s current budget strategy.

Toomey, taking a hint from the town hallspublic opinion polls, and a special election in New York state, not only spares Medicare in his budget proposal — he increases spending on it relative to Obama’s budget proposal. That’s great news, but it may signal that the debate is getting so focused on Medicare that we’re forgetting all the other programs Republicans want to cut. Toomey’s budget cuts nondefense discretionary spending to 2006 levels, which is crazy enough on its own (previous GOP budgets have only proposed cutting back to 2008 levels, also unrealistic), but it then proposes to cap spending at that level for six years. This is the equivalent of suggesting the 2012 budget revert to 2000 levels (12 years ago), before we had two wars, an array of homeland security needs, or retiring baby boomers. Using the CBO’s fiscal multipliers, that nondefense discretionary cut of $214 billion would result in 2.5 million job losses in 2012 alone. It’s an absurd proposal, but one that might fly under the radar while he touts Medicare spending.

Meanwhile, Conrad introduced a budget to Senate Democrats yesterday that reduces the deficit through a 50-50 combination of tax increases and spending cuts, a fairer formula than even what Obama is proposing. He too is probably responding to public opinion, which now acknowledges that balancing the budget will require tax increases. According to a Reuters survey, a majority of Wall Street fund managers and economists recognize the reality that tax increases are needed to balance the budget. The public, too, supports tax increases for at least the wealthy. Eighty-one percent of Americans support a millionaire’s tax like the one rumored to be in Conrad’s budget, which could bring in as much as $78 billion per year. According to Gallup, they’d most like to see deficit reduction through a 50-50 approach like what Conrad is suggesting.

All in all, these budgets show good progress. The public is starting to understand what’s at stake, and the terms of debate are shifting in the Democrats’ favor.