Simon Johnson: Mitt Romney and Paul Ryan's Budget Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You." The conventional wisdom in American presidential politics is that once a candidate has secured a party's nomination, he tends to move away from articulating the views of the party faithful toward the political center. This makes sense as a way to win votes in the general election, and there has been a presumption that Mitt Romney will head in that direction. However, in a panel discussion on Tuesday, Vin Weber, a senior adviser to Mr. Romney, indicated that the campaign might be moving toward positions on fiscal policy that were close to those proposed by Representative Paul D. Ryan of Wisconsin and his Republican colleagues on the House Budget Committee. When Mr. Ryan presented his budget in March, Mr. Romney described it as "marvelous." In the Wisconsin primary, Mr. Ryan campaigned with Mr. Romney and speculation arose that Mr. Ryan might be the Republican vice presidential candidate. Yet Mr. Romney's embrace of the Ryan plan during the general election campaign would represent a significant shift toward a much more extreme view on the future of government than many Romney proposals during the primaries (see this assessment of his primary proposals by the Committee for a Responsible Federal Budget, a bipartisan bipartisan fiscal watchdog focused on deficit reduction). Mr. Weber said he was not speaking for Mr. Romney; I was on the same panel, and my strong impression is that Mr. Weber was floating trial balloons. Mr. Ryan's proposals would substantially phase out the federal government's role in providing basic social insurance for older people by sharply reducing Medicare and by eliminating almost all nonmilitary discretionary spending. The House Budget Committee is also proposing to remove the only safeguard we have against the failure of another megabank. Some libertarians praise these proposals. But these Republicans" strategy is not so much to remove government in favor of abstract "markets" but to shift the balance of power away from government and toward entrenched private lobby groups, particularly in the health care sector and on Wall Street. On Medicare, Mr. Ryan's proposal is very simple. He wants to cap increases in spending on Medicare below the rate at which health care costs increase. By his own estimates, the share of Medicare spending relative to the size of the economy would shrink sharply over the coming decades. (Mr. Ryan proposes to keep Medicare in place for people currently retired and soon to reach the eligibility age of 65, so his proposal would affect people 55 and under today. I, by the way, am not yet 55). Mr. Ryan's approach certainly reduces this dimension of government spending over time. But keep in mind how the nonpartisan Congressional Budget Office has assessed these ideas: according to the C.B.O., this approach would increase total health care costs as a share of the economy and as paid by you (see Figure 1 on Page 22 of this C.B.O. document, which analyzes the proposal Mr. Ryan presented last year; while some details are different this year, the essential substance is the same). The idea behind this C.B.O. scoring is simple. At present the government buys health care for about 100 million Americans. Certainly, the government could use this buying power more effectively as a way to hold down costs. The government has much more market power than you or I would have relative to health care providers and insurers when we are in our 70s, 80s and 90s. The C.B.O. scoring is based on actual experience, including administrative costs in Medicare compared with private insurance. These costs will fall directly on older Americans and their families. Before Medicare was created in the 1960s, there was no meaningful health care insurance for older Americans - and there will be none after Medicare is phased out. For the private sector, this is a set of uninsurable risks. The federal government provides a minimum level of social insurance to all of us, in case we outlive our assets and our families" ability to support us. Mr. Ryan - and now perhaps Mr. Romney - would end this role. According to the C.B.O., the net impact would be to increase what you pay for health care. The government-provided piece would decline, but your insurance premiums and other out-of-pocket expenses would increase. Just as striking is Mr. Ryan's proposal for nonmilitary discretionary spending. This currently amounts to about $650 billion, about 4 percent of gross domestic product, and it has been around this size relative to the economy for about 50 years. This now represents about 20 percent of federal government activity. The federal government is roughly a $3.3 trillion shop, annually, with the big chunks of spending being Social Security, Medicare and other government-backed health care, and the military. The United States economy has a total annual production, or G.D.P., of about $15 trillion. Mr. Ryan is less clear on the details, but assuming that he would seek to maintain military spending at no less than 3 percent of G.D.P. - which is its lowest level in the postwar period - my colleague James Kwak has projected that the domestic discretionary spending would fall to almost zero in the coming decades (see the charts at the end of this blog post). I'm all in favor of bringing the federal debt under control - and stabilizing it at a reasonable level relative to the size of the economy (say, 40 or 50 percent of G.D.P.). But there is no need to eviscerate the federal government to achieve this over a reasonable time frame. Mr. Ryan's plan would effectively shut down the federal government's ability to set rules for the economy and to provide essential public services, such as air traffic control, the monitoring of hurricanes and the provision of disaster relief. Big private companies will no doubt do well under this approach; there will be fewer restrictions on what they do (e.g., as the Environmental Protection Agency winds down or food safety rules go unenforced), and they will be able to increase their market power (as the Department of Justice drops its remaining interest in antitrust issues). This is bad news for entrepreneurs or anyone seeking to invest in start-up companies. The playing field will become ever more uneven - just as it was when J.P. Morgan and his colleagues were building the original industrial, railroad and energy trusts at the end of the 19th century. From the perspective of too-big-to-fail banks, the news from Mr. Ryan is even better. The House Republicans are proposing to repeal Title II of Dodd-Frank, which creates the legal authority to wind down large financial institutions in an orderly fashion. Without this, we are back at the situation of fall 2008, where big banks can blow themselves up, inflict great damage on the economy and also receive large-scale bailouts (see my recent post in this space for more on exactly how that works). None of these Republican proposals should be dismissed as pure rhetoric. For many Republicans in Congress, the Ryan proposals are a very real agenda. And as Ezra Klein has argued, if Mr. Romney is elected president, the Republicans are likely to gain control of the Senate and would almost certainly be able to push through a version of the Ryan agenda - particularly as the key details would be immune to filibuster in the Senate. Under such a Ryan-Romney approach, big risks - such as severe ill health and the danger of other calamities - would be shifted from society to individuals. Large corporations in health care and finance and perhaps in other sectors would benefit. So, too, would the people who control those favored legal entities. This is a return to the way the United States economy operated more than 100 years ago - in what Mark Twain ironically labeled the Gilded Age. A few people would do very well; almost everyone else is in for a hard time.