The Fiscal Impact of Obama's Budget Speech

US President Barack Obama along with House Minority Leader John Boehner of Ohio (2nd L), House Minority Whip Eric Cantor of Virginia (2nd R) and House Republican Conference Chairman Mike Pence (R)

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, David Leonhardt, writer of the "Economic Scene" column for the New York Times, broke down the fiscal impact of President Obama's deficit reduction plan, and how it differs from the Paul Ryan proposal.

Bush tax cuts - back on the table

Rep. Paul Ryan's 2012 budget calls for a 10 percent tax cut for corporations and top income earners. President Obama's counter proposal, presented yesterday, raises the top tax rate by 4 percent.

The stage is set for a fight over the recently-extended Bush tax cuts, and if or when we should let them expire. According to David Leonhardt, if we're as serious about deficit reduction as we're all pretending to be, there's at least an historical argument for putting them out to pasture.

When you look at CBO numbers, the biggest contributors [to the deficit] were, one, what you could call the Bush policies—tax cuts, the Medicare prescription drug programs, the wars—and the second biggest were the two recessions, first in 2001 and again in 2007. They were far bigger as a share of the deficit than the stimulus, so it's absolutely true that the Bush tax cuts and the Medicare prescription drug program are big drivers of the short term deficit. Maybe the easiest way to see this is if you repeal all the Bush tax cuts, you'd do about 75 percent of the deficit reduction that economists say we need to do over the next 5 years.

Closing loopholes, but which ones?

Obama and Ryan may want to take taxes in opposite directions, but each policy touts the same revenue-raising measure: closing tax loopholes. Trimming back exclusions, deductions and credits looks good on paper, said Leonhardt, but the devil will be in the details—something both politicians are short on.

We should not take too seriously a plan's own claims to close tax loopholes...You and I and most listeners can quickly agree with the notion that loopholes should be closed and the tax code should be fairer, simpler, and rates should be lower. That all sounds very good, but the fact is that the big loopholes are very popular: the employer-provided health insurance exemption, the mortgage interest deduction, the tax exclusion for 401k contributions. When people say 'close loopholes,' it's not that meaningful. What we need to know is how are you going to close loopholes.

Cutting during recovery

Leonhardt said it was necessary to keep an eye on our debt and deficits, but was ambivalent about taking drastic and immediate action in the middle of an economic recovery. The recent round of spending cuts, and likely more on the way, have in recent weeks made economic forecasters more pessimistic about growth for the rest of the year, he said.

Why might we want to put off tackling Washington's spending problem? To make his argument, Leonhardt offered two comparative approaches to fiscal woes taken by two very different countries.

Look at what's happening in England, where they're trying the austerity approach; their economy is doing really badly. You don't hear this comparison as often, but I think it's interesting: if you look at China, which did by far the biggest stimulus in the world as a share of their economy, they recovered better than anyone. I'm not saying it's only because of the stimulus, but if you go talk to people in China, they're really pleased with it and they think it played an important role.

The (eventual) end of Medicare

The most controversial piece of either budget proposal is Ryan's plan for Medicare, which he would transform into a voucher system subsidizing the purchase of private health coverage for seniors. "The end of Medicare as we know it," so-called by President Obama.

Interestingly, Leonhardt said the plan was both too conservative and too radical—conservative for the old promises it keeps, radical for giving them an expiration date.

It's too conservative in that it says to anyone 55 or older—more than a third of adults, many of whom will be alive for decades and run up enormous Medicare costs, and who have not paid enough Medicare taxes to cover their bills, not even close—it says to them, 'Nothing will change in Medicare. You can go on Medicare, we will do nothing to try to restrain Medicare costs, you can run up bills that are vastly larger than you ever paid as taxpayers, and we will pass that bill on to everyone younger than 55.'

To those people paying the bill, those people under 55, we say, 'You don't get Medicare. You get something less generous, but we don't have any choice.' I think it's deeply unfair to make that big divide and say, 'I've got this great plan, it's really great, it won't harm you, it will save vast amounts of money—but don't worry: so long as you're 55, you won't have to be any part of it.'

Does Ryan's plan sound familiar?

Many commentators are starting to notice that Ryan's health care policies actually sound a lot the ones put forth in President Obama's overhaul last year. Providing tax credits to low-income citizens so that they can participate in health care "exchanges," or artificial markets, isn't that far off from providing a voucher for seniors to purchase a private plan.

Leonhardt said that evinces just how conservative Obama's reform was too. Ryan's plan simply takes it a few steps further by doing away with Medicare entirely.

It really puts the lie to the notion that last year's health care reform was a radical bill. It has flaws, but it's not radical. It's clearly to the right of the health care reforms proposed by Nixon and Clinton. It decides to follow a market system, it doesn't begin expanding Medicare, it doesn't tell the uninsured, 'You'll participate in a government program like Medicare.' It instead sets up markets. Ryan would expand that so there would be no more single payer system, the elderly would be subsidized, and insurance would be an entirely private market.