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Ryan Plan Would Weaken Automatic Response to Economic Downturns

We explained recently that House Budget Committee Chairman Paul Ryan’s budget gets the lion’s share of its savings by cutting programs that help low- and moderate-income Americans.  The adverse human and social consequences of such an approach are the paramount concern.  But these cuts would also make the economy more vulnerable to shocks by weakening the “automatic stabilizers” — increases in federal spending (and reductions in federal taxes) that occur automatically when the economy weakens — that reduce the severity of economic downturns.

The Ryan plan would convert Medicaid and the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) into block grants.  Currently, anyone meeting these programs’ eligibility requirements can receive benefits; in an economic downturn, when more people qualify for benefits because they lose their jobs or have their work hours cut, program enrollment and expenditures go up automatically, without any action by Congress.  Those additional benefits help support consumer spending by cushioning families’ loss of income.  As a result, the income and spending of households — and businesses — don’t fall as much as they otherwise would.

A block grant doesn’t provide this stabilizing role.  Under a block grant, the amount of money available to pay benefits is fixed, regardless of the state of the economy, so spending doesn’t rise automatically in response to a downturn.

When the economy begins to weaken, automatic stabilizers (along with cuts in interest rates by the Federal Reserve) are our first line of defense against a severe recession.  They provide a boost to spending when it is needed and they are inherently temporary — when the economy improves, spending returns to normal levels as people gain jobs and income and no longer qualify for benefits.

Automatic stabilizers in the federal budget are also a critical counterweight to the destabilizing effects of actions that states take in recessions due to their balanced budget requirements.  A weakening economy reduces states’ revenue and increases the need for their services, just as it does for the federal government.  States, however, must raise taxes or cut spending to close the resulting budget shortfall.  That takes money out of the economy; as a result, the income and spending of households and businesses fall more than they otherwise would.

Ryan’s proposal to block-grant SNAP would eliminate the program’s automatic stabilizing role even though SNAP doesn’t contribute to our long-term deficit problem.  Block-granting Medicaid would eliminate its automatic stabilizing role, as well — and likely lead to weaker coverage and benefits for poor households and adverse consequences for Medicaid providers, as the Congressional Budget Office’s analysis of the Ryan budget found.

Another piece of the Ryan plan — caps on total spending enforced by automatic cuts if the cap levels are breached — would eliminate government spending as an automatic stabilizer altogether; increases in unemployment insurance payments would have to be offset somewhere else, for example.  The Ryan plan falls short of turning the federal budget into a large destabilizer like state budgets are, because revenues can still respond automatically to changes in economic conditions (when people’s income falls, their income tax liability does as well) and the budget deficit can still increase in a recession.  That would change, of course, if supporters of a balanced budget amendment — a kind of Ryan plan on steroids — got their way.