Ryan Plan to Slash Medicaid Could Cost the Economy Nearly Two Million Private Sector Jobs

House Budget Committee Chairman Paul Ryan released his budget resolution, and the general theme of the policy proposals is that the elderly, the poor, and the otherwise vulnerable populations in this country are way too well off and need to be taken down a peg or two. The best example of this principle is the proposal to slash Medicaid by $1.4 trillion, cutting the program by over a third.

Currently, Medicaid (including SCHIP) provides comprehensive health coverage to the elderly, disabled, children, and low-income adults. The cost of providing this health care coverage is split between the federal government and the states. The Ryan budget would "block grant" Medicaid, meaning that it would give states a fixed amount of money rather than a share of the total costs. Because these grants would grow more slowly than expected health care cost inflation, this proposal would have the federal government shift an increasing amount of the coverage costs onto states, who will in turn be forced to cut health benefits and other public investments or services, or raise taxes.

The impact on the truly vulnerable would be dire. About 42% of all Medicaid benefits go toward health care for the disabled or blind. Another 21% go toward health care for the elderly, and 20% go toward health care for children. One would be hard-pressed to find a group of Americans more economically and politically disempowered, and in more need of society's outstretched hand, than this one.

Equally worrying, however, is the expected job loss. Chairman Ryan estimates that his Medicaid proposal would cut the program by $207 billion in the next five years. This sum includes the elimination of the Medicaid expansion built into the Affordable Care Act as well as other cuts to the program. Because the program is a federal-state partnership administered by the state, the cuts would be money right out of the pockets of state budgets at a time when they are already facing over $300 billion in shortfalls in the next few years. They would be forced to either cut their own budgets or raise taxes to close the shortfalls, both of which would imperil the economic recovery. Using standard macroeconomic estimates, we find that this would result in a loss of 2.1 million jobs over five years. This of course depends on how states choose to close their shortfalls: if they choose to increase taxes for the rich, the job loss would be lower, whereas if they slash the social safety net, the loss will be higher (e.g., reducing unemployment benefits has a ripple effect that results in even more job losses).

Let's say states keep the cuts within the Medicaid program. This is not an unreasonable assumption -- after all, if national Republicans have found that the politically easiest savings are by cutting health care for the poor, elderly, and disabled, then it is quite possible that state Republicans (who control a disproportionate amount of state houses) might come to the same conclusion.

Under this scenario there would be a large drop in the spending power of Medicaid recipients in an economy already starved of demand and with elevated unemployment. Furthermore, the job loss would overwhelmingly be in the private economy; Medicaid has a very low overhead, as about 96% of the program's funds go towards benefits which are spent in the private sector. Assuming the 96% ratio is relatively constant across states (or at least not systematically biased in one direction), Medicaid cuts of this magnitude would result in the loss of just under two million private-sector jobs.

The economy still reels from the largest recession since the Great Depression. The economy has over 24 million workers either unemployed or underemployed -- nearly double the 2007 level. The economy would have to create 11.1 million jobs just to get us to pre-recession unemployment levels. To do that in three years would require that the economy add 400,000 each month -- almost twice the amount added last month -- for the next 36 months straight.

In this country of over 300 million people, there are probably only a handful of Americans who, after looking around at this economic wreckage, would conclude that the solution to our problems is depriving children, the elderly, the disabled, and the impoverished access to basic health care. Unfortunately, one of those people is the chairman of the House Budget Committee.