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Takeaway: Romney's choice of Paul Ryan as a running mate could be the key to winning the election. Ryan's proposal is just what the market ordered.

It was announced on August 11, 2012 that Republican Presidential candidate Mitt Romney had chosen Congressman Paul Ryan (R-WI) as his running mate for the 2012 election against Barack Obama.

Up until now, Romney’s choice for a vice president had been closely guarded with many names being thrown in the hat over the past few months. The choice of Ryan is both important and symbolic. Ryan is young, fierce and a tough fiscal conservative. Only 42-years-old, Ryan has been in office since 1998, beginning his political career at the young age of 28. The Chairman of the House Budget Committee, he is perhaps best known for “The Path To Prosperity: A Blueprint for America’s Renewal” (TPFP) which is an alternative 2012 budget proposal seen as a response to President Obama’s 2013 budget proposal.

The Republican consensus (according to several polls) is that Ryan is the best choice Romney could have made for the VP nominee. In a year where debate surrounding the nation’s struggle with debt and budget deficit has taken center stage, Ryan’s proposal aims to solve these issues through drastic measures of spending cuts and austerity programs. While “The Path For Prosperity” was approved in the Republican-controlled House, Democrats killed it in the Senate when it came to a vote in May.

There is no argument that Ryan will invigorate the Romney campaign and act as an integral part of developing his policies once in office. How Ryan will accomplish this, however, remains to be seen. Balancing complex mathematics and economics, there are essentially four main issues at hand in order to make Ryan’s budget work. They are:

  • A total revamp of the Medicaid/Medicare programs, replacing it with a coupon/voucher system
  • Do away with the Patient Protection and Affordable Care Act (aka Obamacare)
  • Fix America’s tax laws to plug loopholes and deduction issues
  • Reduce overall government spending on different fronts

Earlier this year, Hedgeye Healthcare Sector Head Tom Tobin weighed in with his outcome of what would happen should Romney set about implementing Ryan's policies:

Our primary conclusion is that if indeed Romney wins the presidency, and by association and praise, Paul Ryan’s policy recommendations are then implemented, that this will come to be seen as a great deal for the Healthcare Industry.   As it relates to Medicare, the primary source of savings, Paul Ryan’s plan doesn’t  begin until 2024, a full 12 years and several election cycles away.  Additionally, Medicare still grows under this assumption, just at a lesser rate.”

We The People: Why Paul Ryan Matters  - RYAN impact medicare

Hedgeye Director of Research Daryl Jones summarizes the other parts encompassing the Ryan budget quite nicely:

• Healthcare – The Ryan budget would convert the current Medicare system to a system of premium support payments and would increase the age of eligibility of Medicare.  On Medicaid, the federal share of Medicaid would be converted to block grants to the states, which would grow with population and CPI-U.  The Ryan budget would repeal all components of the 2010 Patient Protection and Affordable Care Act (more commonly known as Obamacare). Finally, several limitations of punitive damages in medical malpractice would be implemented;

• Other spending – Under the Ryan budget, mandatory and discretionary spending, other than that for mandatory healthcare (outlined above) and social security, are cut from 12% of GDP in 2010 to 6% of GDP in 2022 (this is below pre-WW2 levels); and

• Revenue – Under the Ryan budget, federal government revenues grow from 15% of GDP in 2010 to 19% of GDP in 2028, and remain at that level thereafter.  For comparative purposes the long run average of federal government revenue as a percentage of GDP from 1960 – 2011 is 17.6%.   So, in essence tax receipts in Ryan’s proposed budget are slightly above the long run percentage of taxes as share of the U.S. economy and ~27% above current levels.

At our current rate, America is on an unsustainable path of spending. Ryan’s budget is a scary proposition for most but it may be the only viable option on the table right now. Counting on a split Congress and the President to get their act together and pass something is like counting on Oscar The Grouch to be polite and cordial. Should we succeed, it could act as the ultimate bullish catalyst for both the markets and the economy; hard to complain about that.