Home > debt, The Economics Profession > Greg Mankiw gets it wrong on the US budget

Greg Mankiw gets it wrong on the US budget

from Dean Baker

Mankiw told readers that:

“to maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare.”

Actually, all we in the US have to do is to fix our private health care system.  If per person health care costs in the United States were the same as in any other wealthy country we would be looking at huge budget surpluses, not deficits. However, the physicians, the hospitals, the drug companies and other providers are incredibly powerful interest groups. They try to ensure that their over-payments, relative to other countries, are not even discussed in debates over budget policy.

Mankiw also errors in comparing the U.S. to Greece. Even in the worst case scenario, where financial markets get freaked over the deficit, the comparison would be to Zimbabwe. Unlike Greece, the United States has its own currency. In the event that the financial markets would not buy up U.S. government bonds, the Fed could do so directly.

This raises a risk of inflation, but if it is just a case of financial markets getting irrational jittery, then the United States need not be troubled. Of course for Greece and other countries without their own currency, it is every bit as bad when fears in the financial market have no basis in reality as when they do. There is nothing that the government can do to counteract them.

  1. Dave Taylor
    October 31, 2011 at 9:38 am

    Two very important but quite different issues here.

    Mankiw is right about the healthcare budget, but what he says is ambiguous, i.e. it can achieved either by controlling rent-seeking in the health-care sector (opening up a variety of government options like moral leadership, name and shame and regulation by law) or in the ways Mankiw clearly wants to rule out (increased taxation of the healthcare business along with everything else, direct taxation of its excess profits). The rational alternative is actually that adopted in post-war Britain: nationalisation of healthcare as a social service, because wholesale marketing of it is at once a financial incitement to and a strait-jacket enforcing abuse of the unfortunate. Rich once-off prizes for the development of new drugs is not inconsistent with subsequent manufacture at cost.

    When Dean Baker says that for “countries without their own currency, it is every bit as bad when fears in the financial market have no basis in reality as when they do”, why does that not apply to the individual States of the US, who (bar the US Trojan horse Britain) are in much the same position as States within the European Union as now constituted? It surely applies to states defined at the level of the US and EU, for isn’t that what the crisis is all about? So how on earth have we got to the state of Gvernments allowing gamblers generating fictions (not to say lies) in the stock markets to determine international exchange rates? Why indeed are the United Nations not determining fair shares of a Keynesian international currency in a rational manner? To point to puppets like Reagan and Thatcher is of course no answer. Who has been responsible for pulling the strings, and why? Is the insanity theirs?

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