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Home Publications Blogs Beat the Press Greg Mankiw Gets It Wrong on the Budget

Greg Mankiw Gets It Wrong on the Budget

Sunday, 23 October 2011 08:48

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 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.

Comments (13)Add Comment
Price and Cost are Not the Same Thing for Health Care, Low-rated comment [Show]
written by Jeffrey Stewart, October 23, 2011 10:44
Since when are the current levels of taxation something to be preserved? Would there be 25 million people unemployed, underemployed and jobless and yet not officially counted as unemployed if cutting taxes was an effective job creation policy?

Does anyone have an explanation why intelligent, supposedly informed people as Dr. Mankiw make such outrageous statements? Is it willful ignorance? Are they pursuing a political agenda? Is it just propaganda?
written by Jeffrey Stewart, October 23, 2011 10:47
Regarding moral hazard and health care: Yeah, there's nothing people like more than taking time off from their jobs, if they have them, to spend hours waiting in a doctor's office even though they know there's nothing wrong with them.

Here's a health care premium, buy a cure for ideological blindness.
what a hack
written by Peter K., October 23, 2011 12:14
Romney's adviser sez:

"Economists debate whether higher taxation in France and other European nations is the cause of the reduced work effort and incomes there."

No mention of Clinton (and economic growth) balancing the budget. No mention of Bush's tax cuts. No mention of wage gains under Clinton's onerous tax regime. No mention of Germany outperforming the U.S. during the recent slump. Krugman points to Iceland's performance also.

The global economy is in such a mess because of elite hacks like this guy.
written by bmz, October 23, 2011 4:18
What Mankiw ignores is that our income taxes are far too low. From 1945 to 1980 income taxes averaged near 12% of GDP. Reagan reduced marginal tax rates so much that they fell close to 9%. Clinton increase them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses have remained 12%(+/-1%)) of normalized GDP throughout(except for the Reagan/Bush1 years, when they were higher) . The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. But, not only can we no longer continue to borrow from the trust funds, we have to start paying money back as beneficiaries start relying on the trust funds. In the short term, we have to raise income taxes to 12%, simply to cover on budget expenses. In the long term, income taxes must rise above 12% in order to pay back the trust funds.
Big Medicine's role in this recession
written by Rachel, October 23, 2011 4:18
The rate of health care inflation has been so large over the last decade that cities and workers in northern California have really suffered.

They've suffered, however, in eerie silence. At least in Boston there has been an effort to constrain the power of the big medical groups. Here, cities and unions just take the hit. Hundreds of workers are laid off, all without mentioning the role of medical inflation. The right wing blames unions and their "entitlements." The SF liberals profess to dream of higher taxes. And the hospital chains continue to raise prices far above the rate of inflation.

So at least around San Francisco, it seems that the pain of this recession is significantly promoted by the health care "providers."
written by bmz, October 23, 2011 4:22
izzie: "Restore true markets to health care so buyers and sellers can make the decisions, not third party outsiders. Let price - not cost - govern those decisions and under competition price itself will be driven to true cost as it is in other countries where markets are respected.
Stupid liberals."
If liberals are stupid, what do we call conservatives who don't know "other countries" have socialized healthcare
written by JSeydl, October 23, 2011 6:33
"If liberals are stupid, what do we call conservatives who don't know "other countries" have socialized healthcare"

Haha, I was thinking the same thing. izzatzo is clearly grasping at straws. Hey izzatzo, why don't you name one country that has a fully privatized healthcare system, where prices -- not costs -- govern consumption decisions? I'm headed out of the country for a few weeks, but I'll look for your response when I get back.
Watch Paul Ryan make a fool of himself on Social Security:
written by AndrewDover, October 23, 2011 7:09


I'm with izzatzo on this one...
written by Abe, October 24, 2011 11:33
Actually, the writer of this post gets it incredibly wrong. Mankiw has it right. You must just be another liberal who's failed your economics courses (studies have shown liberals en-masse do poorly in economics--they have a hard time understanding supply and demand apparently).

You say, "all we have to do is fix our health care system." Yeah, how do you propose to do that? Simply tell everyone how much they can charge for a given service? Mandate prices? Mandate costs? Are you smoking something?

The best thing we could do would be to eliminate employer-provided insurance subsidies, and allow interstate insurance company competition. The combination of these two things would lower insurance premiums, and restore the "power to the people." When people are paying their own premiums and have the ability to shop around for an insurer who meets their needs at reasonable cost THEN we'll see consumers restraining prices simply by demanding less of what drives them up (new, innovative, but largely ineffective techniques which are common in the US but not abroad).

You also claim that it's totally fine if the US Government buys it's own bonds...cause of course that's going to fix everything. If that's the case, why aren't we doing so already? We are, but why aren't we skipping the private bond market and simply issuing and buying our own bonds? Why? Because at that point it makes our money literally monopoly money...and worth about the same as the stuff that comes in the game box. The bond market is what gives our money, and our debt, value. Buying our own bonds drives up inflation because we're printing money to pay off our own debt...and the more money we print, the more the value of every dollar held by every citizen diminishes in value.

There are no easy fixes. Take some more economics classes...it's clear you haven't had any, or enough.
Shop Around
written by JSeydl, October 24, 2011 10:03
Abe, let me ask you a question. Say you get diagnosed with a rare, aggressive form of skin cancer. Suppose the doctors says that if the skin cancer is not removed within the next few days it could spread quickly and perhaps even become life threatening. Suppose also that the doctor says he can surgically remove the skin cancer tomorrow for a price of $50,000. Now, my question is: Are you really going to "shop around" this treatment? Obviously not. Any rational human being would get the surgery done at whatever price from the first doctor seen. What I'm getting at is that, in the market for medical procedures, the basic aspects of a perfectly competitive market are nowhere near existent. Medical procedure providers will always have unfair bargaining power when offering their services. I'm all for "letting the market determine costs," but the healthcare market is not, and will never be, a perfectly competitive market.
written by saurabh, October 25, 2011 12:47
"You also claim that it's totally fine if the US Government buys it's own bonds."

Actually, he says quite clearly that this raises the risk of inflation.

As to how to control prices, there are lots of things that could be done: break up provider networks so they are smaller and have less negotiating power, control purchasing decisions, get away from fee-for-service payments, etc.
Health Care Corporate Welfare
written by FoonTheElder, October 25, 2011 1:44
Just set the market free, is a phony health care solution. The real market, with all of its oligopolies and excesses are largely responsible for the current failed health care system.

The numbers are clear. Currently health care costs over $8000 per year per every American. This is about $1 trillion per year ($3200 x 310 m) more than any other developed country.

What do we get for this extra trillion? 25% uninsured or underinsured. Of course, the phony fiscal conservatives have no problem with Americans paying for this huge waste of money, as long as it goes to the big corporations who pay for their campaigns.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.