Greg Mankiw Gets It Wrong on the Budget

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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.