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Thursday, January 20, 2011

"Greg Mankiw's Thinking Cap"

I can't let this go without comment, but being short on time, I'll turn it over to Ezra Klein:

Greg Mankiw's thinking cap, by Ezra Klein: Here's an interesting mixture of callousness and accidental truth lurking within Greg Mankiw's satirical proposal to reduce the budget deficit:

The essence of the plan is the federal government writing me a check for $1 billion. The plan will be financed by $3 billion of tax increases. According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit. Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit. But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

Like health-care reform, Greg Mankiw's plan really would reduce the budget deficit. That's been contested, so I'm glad to see Mankiw admit it. But Mankiw's broader point is that giving Greg Mankiw a billion dollars to write misleading political commentary would be a poor use of resources. And I agree. But he is analogizing giving Greg Mankiw a billion-dollar check to giving health-care insurance to 32 million people who, in the vast majority of cases, can't get it themselves. I know that Harvard University offers insurance to its employees and they do that because their employees, like Professor Mankiw, would be quite angry if they didn't. They don't think of insurance as an absurd extravagance or a billion-dollar check from the sky. They think of it as something much more like a necessity, something that their workers wouldn't be willing to go without. Something that I'd bet Mankiw himself doesn't go without. Maybe I'm wrong. If not, there's a real callousness to this post.

Now for the accidental truth: Mankiw's analytical claim is that it's somehow peculiar to believe a bill reduces the deficit because it raises more money than it spends. After all, the spending doesn't reduce the deficit. His apparent belief that the "revenues and spending cuts" side of legislation has nothing to do with the "new spending or tax cuts" side helps explain why he joined the Bush administration's Council of Economic Advisers in May 2003, the same month that the Bush administration's second set of unpaid-for tax cuts was passing through Congress, and a few months before the Bush administration's completely unpaid-for Medicare Prescription Drug Benefit was signed into law. That's a creative way to look at legislation, and I'm sure it came in handy when defending the Bush administration's economic policies.

Here's the thing about the thinking Mankiw is criticizing: It actually reduces the deficit, and it does it while mostly ending the days when Americans would find themselves involuntarily uninsured. You can't say that for the thinking that drove the fiscal policies of the administration he served in, or that led him to analogize a billion-dollar check for himself to health-care coverage for the poor. It's another example of the ACA's opponents conveniently omitting the uninsured from the discussion and developing a new and inconsistent definition of fiscal responsibility.

To equate the good that comes from covering people with health insurance -- insurance that the private market will not provide for them itself -- with giving Mankiw a handout of a billion dollars is pretty silly. He knows better. Apparently he doesn't have a plan to accomplish the same good for less or he would have told us about that instead of trying to add fog to the debate. Or, perhaps he does have a plan, but his view is that the benefits from helping people do not cover the costs, so it wouldn't be worth it -- hence the charge of callousness. In any case, the important question has nothing to do with the deficit per se, it's whether correcting for this market failure in health insurance markets produces social benefits that exceed the costs. If he believes the benefits of extending health care coverage to people who cannot get it any other way are small, he should say so directly. If he doesn't believe that, then stop the fog machine, actually use the thinking cap, and give us the alternative plan.

    Posted by on Thursday, January 20, 2011 at 02:25 PM in Budget Deficit, Economics | Permalink  Comments (54)


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