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Old 01-09-2009, 12:11 PM   #1
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The Case for Bigger Government by Jeffrey D. Sachs

The Case for Bigger Government - TIME

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The Case for Bigger Government by Jeffrey D. Sachs

Thirty years ago, Americans were told that government was part of the problem, not the solution. We bet on the magic of the marketplace, but the magic proved illusory. Every major part of the economy — health care, energy, transportation, food and finance — is deeply troubled. Now we are ready to invite government back in to help solve our problems, if the price is right and the strategies are convincing. By spending more through government and treating government as a partner rather than an enemy of the private sector, we can potentially save vast sums in the long run through a more efficient health-care system, safer climate, more competitive economy and more secure country.

President-elect Barack Obama's challenge will be twofold: to capture the potential benefits of a new age of government activism, while still protecting the country's long-term fiscal health. On Jan. 6, Obama warned that the cost of a major stimulus package and the continued effort to bail out the financial system could result in years of "trillion-dollar deficits." Deficit spending is needed to help revive the economy from recession, but trillion-dollar deficits for years to come would sink us in debt and risk a collapse of the currency. We need a sensible strategy that deals with the present crisis while preparing for the future. We need more government, and to pay for it we'll need to raise taxes relative to GDP over time.

Even as our economy worsened, many Americans consoled themselves with the belief that at least we were better off than people in other rich nations. No more. When you compare the U.S. with Canada, Western Europe and Japan, the news is sobering. Our child-poverty and infant-mortality rates are the highest, our life expectancy is the lowest, our budget deficit as a share of gross domestic product (GDP) is the highest, and our 15-year-olds rank among the lowest on tests of math and science.

A big difference between the U.S. and the rest of the rich world is that for the past 30 years or so, Americans consistently rejected "government solutions" to the problems of health, poverty, education and the environment. We've kept our taxes as a share of national income lower than Europe's by focusing on the private sector. But we're getting much less for our money. Markets are great at providing consumer goods and services. We don't want the government running our restaurants, movie houses, bookstores and manufacturers. Markets are not so good, though, at some very important things. A pressing example: our mostly private health system, at $8,000 per American, is twice the cost of Europe's mostly public system, yet with worse outcomes. And nearly 50 million Americans lack health insurance.

President-elect Obama inherits the worst economic crisis since the Great Depression: the financial sector is in ruins; the budget is hemorrhaging red ink; debt-ridden households have clamped down on spending, thereby pulling the rug out from under the economy; unemployment is soaring; the country is in two wars; and the unmet social and environmental needs are vast. These conditions demand a fundamental realignment in strategy that ultimately comes back to taxation: Will we pay for the government we need? Obama's big domestic program, the American Recovery and Reinvestment Plan, proposes doubling renewable-energy production and making public buildings more efficient. It calls for better schools and classrooms and the rebuilding of our crumbling roadways and bridges. The President-elect wants our fill-out-the-forms health-care system to be computerized, which will save both lives and money. (See the global financial crisis in photos.)

He'll certainly have to add to that list. Don't forget bailing out the financial system, helping deficit-ridden state and local governments, revamping the auto industry and funding more global-development assistance to defeat terrorism and overcome instability. Add it up and it will require perhaps 5% of national income on top of our current spending, or approximately 25% of our total GDP.

Here's the problem with that math: the tax system brings in about 18% of GDP, less in a recession — and Obama is even floating a two-year, $300 billion tax cut (roughly 1% of GDP per year). Even worse, our federal revenues are nearly exhausted by just four areas of spending: Social Security and other retirement programs, health programs such as Medicare and Medicaid, defense, and interest payments on the public debt. Almost all the rest of our expenditures — from education and infrastructure to international diplomacy and much more — have to be funded by borrowing. We are racking up trillions of dollars in debt, to be paid in the future through taxation or inflation, in order to carry the year-in, year-out responsibilities of government.

There are certainly some straightforward ways to start closing the budget gap. The Bush tax cuts for the rich should be rolled back this year, not next, to start collecting about 0.5% of GDP in extra revenues from those who can most easily pay, though this might just partly offset other tax cuts and recession-induced declines in tax collections. The spending on the wars in Iraq and Afghanistan should be ended, not prolonged, saving at least 1% of GDP. We'd still probably be close to $1 trillion (perhaps 6.5% of GDP) shy of budget balance. With the economy in a tailspin, deficit financing of up to $1 trillion could make sense, but it's a fleeting option because foreign nations have lost confidence in the U.S. economy and currency.

Instead, we will have to look for a variety of solutions. Infrastructure can be financed in part by borrowing against future user fees, like tolls on roads and higher electricity rates for more reliable and cleaner power, rather than against general government revenues. This strategy can probably cover as much as 1% of GDP per year. We can introduce new taxes on the carbon emissions from coal, oil and gas to hasten our transition to sustainable energy. For example, instead of letting gasoline prices tumble now only to see them soar again shortly, we could set a floor on prices at the pump and collect the difference between the wholesale and retail prices in federal revenues. Various carbon and gasoline taxes could raise another 1% or so of GDP. The public will also probably accept taxes on health care if they convincingly help save even more in private outlays on health insurance. A well-managed system of public financing of health care can do that and allow us to cut the horrendous sums paid to health-insurance companies. And in the end, though almost no U.S. politician will say it now, the U.S. will probably have to follow Europe down the path of the value-added tax — a kind of national sales tax.

In the past 50 years, arguing for tax increases to fund the expansion of federal programs has been a political death wish. Lyndon Johnson could not sell the public on tax increases to pay for his War on Poverty when the Vietnam War intruded. Jimmy Carter failed to close the deficit through higher taxes in the late 1970s. And Ronald Reagan made tax cuts the down payment on every election since. George W. Bush, of course, imitated Reagan in cutting taxes, thereby creating huge new budget deficits. Voters are still willing to permit the government to expand its share of GDP, particularly in the face of national crises — and we are certainly in the middle of one. Tax revenues jumped from just 5% of GDP in 1936 to 15% to 20% during and after World War II, creating our modern tax system. At the end of the war, the level of federal taxation averaged around 18% of GDP, a rate that has remained nearly constant ever since.

What has changed is the way we spend that 18%. In the 1950s, during the Korean War and at the height of the Cold War, about 10% of GDP was devoted to defense. Over time, that share of spending on defense declined, making room for proportionally more spending on things like health care, education and infrastructure. By the late 1970s, as defense spending declined to 4% to 5% of GDP, there wasn't a lot more room to squeeze defense for higher domestic spending. Even with the end of our current wars in Iraq and Afghanistan, it's most unlikely that we'd save as much as 2% of GDP, given the vocal demands for increases in military budgets.

As our budget choices were getting tougher in the 1970s, Europe faced similar dilemmas and took a different course. While Americans rejected new taxes and new domestic programs, Europeans elected governments that introduced higher taxation, mainly value-added taxes, to cover the rising costs of health care, education, infrastructure, poverty relief and international-development aid. Ultimately, the Europeans restrained excessive growth in the welfare state in order to maintain global competitiveness and rebalance their economies and succeeded in sustaining the public-private partnerships and welfare-state benefits.

The European strategy, with levels of taxation and government spending roughly 8% to 10% of GDP higher than in the U.S., has many successes to show for it: less costly and more reliable health care, the elimination of hard-core poverty, solid educational achievements, and social services that ensure better care for children and more flexibility for mothers and the elderly. The U.S. will not mimic Europe for many reasons — size, diversity, tradition and, of course, vested interests — but we can learn from Europe. Most important, we can see how government can be a partner of the private sector, not an enemy. (Read "Merkel's Caution on Economy Draws Fire".)

The time has arrived to restore national prosperity and security with a smartly rebalanced partnership between the public and private sectors. Fiscal policy will be President Obama's biggest political hurdle. Expanded spending by government — for health care, climate change, energy security, education, infrastructure and peaceful diplomacy — is urgently needed, but large deficit financing is not a long-term option. Although Obama's tax cuts might stimulate consumer spending — and placate Republicans — any permanent cut would be a huge error, and even short-term tax cuts are an unnecessary risk. Obama's long-term success will depend on his ability to lead Americans to a new, even revolutionary consensus that the U.S. government can offer value for money.
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Old 01-09-2009, 01:23 PM   #2
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And nearly 50 million Americans lack health insurance.
I like how he ignores that some people can afford the insurance but choose not to. He also ignores the trade barriers preventing people from buying insurance from state to state which prevents market competition. He doesn't seem to get that the U.S. already has lots of government involvement. ("MediCare"/"MedicAid")

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President-elect Obama inherits the worst economic crisis since the Great Depression: the financial sector is in ruins; the budget is hemorrhaging red ink; debt-ridden households have clamped down on spending, thereby pulling the rug out from under the economy;
Yeah and government had nothing to do with it. Their oversite failed. SOX had holes with private equity firms. The federal reserve had a loose monetary policy. Fannie Mae and Freedie Mac (along with ACORN) pushed for more bad loans

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We can introduce new taxes on the carbon emissions from coal, oil and gas to hasten our transition to sustainable energy.
I guess he forgot that we are in a financial crisis.

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Lyndon Johnson could not sell the public on tax increases to pay for his War on Poverty
I agree it's hard to get the public to actually pay for the programs they demand. This is still an issue. Look at Bush and Obama.

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And Ronald Reagan made tax cuts the down payment on every election since. George W. Bush, of course, imitated Reagan in cutting taxes, thereby creating huge new budget deficits.
Ronald Reagan didn't have a line item veto and the congress controlled by democrats didn't cut spending. Bush is not that conservative and the congress again (especially democrats) greeted well No Child Left Behind and prescription drugs to be covered by the government which exacerbated the deficit.

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(Read "Merkel's Caution on Economy Draws Fire".)
Merkel's right in being cautious. The U.S. is in a deficit and Obama expects these deficits to continue for years. If that's the case then a stimulus doesn't bring an economy out of a recession especially if we have to have it for years. The recession, according to the G20, should only last 18 months. I mean if a stimulus was a magic wand, then why don't we do it all the time and have more improvements? Everyone seems to be following Krugman blindly, or because Keynesian economics opens the door to more government intervention which is good for bureaucrats. All the stimulus we need is increased employment insurance and welfare payments to help people move from unproductive companies to productive ones.

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The time has arrived to restore national prosperity and security with a smartly rebalanced partnership between the public and private sectors. Fiscal policy will be President Obama's biggest political hurdle. Expanded spending by government — for health care, climate change, energy security, education, infrastructure and peaceful diplomacy — is urgently needed, but large deficit financing is not a long-term option. Although Obama's tax cuts might stimulate consumer spending — and placate Republicans — any permanent cut would be a huge error, and even short-term tax cuts are an unnecessary risk. Obama's long-term success will depend on his ability to lead Americans to a new, even revolutionary consensus that the U.S. government can offer value for money.
Gee I guess you can't have it all can you? If the fiscal situation is a problem then cutting spending and raising taxes will be the only solution to improve the fiscal policy. Climate change policies are anti-recovery so good luck with that Obama. Increasing Health Care spending without tax increases is simply continuing the Bush mistake again. Europe has more government but unemployment rates during a boom of the cycle always lag behind the United States. Anti-Poverty experts in Europe and Canada never admit that hardcore poverty is down and say we need more funding all the time. Or is it that special interest groups have an interest in always demanding more funding like the quote below?

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Having stood firm under pressure from all the special interests in her unruly coalition until now, her epiphany on the issue of bailouts has now unleashed a cacophony of demands. Unions want employers to promise no layoffs during the recession, while small and mid-sized companies want the government to force banks to resume lending. The Social Democrats want to put cash in the pockets of ordinary citizens to enable them to go shopping and boost weak public consumption. And Merkel, a deficit hawk by instinct, is also under pressure from leading conservatives to cut taxes fast and deep. (Time magazine)
This looks like a moral hazard. The taxpayer is always forgotten. Taxpayers will have to pay the debt back eventually. I guess debt financing can fool the public that they won't have to pay for programs so that's why they are so demanding of more programs.

If this government spending is so important then why did Japan fail with their bailouts and loose monetary policies? Japanese didn't invest in Japan because other countries had higher interest rates but now that everyone is doing the same thing so where to invest now? If America is considered the gold standard will that still be the case if Obama is right and that deficits will continue for years? Who's going to keep buying their Treasury notes unless there are higher interest rates?
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Old 01-09-2009, 02:26 PM   #3
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I like how he ignores that some people can afford the insurance but choose not to.
How many of the 50 million people fall into this group?

I see this bandied about all the time, so let's get some numbers then.

How many can afford $300/month or whatever, but choose not to spend it?
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Old 01-09-2009, 02:36 PM   #4
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I like how he ignores that some people can afford the insurance but choose not to.
Wow I wish I had that problem!!

Phil will be waiving his and getting *some* of the money back (he doesn't have a choice about life, dental, and vision even though he gets life and dental through me and doesn't need vision b/c my uncle is our eye doctor), but I'm not sure if he counts since he's waiving because he is already covered through me. We cannot afford to be uninsured, nor could we afford to ensure ourselves without my employer.

I've never heard of someone who can afford insurance choosing to go insured. In fact, at least in college it's not even possible. If you're not insured the school will automatically enroll you in their program. We had to provide proof that we were insured each year or we were automatically enrolled and charged.
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Old 01-09-2009, 02:52 PM   #5
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Originally Posted by purpleoscar View Post
I like how he ignores that some people can afford the insurance but choose not to. He also ignores the trade barriers preventing people from buying insurance from state to state which prevents market competition. He doesn't seem to get that the U.S. already has lots of government involvement. ("MediCare"/"MedicAid")


This like most of this post, is just flat out false... Who sells you this crap?
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Old 01-09-2009, 03:23 PM   #6
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I was gonna ask the same question.
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Old 01-09-2009, 04:50 PM   #7
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This like most of this post, is just flat out false... Who sells you this crap?
Competition helps bring the price down. You don't think having the ability to cross border shop for cheaper insurance would help?
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Old 01-09-2009, 04:55 PM   #8
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How many of the 50 million people fall into this group?

I see this bandied about all the time, so let's get some numbers then.

How many can afford $300/month or whatever, but choose not to spend it?
Health Care Lie: '47 Million Uninsured Americans'
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Old 01-09-2009, 04:56 PM   #9
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Competition helps bring the price down. You don't think having the ability to cross border shop for cheaper insurance would help?

WHAT?!

Where do you get this from? Who told you we can't "cross border" shop for insurance?
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Old 01-09-2009, 05:49 PM   #10
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Where do you get this from? Who told you we can't "cross border" shop for insurance?
On this point, I think he's correct, in part. As far as I know, purchasing health insurance from a company outside of your state is not possible.

On the other hand, I disagree that many people have extra cash lying around to buy health insurance. It is generally prohibitively expensive. I could probably write another essay on this subject to get more detailed, but I really don't have the energy to right now.
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Old 01-09-2009, 05:59 PM   #11
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On this point, I think he's correct, in part. As far as I know, purchasing health insurance from a company outside of your state is not possible.
I've been insured by companies outside my state. BCBS of Minnesota while I was living in TX.

The issue is not one of "trade barriers" the issue is one of coverage, most state specific carriers don't cover other states they are state specifically designed so they just won't work in other states. And it really has NOTHING to do with competition.
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Old 01-09-2009, 06:07 PM   #12
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That's a pretty bad website. The "article" itself says the number is up for debate and they SPECULATE on a lower number. Their agenda is pretty staight forward. I wouldn't take their reporting just like I wouldn't take Moore's at face value.

You buy into the lie(as did this website) that there is a large number of individuals that can afford insurance but don't and it couldn't be further from the truth.
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Old 01-09-2009, 06:09 PM   #13
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I've been insured by companies outside my state. BCBS of Minnesota while I was living in TX.

The issue is not one of "trade barriers" the issue is one of coverage, most state specific carriers don't cover other states they are state specifically designed so they just won't work in other states. And it really has NOTHING to do with competition.
I'm not entirely sure of the specifics of this issue, so I can't really argue further. I just remember one time a few years ago where I did try to shop around for health insurance, and I realized that it was a dead end. None of the companies I checked would insure people in my state, so it all came down to the one state-chartered provider. Hardly competitive.

On the other hand, the idea of health insurance, in general, is anti-capitalist and anti-competitive, which may be why medical costs are monstrously high and unchecked, thus now making insurance itself unaffordable. The option here would be to ban health insurance outright and let "market forces" drag health care costs down to what the market could bear, which, as expected, would likely decimate an entire industry that is constructed around those high costs. This is why, more or less, I don't expect a "capitalist" solution to our health care problems, because the measures required to enact it would likely be too painful.
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Old 01-09-2009, 06:11 PM   #14
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It is generally prohibitively expensive. I could probably write another essay on this subject to get more detailed, but I really don't have the energy to right now.
It's not even the cost of the plans that's too expensive, it's paying all the money for the plans and then STILL having to pay insane deductibles or being denied for every this or that. I can't figure out what my insurance covers besides generic prescriptions and annual physicals only with your PCP. They haven't been covering Phil's appts with his neurologist, bloodwork the neuro requires in order to renew his prescription, and they only partially covered his last prescription. I had to pay for an urgent care visit because my PCP was closed for the Christmas holiday and I had a bacterial infection that needed antibiotics. I was in the room for less than 5 minutes and told the Dr. what was wrong with me and what scrip I needed (had the same infection a few years before), but I had to pay over $100 simply because my Dr was closed for a week. So you pay and pay and pay but can never reach the stupid deductible...so what exactly are we paying FOR? (dont answer that!) And I supposedly work for one of the best employers in its class as far as the benefits.

Anyway....
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Old 01-09-2009, 06:15 PM   #15
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It's not even the cost of the plans that's too expensive, it's paying all the money for the plans and then STILL having to pay insane deductibles or being denied for every this or that. I can't figure out what my insurance covers besides generic prescriptions and annual physicals only with your PCP. They haven't been covering Phil's appts with his neurologist, bloodwork the neuro requires in order to renew his prescription, and they only partially covered his last prescription. I had to pay for an urgent care visit because my PCP was closed for the Christmas holiday and I had a bacterial infection that needed antibiotics. So you pay and pay and pay but can never reach the stupid deductible...so what exactly are we paying FOR? And I supposedly work for one of the best employers in its class as far as the benefits.
Exactly my point. The system is neither capitalist nor competitive nor even functional anymore. The medical industry is as delusional as the global economy was over the last 30 years, in thinking that it could just run on tax cuts and unlimited credit. The reality now is that, while insurance acted as a buffer to justify higher costs for a while, now the costs have become so high that not even insurance can make it affordable anymore. And it's just getting worse.

The pragmatic solution is probably going to be a mixture of socialized medicine and hard caps on what things are going to cost. Not ideal one bit, but I'm not even sure what the solution is anymore, short of banning health insurance and watching the zeppelin burn.
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