In the reconciliation package currently being debated in Washington, President Biden and many Congressional Democrats aim to significantly expand the size and the scope of government. Americans should be wary of their plans, not only because of the large fiscal cost, but also because of the broader risks to economic prosperity.
The details Of the ambitious $ 3.5 billion social spending bills are still under discussion, so it's unclear what it will end up including. In many ways, this looks like a bag of initiatives gathered from the Progressive Wish List. And maybe it's bigger than it looks: Reports suggestsnt that some provisions will expire arbitrarily before the end of the 10-year budget window to reduce the apparent size of the bill, although lawmakers hope to extend these policies at a later date.
People of all ages are online to get something : pre-K government funded for 3- and 4-year-olds, extended child credits for families with children, two years of community college tuition-free, increased Pell grants for other students, improved health insurance grants, paid family and medical leave, and health insurance expansions for older Americans. A Times headline aptly described the plan's cover as "cradle to the grave.
If there is a common theme, it is that whenyou need a helping hand, the government will be there for you. people struggling in our hectic market economy. At first glance, this instinct doesn't seem bad. Many Western European countries have more generous social safety nets than the United States. The Biden plan takes a big step in that direction.
Can the United States afford to adopt a larger welfare state? From a tight budget perspective, the answer is yes. But the policy also raises broader questions about American values and aspirations, and what kind of nation we want to be.
Le Bide nl ' administration promised to pay for the entire scheme with higher taxes on corporations and the very rich. But there are good reasons to doubt this claim. Budget experts, such as Maya MacGuineas , Chair of the Budget Committee responsible, is skeptical that the government can raise enough tax revenue from the rich to fund Mr. Biden's ambitious budget.
US could do what Western Europe does: impose higher taxes on everyone. Most countries use a value added tax , a form of national sales tax, to generate significant revenue efficiently. If Americans really want a bigger government, we'll have to pay for it, and a VAT might be the way to go.
The costs of an enlarged welfare state, cepehowever, extend beyond those reported in the budget. There are also broader economic effects.
Arthur Okun, former economic adviser to President Lyndon Johnson, addressed this timeless issue in his book by 1975, " Equality and efficiency: the big compromise . ”According to Mr. Okun, policymakers want to maximize the economic pie while at the same time cutting evenly. But these goals are often in conflict. As policymakers attempt to rectify market performance by equalizing shares, the pie tends to shrink.
Mr. Okun explains the compromise with a phor: providing a social safety net is like using a leaky bucket to redistribute water between people with quantitiess different. Although bringing water to the thirstiest can be noble, it is also expensive because some of the water is lost during transport.
In the real world, this leakage occurs due to higher taxes distorting incentives and hampering economic growth. And these taxes are not only the explicit ones that finance services such as public education or health care. They also include the implicit taxes incorporated into the services themselves. If these benefits decrease when your income increases, people are discouraged from working. This implicit tax distorts incentives in the same way as explicit taxes. That's not to say that there's no point in trying to help those in need, but it does require being aware of the downsides of doing so.
Which brings us back to Western Europe. Compared to the USUnited States, GDP per person in 2019 was 14% lower in Germany, 24% lower in France and 26% lower in the UK.
Economists disagree on why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott , Nobel laureate in 2003, is that Europeans work less than Americans because they face higher taxes to fund a more generous social safety net.
In In other words, most European countries make more use of this leaky buckett than the United States and experiences greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones. Americans must be careful to avoid this fate.
Compassion is a virtue, but respect for those who are talented, hardworking and successful in 'is also. Most Americans are descended from immigrants, who left their homelands to find freedom and forge their own destiny. Because of this history, we are more individualistic than Europeans, and our policies rightly reflect this cultural difference.
This does not mean that states -United have already struck the right balance between compassion and prosperity. It is an ongoing tragedy that the children are more likely to live in poverty than the general population. This is why my favorite provision in the Biden plan is the extended child credit, which would reduce child poverty. (I'm also in favor of policies aimed at climate change, which is a whole different issue. Unfortunately, th e Plan Biden missing the opportunity to adopt the best solution: a carbon tax .)
But the whole 3.5 trillion dollar package is too big and too much risk. The wisest thing is to take more gradual measures rather than trying to redo the economy of 'one hit.
N. Gregory Mankiw is professor of economics at Harvard. He was Chairman of the Council of Economic Advisers under President George W. Bush from 2003 to 2005.
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