Posts Tagged ‘fiscal policy’

sanders

For the Wall Street Journal (and Harvard’s Gregory Mankiw), presidential candidate Bernie Sanders is proposing to spend a really big amount of money! $18 trillion! “The largest peacetime expansion of government in modern American history”!

However, as James Kwak explains, that spending figure is meaningless on its own.

Most of that money—$15 trillion—is the expansion of Medicare to cover all Americans. Yes, that’s a lot of money. But we are already spending a ton of money on  health care—with embarrassingly poor results. In 2013, total premiums for private health insurance cost Americans $962 billion, individuals and families paid $339 billion out of their own pockets and “other private revenues” accounted for another $121 billion of health care (data here). That’s $1.4 trillion of health care spending, paid for by families and businesses, most of which would be replaced by Sanders’s plan. Project that out for ten years, add health care inflation, and you’re talking about a lot more than $15 trillion.

At the end of the day, what matters isn’t the amount of money that the federal government spends for health care. What matters is the amount of money that the American people spend for health care. The government is just a device that we use to provide certain services that are better handled collectively than individually. If the government can provide equivalent service at lower prices, then the gross dollar amount involved doesn’t matter.

And, as the folks at the Center for Economy Policy Research add,

This still leaves $3 trillion for us to get frightened over, and this still looks like a really big number. As a point of reference, GDP over the next decade is projected at roughly $240 trillion. This makes the cost of the rest of Sanders’ plans equal to less than 1.3 percent of GDP.

Should we worry about that? The increase in annual military spending from 2000 to the peaks of Iraq/Afghanistan wars was roughly 1.8 percent of GDP. This was also the size of military buildup that took place under President Reagan. Jeb Bush is proposing to cut taxes by roughly this amount if he gets elected.

In short, the additional spending that Senator Sanders has proposed is not trivial, but we have seen comparable increases in the past for other purposes. We can clearly afford the tab, the question is whether free college, rebuilding the infrastructure, early childhood education and the other items on the list are worth the price.

Let’s see, then: $18 trillion over ten years to get decent, affordable healthcare for all, plus fully funded Social Security, improved infrastructure, more affordable college education, paid family and medical leave, strengthening workers’ pensions, jobs for unemployed young people, and better child care.

Sounds like a pretty good deal to me.

latin+america+5

I often explain to students that Gini coefficients should be used with more than a few grains of salt.

One reason, as Timothy Taylor explains, is that changes in the Gini coefficient don’t tell us where the changes come from.

because the Gini boils down the overall distribution of income to a single number, it also loses some detail. For example, if the Gini coefficient has risen, is this because the share going to the top 20% went up, or the top 10%, top 1%, or top 0.1%? You can see these kinds of differences on a Lorenz curve, if you know what you’re looking for, but the Gini alone doesn’t tell you which is true.

The other reason, which Taylor does not discuss, is that Gini coefficients should not be compared across countries. That’s because it’s blind to different economic and social structures. Thus, a coefficient of .52 in one country, where all goods and services are private commodities, means something quite different from the same number in a country in which many of those commodities (such as education, healthcare, and so on) are provided as public goods.

So, what is the Gini coefficient good for? There are two acceptable uses for that simple, convenient number.

One is to look at the degree of inequality before and after fiscal policy, as in the chart above (from the World Bank [pdf]. There, we can see that fiscal policy in Latin American countries does very little to alter the before-fiscal-policy, or market, distribution of income.

The other acceptable use is to look at the changes over time for the same country, as in the chart below from the same report.

LA-Gini

What we can see, once we resist the temptation to compare numbers across countries, is that there is a wide range of experiences across Latin America: while Honduras’s distribution of income became slightly more unequal (increasing by 2.1 percent between 2007 and 2011), Mexico’s became a bit more equal (falling 2.3 percent from 2008 to 2012) and Bolivia’s fell quite dramatically (by 15.9 percent from 2007 to 2012).

So, yes, go ahead and look at changes in Gini coefficients for individual countries—before and after fiscal policy, and over time—but, by all means, resist the temptation to compare the coefficients across countries. Such comparisons are, at best, meaningless and often can be quite misleading.