David R. Henderson  

A Tax and Transfer Company with an Army

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That's my relabeling for accuracy of an otherwise-excellent Paul Krugman post today. Two excerpts from his post:

But this seems like a good time to repeat, once again, the truth about federal spending: Your federal government is basically an insurance company with an army. The vast bulk of its spending goes to the big five: Social Security, Medicare, Medicaid, defense, and interest on the debt.
. . .
And if you want smaller government, either you're talking about cuts in the big five, or you have no idea what you're talking about.

Of course, Social Security, Medicare, and Medicaid are not true insurance. They are tax-and-subsidy schemes.

While I'm at it, these two posts of his (here and here) on how Iceland used a floating exchange rate to avoid wrenching internal adjustments in wages and prices are excellent.



COMMENTS (11 to date)
Phil writes:

Dr. Krugman: I want cuts in government regulation and busybodying. Do I have no idea what I'm talking about?

Ryan P writes:

@Phil,
To be fair, in context of the post it's clear Krugman is talking about "smaller government in the sense of cheaper government". Regulation may be annoying, but it doesn't show up as a big spending or tax line (which might be one of the reasons we use it -- e.g., why CAFE when gas taxes or equivalent achieve the same goal much more efficiently?)

Foobarista writes:

How about wages and salaries? Getting rid of useless layers of federal bureaucracy? Cleaning out the regulatory, union, and set-aside crapola that makes infrastructure cost triple what it costs anywhere else? Yes, I know this stuff is only megabux and not gigabux of the sort that reforming the "social insurance" stuff would be, but it's the sort of "sacrifice" that's required of the government and the political classes that would be needed to talk about fixing "the big three" entitlement programs.

steve writes:

I usually find Krugman infuriating, but sometimes he does make a good point. I want smaller government.

wintercow20 writes:

As some comments above already allude to, focusing on government spending is a little bit like being a bad Bastiat ... focusing only on the seen. The impacts of "big government" can be (I believe ARE) far reaching. What is the annual dead weigh loss due to inefficient tax policy? The Feldstein work I am familiar with suggests 30% of tax takes. OK, so even if that is a gross overestimate, suppose 10% is reasonable. Well, at all levels, what were taxes last year? In the $5 trillion range? So there's a $500 billion cost right there. What are the estimates of lost GDP and higher consumer costs and lower wages due to poor government policy? They would seem to be in the trillion dollar range or more. Again, this says nothing of Medicare and the like.

What about the Medicare price controls that filter their way through the medical system, possibly distorting the market mechanism from working well. What of occupational licensing keeping costs high and preventing people from entering certain industries easily? What of the cost of imprisoning a larger share of our population than any of the Western World's nations? What of the government monopoly in education? I argue that it is unnecessarily costly, but even if it were cheaper than private alternatives, I would still favor private schooling - how would that square with his story? And so on.

Now, I do agree with his point, but it dismisses out of hand what I would argue are strong data suggesting the cost of government is far larger than the 5 items he cites above. I'm in no mood to speculate on why these sorts of things are not regular features on his columns. I presume he may think I want to pollute rivers and enfeeble children for arguing as I do.

Phil writes:

@Ryan P: OK. If that's what he means, then I take back my comment. But "cheaper government" is not necessarily what I mean when *I* say "smaller government".

cassander writes:

According to the small business administration, the cost of compliance with federal regulation is 1.7 TRILLION dollars a year, more than medicare and SS combined, about 8,000 per employee. That's money that should be counted as part of the cost of government, but never is.

http://archive.sba.gov/advo/research/rs371tot.pdf

Franki Howland writes:

David Henderson does a service by pointing to Krugman's columns and it is useful to point out that taxes are a necessary corollary. The comments above refer to the government's regulatory activities. Henderson also mentions subsidies (is he thinking about the subsidy to health providers?), but I think he means transfers, or at least that he should note that transfers to old people and poor people are pretty important. The other really crucial activities of government are the judicial system and paying for education. But to deny that Medicare, Medicaid, and Social Security provide lots of insurance just makes Henderson appear to be an ideologue.

David R. Henderson writes:

@Phil, Foobarista, wintercow20, and cassander,
Good points. I did go a little overboard, didn’t I?
@Franki Howland,
On subsidies, yes, there are subsidies to health care providers, but the main health-care subsidies are to the beneficiaries of Medicare and Medicaid. Calling them transfers is also fine, which I do in the title of the post.
I think you missed my point on Medicare, Medicaid, and Social Security. They are not insurance because the government taxes for them and then has a formula for benefits. That’s not how insurance works. And if you doubt that, take a look at Flemming v. Nestor.
Finally, my reasoning on this does not make me an ideologue. Making clear distinctions and using language carefully are not ideological. An ideologue is somehow who has a set of values that he uses to judge political systems and policies. I am an ideologue, but this reasoning above is not an instance of it.

Arthur_500 writes:

Mr. Krugman supplies one alternative and then says that is the only alternative but he has offered a falsehood as a premise. So what's new?

There are many ways to reduce the cost of government and not reduce either effectiveness or value to the society. One way to start would be to actually run Social Security and Medicare like funds rather than stealing those funds and then not being able to pay them back. That's called good governance.

Of course, when you have liberal fools who have their hands out then there is no way an elected official will ignore those foolish voters. In this way, the esteemed, but foolish, Mr. Krugman has hit the nail on the head. Anyone who would expect elected officials to provide good governance in the face of liberal media onslaughts should have his head examined. Who writes the articles? Mr. Krugman of course.

Frank Howland writes:

Just a note to ask why my second comment wasn't posted? It made reasonable points in a polite manner. Maybe you never saw it; if not I wonder what's up. Perhaps you can explain your comment policy.

Thanks,


Frank

[Hi, Frank. I'm puzzled because the comment doesn't seem to exist. I've checked the spam folder and it's not there. Can you recreate it and try again? --Econlib Ed.]

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