Innovation/Global Risk

  America: Failed Welfare State

By Shlomo  Maital  

  New York Times columnists David Brooks and Paul Krugman (Economics Nobel Laureate) do not coordinate their columns. But their weekend columns (Feb. 25-26) were closely related.  Brooks’ point: American is indeed a welfare state, despite what everyone says, but it is a ‘failed’ welfare state.  Krugman’s point: Deep down, even Romney and Republicans believe that you cannot ‘austerity’ your way to prosperity. 

   Brooks’ simple point is this.  You can provide services to your citizens in two ways. The government can provide them, thus spending money. Or, it can make the private sector provide them, by offering ‘tax credits’ (e.g. huge tax credits to businesses for providing health care to their workers).  Tax credits is also known as ‘tax expenditure’, because, it makes no difference to the government budget if the governments spends another buck or reduces taxes by a buck. 

    When you include these tax credits in the picture, it turns out (according to the OECD) that America is one of the biggest welfare states in the world, behind
Sweden  but ahead of (!) Italy, Austria, Holland, Denmark, Finland and Canada, with America’s average in govt. spending above that of the OECD!  

    So, what is the problem? The problem is, tax credits are incredibly inefficient.  When you provide health care by giving tax credits to employers, health care offered by for-profit health care providers, you deprive those without jobs of health care and you make something that is basically non-profit and ‘public’ in nature into a private for-profit good – a disaster.  That is why America spends so much on health care, and gets so very little.   Some things are fundamentally ‘public’ in nature and have to be provided by government. Health care is one of them. 

     All the conservative Republic bluster  about big government and cutting spending was revealed to be hypocrisy, when Mitt Romney recently made his ‘gaffe’ (a gaffe, Krugman says, is when a politician tells the truth).  “If you just cut [spending], you’ll slow down the economy” Romney said.  Of course he later backtracked. But the cat was out of the bag. 

   So, putting Brooks and Krugman together:   The Republican worldview is hypocritical and misguided.  America IS a welfare state, that’s a good thing, but incredibly bad at it. Simplify taxes, eliminate the credits and loopholes, and provide citizens directly with what they need.  This will stimulate the economy and make people better off.  In their few honest moments, even the Republicans agree.

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