By Arnold Kling
Feel free to put constructive questions in the comments. Here are two questions that I recently received, one on health care and one on Keynesian economics.
On health care, actually two questions:
You asked thequestion why is health care something we want/expect others to pay for but don’t want to pay for ourselves. I’m wondering if people actually think of it that way? I think of it as pooling our money to insulate everyone. I see myself still paying for health care, just more indirectly. I’m paying taxes and/or premiums and in return I get my health care covered…Another question I have for you…I was under the impression that the Medicare fund is something that is invested in same/similar markets that individual savings would be invested in?
On the first question, if you are faced with a possibly unnecessary MRI, you don’t think “I could be wasting money in my insurance pool.” If you were paying for it yourself, you would worry about wasting money. Imagine we all had “eating insurance,” where we paid a flat fee and then could walk into any supermarket or restaurant and get our food paid for by “eating insurance.” In that case, you would never look for bargains or pass up an appetizing item because of cost.
On the second question, I hate to disenchant you, but just as there is no Easter Bunny, there is no saving going on in Medicare. Medicare is a transfer of taxes from young workers to old retirees.
Next, on Keynesian economics:
why can’t money saved by Americans spur the economy as much as spending it? …why wouldn’t tax cuts – if people would save some of this money – work just as well as a program like TARP, without all the bureaucratic overhead? If people dumped some of their tax cut savings into savings accounts, then banks would have more liquidity to make more loans.
The question of why savings are not good for the economy is one of the most fundamental issues in economics. In textbook microeconomics, saving is good. In textbook Keynesian economics, saving is bad. In micro, saving helps support investment. In Keynesian macro, saving disappears down a black hole. This is really too big a question to deal with in one blog post. Sorry.
It is hard for me to defend TARP, because I am against it. But the idea is to give banks funds that improve their capital position, which in turn could raise lending by multiple amounts.
As an aside, I do not see how the same policymakers can support both stimulus and TARP. If you support the stimulus, it’s because you believe there is a lack of demand for loanable funds. If you support TARP, it’s because you believe there is a lack of supply of loanable funds.
I definitely oppose TARP. I would be in favor of a real stimulus, but the “stimulus bill” is a long-term spending increase that bears almost no resemblance to a real stimulus. Because of the difficulties with using spending in a timely fashion, I favored tax cuts as a stimulus. The tax cut I wanted to see was a cut in the employer contribution to the payroll tax, which would have stimulated employment and helped corporate balance sheets. (In the long run, if such a tax cut were maintained, the money would flow throw to wages.)