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The 10-year budget framework that President Barack Obama released in February, called “A New Era of Responsibility,” is as much a philosophy of government as a fiscal action plan. Gone is the Ronald Reagan view that “government is not a solution to our problem; government is the problem.” Obama rightly sees an expanded role for government in allocating society’s resources as vital to meeting the 21st century challenge of sustainable development.
The scientific discipline known as public economics describes why government is needed alongside markets to allocate resources. These reasons include: the protection of the poor through a social safety net; the correction of externalities such as greenhouse gas emissions; the provision of “merit goods” such as health care and education that society deems to be essential for all of its members; and the financing of scientific and technological research that cannot be efficiently captured by private investors. In all these circumstances, the free-market system tends to underprovide the resource in question—whether income support for the poor, abatement of carbon emissions, low-cost primary health care, or R&D for renewable energy.
After a decade of macroeconomic instability, Reagan came to office in 1981 on a platform of shrinking the public sector to free resources for market-based allocation. Federal revenues and outlays remained relatively unchanged as a share of national income from 1981 to 2008, at around 18 percent of gross domestic product (GDP) for revenues and around 21 percent of GDP for outlays. The U.S. ran budget deficits during most of that period, with a long and chronic stalemate between those who would raise taxes and those who would cut spending. By and large, the public resisted cuts to spending programs but also resisted calls for tax increases.
The result is in strong contrast with Europe, where both taxes and spending are notably higher. Counting all levels of government (federal, state, and local), government revenues in the U.S. are about 33 percent of GDP, compared with 45 percent in Europe; spending stands at 38 percent of GDP in the U.S. and 46 percent in Europe. Yet because U.S. taxes are even lower than spending as a share of GDP, U.S. deficits are chronically higher. The main predictions of public economics are also supported. The U.S. lags behind Europe in several areas where public spending makes a vast difference: U.S. health outcomes are worse (for example, lower life expectancy with a much more costly private system); U.S. poverty is much higher; U.S. educational outcomes are worse (poorer outcomes in science, math, and functional literacy); and public infrastructure is superior in many European countries (for example, better mass transit and broadband penetration).
Obama’s budget plan properly focuses on areas that public economics identifies as priorities and where the U.S. discernibly lags behind many parts of Europe: health (the costly private U.S. system yields a lower life expectancy), education (worse science, math and functional literacy), public infrastructure (for mass transit and broadband, for example) and research and development (especially on sustainable energy). The emphasis is on public-private partnerships (PPP), combining public financing and private sector delivery. Among other major efforts, the PPP model will be used to promote the next generation of electric automobiles (plug-in hybrids, all-battery and fuel cells), a smart grid to tap renewable solar and wind energy in a resilient and efficient national network, and the testing of carbon-capture and sequestration at coal-fired power plants.
Obama’s vision of an expanded federal role is on-target and transformative, but the financing will be tricky. This year’s deficit will reach an astounding $1.75 trillion, or 12 percent of GDP, as a result of a collapse of tax revenues, bank bailouts and stimulus spending. Under the plan, the government debt held by the public will balloon from 40.8 percent of GDP in 2008 to 65.8 percent in 2013, a level that will weigh heavily on the budget for years.
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Add CommentThank you Mr. Sachs. Progressives need to give Obama the political cover to be truly fiscally responsible, and actually pay for the government we all want. We need to start demanding new taxes--unfortunately not just on the rich (that won't cut it)--so he can diffidently accede to the will of the people.
Reply | Report Abuse | Link to thisSteve Roth
http://asymptosis.com
Mr. Sachs,
Reply | Report Abuse | Link to thisFirst I have worked in the corporate world. I now run my own business and advise others. Your idea of government responsibility is contradictory to what made America great. As a matter of fact your ignorance reduces the fundamental mechanics of our ecomomy to that of Marx. The Government is not responsible for bailing out the companies who have fleeced the public and ran off the money (big dogs). Nor is the Government responsible to help those who bet on the big odds and lost there money. The bailout only rewards scams and the ignorant people who have invested in them. If the Government wants to help the economy they must promote new technologies and ideas. This comes of supporting from the bottom up and not big corporations. Maybe someone might think in microeconomics for a change and help America maintain its leadership. The bailout does not address the fundamentals of what made America different and great. People running our Government are corrupt and filling there own pockets. I do not want us to be like the rest of the World, I want to be different, the way America has always been different. I have lived in countries that are tryingto get rid of exactly what you and Obama are trying to drive us into. It is easy to get into but nearly impossible to get rid of. I do not want Socialism and when people are rushing to get Government jobs we have a problem. Obama has never had a real job and you probably have not either or you would understand why America is or was great.
way to promote irresponsibility. what better way to keep people down than to keep them on their knees, begging for governmental handouts.
Reply | Report Abuse | Link to thisdaveclaresen,
Reply | Report Abuse | Link to thisWell said. I couldn't believe the article casually approves of the major shift in governemnt philosophy that is happening. This is precisely what will make America "used to be great."
You have actually worked for your success and know the reality of the effects of large government on trying to succeed as a private business. Strange you your opinion is opposite from the authors.
This is an extreme oversimplification of economic theory, that even those in the Obama administration would take issue with.
Reply | Report Abuse | Link to thisNot saying I don't agree with some of the arguments e.g. taxing is preferable to public debt, but I believe that this article misrepresents the ideas it's arguing for.
If I were to accept the your precepts regarding the role of the Government in health care, environmental issues, financial and industrial markets or education, then I would be forced to agree with your conclusions regarding public debt and taxes.
Reply | Report Abuse | Link to thisHowever, if I were to question those precepts, which I honestly do question, then the debate shifts from how to pay for the gross expansion of Governmental regulation, influence, involvement and interference in those areas of the economy and my life.
The debate should not, yet, be about how to pay for them, but whether those things need to be done at all.
Here are some questions I would like to see at least discussed:
General:
What other ways are there to meet the same public needs? Are the governmental programs in place helping or are they part of the problem?
In what ways have past decisions and actions created the unintended consequences that brought us to the current state and how do we prevent new actions from creating further unintended consequences?
Education:
Are the ways we are measuring the efficacy or success of our education system valid?
Is the current public education system, as it functions today, capable of educating our children in the areas and skills needed in the 21st century?
What areas and skills do our children need?
I could go on for page after page, but that gives you the basic gist of why I so fervently disagree with your assumed precepts for this article. The discussions are not over and the debate still hasn't happened about *what* needs to be done. In no way is it time to start talking about *how* to pay for it.
Scott @ GGE
I am astonished that a supposedly scientific publication would pring such a misleading piece. Here are a few examples of what I mean:
Reply | Report Abuse | Link to this"The U.S. lags behind Europe in several areas where public spending makes a vast difference: U.S. health outcomes are worse (for example, lower life expectancy with a much more costly private system); "
We do not have a private health care system. Half of all health care expenditures are made by the Federal Government. The system is so heavily regulated that there is no way of knowing what a private system would even look like. Also, we pay for the bulk of the world's pharmaceutical research.
"U.S. poverty is much higher;"
By what measure? Certainly not if you look at unemployment rates, standard of living, or median household incomes.
"U.S. educational outcomes are worse (poorer outcomes in science, math, and functional literacy);"
This is incredibly misleading. Our public schools are worse than Europe's, but our mostly private University system is superior by every measure.
There is a consistent inverse correlation between the extent to which a government is involved in the economy and the growth rate of that economy. Look to Asia for examples, or compare the U.S. to Europe. Because of the nature of compound growth, small differences in rates of growth amount to very large differences in the size of an economy in the long run. The role of government in the economy should be to facilitate maximum growth, which means staying lean and smart.
I seems to me, after watching politics and participating as a voter for 50 years, that the voting majority for the most part want the government to pay for just those things that each of us wants, but not for those other expenditures of which we do not approve. Then we rationalize that the government has plenty of money to pay for our spending preferences if only it would stop using our resources on those other wasteful programs. And certainly it can take less from me in taxes if it stops wasting money on those undesireable programs. Of course, we would never acknowledge that our voting comes from rationalizations like these. But in looking at what we vote for and against, this kind of thinking must hold great sway.
Reply | Report Abuse | Link to thisI thought that this was supposed to be a science journal. I guess I was wrong. This represents another breakdown in roles where politics is inserted into venues that it does not belong. By doing so, right or wrong, it makes the other articles and information published in this journal suspect. In the back of your mind you are asking yourself "has this material been biased by a political agenda?" I now always have that in the back of my mind where I didn't so much in the past. Naively, I thought that the scientific journals were more resistant to that kind of thing. Is it falling by the wayside the same way the rest of public media has? News isn't isn't journalism anymore. Media shapes the news. It does not report it. Is science still science?
Reply | Report Abuse | Link to thisUntil very short ago, the US and the whole world (with the exception of North Korea and a couple of other axes of evil) firmly believed in the orthodoxy of reagano-thatcherism. "Less government" was the password to freedom and prosperity. It even brought down Communism and made Ukamerica master of the Universe.
Reply | Report Abuse | Link to thisAnd what are we hearing nowadays? "Expanded government"! The new orthodoxy: sustainable development through more government and public spending. Reaganomics flushed down the toilet.
I wonder where all the bright economists were five or ten years ago. And the editors of the Wall Street Journal, the Financial Times, etc. And what are they doing now? Rushing to lead the new trend? Or lurking, deep in their holes, for the next time when pure first-shoot-ask-later-capitalism will again be all the go.
It seems that economic choices and policies follow a sort of sawtooth trajectory. The greatest gurus don't know a thing. It's just fashion: short skirts this year, long skirts next year, black yesterday, white tomorrow...
This raises a very scientific question: is economics a real science or is it a capricious state of heart? If the latter is true, then calculation and reasoning and statistics are futile. We merely have to wait for the public to get bored and wish for the opposite. There's always a Bush or an Obama ready to play the role.
Fascinating,
Reply | Report Abuse | Link to thisFortunately, many of us do not view the Government as the best choice of a universal service provider nor that redistributing wealth should be the mission of Government. Our views are derived from our love of freedom. If you give someone else the responsibility of taking care of you, then you give away a piece of your freedom. This article simply assumes a new world order paid at the expense of the productive worker. We have an alternative plan. The author and all his supporters have a right to believe as they wish and share their views on who should pay for additional Government. In the democratic world the answer should be those who want and desire it should pay for it. Thus we should have a new Federal Tax bracket for the author of his supporters of 80% of earned income. This way they can be happy paying for the extra government they want but we as free people could do with out. This is a fair compromise that should be immediately implemented. This is simply a repeat of the old saying put your money where your mouth is
Fascinating,
Reply | Report Abuse | Link to thisFortunately, many of us do not view the Government as the best choice of a universal service provider nor that redistributing wealth should be the mission of Government. Our views are derived from our love of freedom. If you give someone else the responsibility of taking care of you, then you give away a piece of your freedom. This article simply assumes a new world order paid at the expense of the productive worker. We have an alternative plan. The author and all his supporters have a right to believe as they wish and share their views on who should pay for “additional” Government. In the democratic world the answer should be those who want and desire it should pay for it. Thus we should have a new Federal Tax bracket for the author of his supporters of 80% of earned income. This way they can be happy paying for the extra government they want but we as free people could do with out. This is a fair compromise that should be immediately implemented. This is simply a repeat of the old saying “put your money where your mouth is”
I was surprised and disappointed to read in Scientific American an opinion piece that is so grossly neither scientific nor American. Sachs' assertions about the correctness of Obama's "vision", budget priorities, and financing (higher taxes on "the rich") reflect a big-government socialist philosophy that one would expect to have been tossed in the dustbin of history after the fall of communism (when Sachs advised East European governments) and certainly after the current financial crisis, which was catalyzed by the federal government. Sachs conveniently presents only one half of the story when he states that the free market tends to under-provide public goods, requiring government to step in. First, there are solutions other than government, and second, government provision introduces other inefficiencies, e.g. those famous by Public Choice theory. It was a nice final, mocking touch to include the portraits of Washington and Jefferson: these men fought against a dominating, taxing central government and and architected the US Constitution of enumerated federal powers and sovereign states. They would vehemently disagree with Sachs. It was Washington who said, "Government is not reason, it is not eloquence, it is force; like fire, a troublesome servant and a fearful master. Never for a moment should it be left to irresponsible action."
Reply | Report Abuse | Link to thisThere is an often expressed belief that America's prosperity comes primarily from its approach to capitalism and business. It does not. Abundant natural resources with benevolent climate is the primary source of this historical prosperity. It was not even necessary to kill most of the Indians since they conveniently died of diseases brought from Europe. Unfortunately, we are no longer an exporter of natural resources but an importer. Technology may be the same in a decade. While the private sector has contributed to technology, most of it came from government actions such as the DoD and fighting WWII or giant monopolies such as AT&T (or even GM) that are no longer powerful. Microsoft is not a significant source of innovation.
Reply | Report Abuse | Link to thisWhen Rome was in trouble, Romans would write about how they needed to go back to traditional Roman values. Such backward looking was silly then and just as silly now. It is unclear what system if any will maintain USA prosperity. If such a system can be found and implemented, it will not be done by looking back to past glory and imaginary causes.
"Obama rightly sees an expanded role for government in allocating society's resources "
Reply | Report Abuse | Link to thisWrongly. Society does not have resources. YOU have resources, I have resources. Whether or not I give my resources to you for your pet project is not for you to say. You do what you want with your labor, I will do what I want with my labor. That is American. Forced taxation is slavery, involuntary servitude, that is not the American way.
Progressive and Fiscal Responsibility should not be used together in the same sentence. However, the reader that did so at least explained "fiscal responsibility" as being more taxes on everyone. Can you believe it? What is is this reader (and writer) doing on a Scientific journal? The evidence is clear; socialism does not work, except on a small scale and for a short time where people voluntarily subscribe to it. I am not subscribing to it. I *chose* to leave my high paying job in Virginia; my annual salary was cut in half but, thanks to a lower tax bracket and cheaper commute, my actual quality of life is about the same and I get to keep more of what I earn in relative terms. California is experiencing this phenomenon multiplied many times.
What SA's author and many readers seem to subscribe to, is socialism, a philosophy antithetical to the American way and our Constitution.
The United States of American has no "sovereign", no ultimate "owner" of land such as the Crown of England, by which ultimate ownership also creates a type of duty over the thing owned. In the United States, lacking a sovereign, there is also no ultimate duty by that nonexistent sovereign. Government is "of the people" and should and must be the absolute minimum that encourages citizens to go about the business of "business". Some will succeed, some will fail. Since the room for growth is hugely larger than the room to fail, the net effect is growth. Socialism puts a "cap" on growth (either hidden, called taxes, or explicit, in terms of centrally managed economies). making the room to fail equal to or larger than the room to succeed, so the net effect on society is stagnation or failure.
Two things -- Scientific American's publisher is German, hence will reflect European Socialist ideals, and seems to have become a policy instrument for the Left. It is not appropriate for SA to decide what is "proper" for United States tax and spend policies and I daresay that a proper economic analysis would reveal disastrous consequences for taxing 33 percent of GDP; it is why socialism does not work. It sort of works in tiny European countries that have been doing it for only a generation. It didn't work in the Soviet Union and it won't work in the United States. Germany does not have a huge neighbor to the south with no government services; sending millions of its inhabitants north to take advantage of our new socialism.
Reply | Report Abuse | Link to this"Obama's budget plan properly focuses on areas that public economics identifies as priorities and where the U.S. discernibly lags behind many parts of Europe:"
Maybe we WANT to lag behind Europe in taxes and government spending!
Anyone out there hear of "deadweight loss" from taxation? Its an economic term, it speaks to the economic cycle loss caused by the tax "wedge" in the price versus demand curves. When you multiply it by adding that tax at every stage of production (ie, the "VAT"), it becomes even worse. You know the whole point of "stimulus" is that you get more money, you spend it, and stimulate production. But increase tax, and your extra money goes right back to the government and does NOT stimulate the economy.
Here you have it: Carbon is NOT to be reduced, it is simply a new source of revenue:
Reply | Report Abuse | Link to this"new revenues from auctioning carbon-emission permits"
You can breathe, light your fire, but you'll have to PAY. Cows and sheep, too!
http://www.stuff.co.nz/national/farming/602109
I think the most important subject for use of this money is in trying to understand in a scientific way how our money and our macroeconomy actually works! Mostly macroeconomics is not regarded as an exact science and the amout of contravercy about it suggests that the situation has yet to be properly resolved. As a researcher on this matter it soon becomes clear that one needs to build a model of the system in order to understand it and its ability to function. So the problem then becomes which model.
Reply | Report Abuse | Link to thisMy research is centered in firstly choosing a model that satisfies the "Einstein Criterion" which rather like Ockam's Razor calls for as much simplicity as possible provided it is not over-simplified. By looking at the situation from sufficiently great a distance, many of the less important details can be avoided. The model I choose is not based on individuals in the society but rather on how blocks of them function, in all of the somewhat limited possible ways. Thus the personal and individual workings are avoided in the same manner as the gas laws, which are not directly concerned with separate molecular collisions.
The irrefutable logic of taking this approach and the relatively simple model that follows is a more scientific and reasonable way of providing answers to what should be done to get back in the technical road leading toward national progress. The answer as has already been suggested in these comments is in innovation of a better and more just system of government with less corruption and greater sharing of the opportunity for people 9especially the poorer unemployed ones) to find and do useful work.
The macroeconomic analysis which I have done suggests that one solution is to tax the opportunities that are presently being wasted. Instead of collecting part of our wages, collect part of our lost opportunities which are presently being held back by land owners and speculators. Tax land values not people.
Prof: Sachs,
Reply | Report Abuse | Link to thisRe: "Obama's vision of an expanded federal role is on-target and transformative, but the financing will be tricky" (page 1).
Tricky could very well be the understatement of the year. If Reagan was wrong on the one side, it seems to me Bush was- and Obama is wrong on the other. How can anyone authorize the addition of over a trillion digits (generated by the "backing" of a computer keyboard) into the U.S. "economy" and simply write it off as "tricky?" Trickle-down "economics" might be valid in theory, but no system of economics can account for human greed. If anyone is inclined to accuse me of being pro-Reagan, the accusation is false. Yet, Reagan's philosophical outlook would seem to have been correct. When has any government program solved any problem efficiently and without burdensome cost?
Does "...higher taxes on the rich..." include Ted Turner, David Rockefeller and George Soros?
"The irrefutable logic of taking this approach"
Reply | Report Abuse | Link to thisEverything can be refuted :-) including the use of the word "logic" in this context.
"I think the most important subject for use of this money is in trying to understand in a scientific way how our money and our macroeconomy actually works! "
There is no "our money". You have money, I have money. You do not have my money and I do not have your money. If I take your money that is stealing and illegal. If you take mine, it is the same.
Money exists or is backed ultimately by labor (and by raw materials such as gold). You do not have a right to my labor and I do not have a right to your labor.
You do not have a right to my money or labor EVEN IF you have provided me a service, if we have no contract. If you wash the windows of my car and I have not asked you to do so, your payment may be "thank you".
That is microeconomics. Multiply by millions for macroeconomics but it is still the same. Groups cannot suddenly have rights that individuals lack. True it is that groups act as though they have rights, but that is just herd mentality. Mob mentality I should say.
Thus, if you have no right to my labor against my will, and no right to my money against my will, how can there possibly be "our money"?
What you suggest is called Socialism. It stems from a seriously mistaken belief that money is just "out there". I suggest for your review the parable of the ant and the grasshopper, or the little red hen; each tells the same story.
Now then, I acknowledge the existence of a concept called the social contract (see Rosseau). This is an implied contract between each citizen individually and all citizens collectively (the nation). It would be better for everyone if this contact were expressly documented for each citizen, as it was in Pennsylvania when this nation became a nation. Many people in the United States retained British citizenship and were not permitted to participate in government. Those who chose to participate took oaths of citizenship and these oaths were documented. Beause of that, people made choices to obtain the benefits of the nation in return for which certain obligations existed such as military service.
Those obligations continue to exist even though most individuals have made no contract or oath. It is perhaps the only exception to contract law that I can think of, a contract that comes into existence the moment you are born. It casts a shadow on "land of the free and home of the brave".