June 03, 2004

Cleaning Up After the Elephants

Cleaning up after the elephants. It really is a thankless task. Our letter in response to Robert Samuelson's bizarre review of Rubin's memoirs:

From the New Republic:

UNCALCULATED

In his book review, Robert J. Samuelson argues that the nation's central budgetary problem is "federal spending, driven by higher retirement benefits for aging baby-boomers" ("<>What the Boom Forgot," May 3). Samuelson criticizes the Clinton administration for failing to address that problem by scaling back Social Security and Medicare. The projected imbalances in government retirement programs are indeed worrisome, and it is unfortunate that progress was not made in addressing them during the 1990s. But Samuelson does not adequately explain that the critical long-term expenditure problem lies in Medicare and Medicaid--far more so than in Social Security--and he overlooks the role of recent tax cuts in worsening the budget outlook.

Over the next 75 years, the cost of Medicare and Medicaid will rise by more than 10 percent of gross domestic product (GDP), due to an aging population and increases in health care costs. That is more than four times the expected increase in Social Security costs over the same period. The distinction matters because rising Medicare and Medicaid costs are harder to address. Some changes can certainly be instituted in Medicare, such as increased premiums. But the most critical task is to slow the rate of growth in health care costs system-wide--a tough proposition. Otherwise, it won't be possible to achieve significant savings in Medicare and Medicaid without substantially increasing the number of Americans who are uninsured or underinsured. Samuelson chides the Clinton administration for failing to tackle these big issues, but that administration at least addressed--albeit unsuccessfully--systemic health care reform.

Samuelson's analysis of long-term fiscal problems also leaves out the 2001 and 2003 tax cuts. If made permanent, these tax cuts will cost more than $10 trillion over the next 75 years--three times the entire Social Security shortfall over this period. One cannot bemoan Social Security's contribution to budget problems while barely mentioning the tax cuts. Unless one believes that long-term deficits can be closed entirely on the expenditure side--undesirable substantively and implausible politically--future generations would have faced heavier tax burdens than current generations, even before the recent tax cuts. Why impose larger fiscal burdens on future generations to finance tax cuts for current ones? Samuelson also gives short shrift to the "save Social Security first" strategy that the Clinton administration pursued in the late '90s. A key goal of that strategy was to use budget surpluses to pay off the national debt. Far from shifting costs to future generations, as Samuelson charges, this policy sought to do the reverse--to reduce the debt burden we impose on future generations of taxpayers.

Another weakness of the review is that Samuelson appears of two minds on the dangers of deficits. In belittling the Clinton administration's deficit-reduction efforts, he argues that deficits "do not matter nearly as much as the public and many economists believe" and dismisses the reduction in the deficit by 2.5 percent of GDP between 1992 and 1995 as "such a small change." But, in arguing for significant cuts in retirement programs, he warns that "there could easily be circumstances" in which large, persistent deficits could "trigger a financial crisis" and "reduce economic growth." This inconsistency is reflected in his advocacy of Social Security benefit reductions to curb rising costs. The total increase in Social Security expenditures over the next 75 years will amount to 2.5 percent of GDP, the same amount he dismisses elsewhere as a small change.

Deficits do, in fact, matter. When the deficit fell by 2.5 percent of GDP between 1992 and 1995, the share of net private savings soaked up by the deficit fell by a full third, freeing more funds for investment. And, contrary to Samuelson's claim that deficits aren't that important because we can borrow from foreigners, such borrowing has real costs. The more than $2 trillion in debt to foreigners we have now accumulated effectively mortgages our domestic investments, since foreign creditors will capture a share of the returns on those investments. Samuelson also downplays the deficit-reduction efforts of the '90s by claiming that "good luck, more than good policy, produced the surpluses." Good policy in 1990 and 1993 got us from large, growing, and potentially dangerous deficits to smaller, stable, manageable deficits. Good luck--revenue growth associated with the late '90s boom and the post-cold-war reduction in military spending--then turned those small deficits into surpluses. It's true that good policy alone did not produce the surpluses. It is equally true that the surpluses would not have materialized without sound policy.

Today, after three years of large tax cuts and other adverse fiscal developments, the fiscal picture has darkened considerably. The fiscal policies of the '90s that Samuelson dismisses look better in hindsight, not worse.

J. Bradford Delong
Robert Greenstein
Peter R. Orszag

The authors are, respectively, professor of economics at the University of California at Berkeley, executive director of the Center on Budget and Policy Priorities, and senior fellow in economic studies at the Brookings Institution.

Posted by DeLong at June 3, 2004 09:14 AM | TrackBack | | Other weblogs commenting on this post
Comments

"Cleaning up after the elephants. It really is a thankless task."

Let me be the first to say, "Thank you." :-)

Y'all rolled up your sleeves and took a large shovel to the pile that the elephant left behind. The state of political discourse is less stinky because of it.

Posted by: Brad Reed on June 3, 2004 10:24 AM

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Is going from 39.6% to 35% really a "large tax cut"?

Posted by: Dave S. on June 3, 2004 10:43 AM

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Yes, it is a big tax cut, or more accurately a large revenue reduction.

Think about Bill Gates being in a room of 99 other people earning 35K/year.

If he earns $100M/year.

Let's have two rates: 25% until $200K, and 39.6% above that. Total revenue would be $39,520,800.00.

If you lowered the rate to 35%, you would generate $34,930,000.00, or $4,590,800.00 (11.6%) less revenue.

Posted by: Matthew Saroff on June 3, 2004 11:23 AM

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You go guys!!!

Uh Dave:
Is reducing revenue by 22% a big tax cut???

FY Revenue %GDP GDP
Trillion
2000 $2.02 20.9 $9.66
2003 $1.78 16.5 $10.79

Posted by: bakho on June 3, 2004 11:38 AM

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Very well said.

Posted by: RT on June 3, 2004 12:08 PM

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(Musing)

There should be some kind of established convention for public discourse surrounding the use of the word "percent," and in particular for describing the differential between two percentages as a percent. To say something like "Congress cut the top marginal income tax rate by 20 percent" is so confusing that it ought to be an automatic foul that sets off people's alarms. Alas, it is not.

Posted by: alkali on June 3, 2004 12:18 PM

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It was only a budget surplus if one counted the Social Security surpluses.

Posted by: Andrew Boucher on June 3, 2004 12:38 PM

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Good job guys, thank you.

Posted by: me on June 3, 2004 12:41 PM

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"Some changes can certainly be instituted in Medicare, such as increased premiums. But the most critical task is to slow the rate of growth in health care costs system-wide--a tough proposition. Otherwise, it won't be possible to achieve significant savings in Medicare and Medicaid without substantially increasing the number of Americans who are uninsured or underinsured."

You know, I remember seeing this segment on CNBC, or one of those cable networks, a few days ago about a health program at Home Depot. It tried to get its employees to do things like walking during lunch or breaks and eat better and so on and so forth. The main goals, if I remember correctly, was to make the lives of the employees better by having them lose weight and things like that but also to lower insurance costs.

I started to wonder, as I have in the past few months, about how much things like obesity, and therefore diabetes, high blood pressure, and heart disease, will cost the health care system in the future. Has there been a study done on the potential costs? Programs like the one at Home Depot seem to be perfectly sensible, and if the benefits would be great, I don't see why other companies couldn't try the same thing. (That assumes, of course, that the costs aren't astronomical. I'd be surprised if they were, because I doubt Home Depot would take such a huge hit.)

Posted by: Brian on June 3, 2004 12:46 PM

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"Some changes can certainly be instituted in Medicare, such as increased premiums. But the most critical task is to slow the rate of growth in health care costs system-wide--a tough proposition. Otherwise, it won't be possible to achieve significant savings in Medicare and Medicaid without substantially increasing the number of Americans who are uninsured or underinsured."

You know, I remember seeing this segment on CNBC, or one of those cable networks, a few days ago about a health program at Home Depot. It tried to get its employees to do things like walking during lunch or breaks and eat better and so on and so forth. The main goals, if I remember correctly, was to make the lives of the employees better by having them lose weight and things like that but also to lower insurance costs.

I started to wonder, as I have in the past few months, about how much things like obesity, and therefore diabetes, high blood pressure, and heart disease, will cost the health care system in the future. Has there been a study done on the potential costs? Programs like the one at Home Depot seem to be perfectly sensible, and if the benefits would be great, I don't see why other companies couldn't try the same thing. (That assumes, of course, that the costs aren't astronomical. I'd be surprised if they were, because I doubt Home Depot would take such a huge hit.)

Posted by: Brian on June 3, 2004 12:47 PM

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Oh yes, as others have said, that was a great response.

Posted by: Brian on June 3, 2004 12:49 PM

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Brian -- I have made the observation to my wife that Walmart must have the heaviest employees in the country. But if you take it a step futher, poor people eat a poor diet heavy in starches.
Poor people make poor choices -- that is one reason why they are poor. But anyway, one thing I have heard zero comment on is that one factor behind the weight gains for the average American over the past decade -- that is now the latest "crises" -- is flat to falling standards of living for the working poor in the US.
Has anyone seen any studies of this -- it seems a natural subject for someone.

Posted by: spencer on June 3, 2004 02:15 PM

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I think there's something to what you said. And since the majority of the people working at places like Home Depot or Wal-Mart are probably going to be middle or lower class in terms of income, trying to implement programs like this might make even more sense.

Posted by: Brian on June 3, 2004 07:40 PM

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"Is going from 39.6% to 35% really a 'large tax cut'?"

Maybe I'm wrong, but aren't you forgetting to factor in the cuts in capital gains taxes?

Posted by: Brian on June 3, 2004 07:47 PM

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I get tired of reading the endless debates with people like Robert Samuelson, because never admits error, and is incapable of admitting error, and is perhaps incapable of realizing when he is in error and when he is not.

But I am interested in Brad Delong's "Come the Revolution. . ." list. That is, what Prof. Delong thinks we should do, if were appointed czar for a day, come the revolution.

I know it's no use advocating an unelectable platform, even baby steps would be an improvement, blah, blah, blah, but forget that for a moment. What should we do? If you had the power would you set the top marginal rate at 33%? 36%? 39%? 42%? 90%? Estate tax? Child tax credit? Payroll tax? Means testing? Benefit cuts?

And then here is perhaps the key question. Once you've advocated your set of policies, can you tell me what the consequences will be for acting in the way you advise, versus the the consequences of the status quo, or the consequences for Sameulson's preferred policies?

Posted by: roublen vesseau on June 3, 2004 08:02 PM

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"Samuelson criticizes the Clinton administration for failing to address that problem by scaling back Social Security and Medicare... But Samuelson does not adequately explain that the critical long-term expenditure problem lies in Medicare"

He didn't criticize Medicare *enough*?

"... the most critical task is to slow the rate of growth in health care costs system-wide... Samuelson chides the Clinton administration for failing to tackle these big issues, but that administration at least addressed--albeit unsuccessfully--systemic health care reform."

In its first two years. In its last six years, exactly *what* did it do regarding 'the critical task to slow the rate of health care costs' in Medicare? And what did it achieve on this point in eight years total?

(I realize Clinton did have a chance to make a legacy on this with the Breaux bi-partisan commission -- but he turned his back on that for the sake of partisan politics.)

"Samuelson also gives short shrift to the 'save Social Security first' strategy that the Clinton administration pursued in the late '90s. A key goal of that strategy was to use budget surpluses to pay off the national debt."

Well, the budget surplus didn't appear until 1997 -- and as a big surprise, if one looks at the Clinton Administration's own budget projections, which had deficits rising forever even after their tax increase produced a one-shot reduction in its size before it resumed growing, as they thought at the time.

So what was the Clinton Administration's strategy to "save Social Security first" then and during its first term? And until the economy unexpectedly but happily produced the surplus in the second?

The idea to save Social Security first seems to have arrived rather late and fortuitously.

BTW, since we just got a stern lecture from the authors about how Social Security isn't the real problem, Medicare is, and on how Samuelson errs in over-emphasizing Social Security, isn't it surprising to see them defend here a policy of "Save Social Security first"?

Shouldn't they be equally criticizing the Clinton Administration for putting Social Security first (and waiting five years for some good luck to do even that) -- while not doing anything at all about the real problem, Medicare, ever ... and for scuttling Sen. Breaux's bi-partisan Medicare reform commission? Which was the best and probably only real shot at Medicare reform we've had, or will have for a good while yet.

"Another weakness of the review is that Samuelson appears of two minds on the dangers of deficits. In belittling the Clinton administration's deficit-reduction efforts, he argues that deficits 'do not matter nearly as much as the public and many economists believe' and dismisses the reduction in the deficit by 2.5 percent of GDP between 1992 and 1995 as 'such a small change. But, in arguing for significant cuts in retirement programs, he warns that 'there could easily be circumstances' in which large, persistent deficits could 'trigger a financial crisis' and 'reduce economic growth.'"

Aw, geeze, there are deficits and there are DEFICITS.

We're comparing a deficit change of 2.5% here to the GAO projection that the deficit resulting from the retiree spending programs would reach of 20% of GDP -- larger than the entire federal government today -- around 2040, and be rocketing straight up because of the compounding interest on the debt, at which point GAO ended its 75 year projection about 30 years early because everything collapses and that world is impossible.

And that projection was made in 2000 assuming the surpluses would continue for a good while yet.
(e.g http://www.gao.gov/new.items/d01385t.pdf , see figures #3 & 4.)

So Samuelson is being criticized for being "inconsistent" in saying a 2.5% budget deficit isn't nearly so big a deal as one that GAO projected would collapse the government? C'mon.


Posted by: Jim Glass on June 3, 2004 08:21 PM

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Spencer: below is citation and abstract for a review article on SES and obesity, and another on SES, health insurance status, and other health problems. The first article may be of interest to economists and engineers because it works in the wonderful diet linear programming problem we all studied in our mathematical programming classes. You can find many more citations by using PubMed article search at the National Library Of Medicine.

And thanks to host for writing a response to R. Samuelson piece in the New Republic. Sorry situation that such a journal would put that guy out as a serious economic journalist. Now, could you do something about the latest Brooks NYT column that pruports to say Bush admin macro policies are OK? -just a flawed but understandable response to that tricky tricky recession problem in 2001 (One that the Bush admin trumpeted as the mildest in, basically, all of history, but very and dangerously tricky, nevertheless. So tricky it called for exactly the same policy as did expected large budget surpluess and endless economic expansion)

American Journal of Clinical Nutrition. 2004 Jan;79(1):6-16. Poverty and obesity: the role of energy density and energy costs. Drewnowski A, Specter SE.

Many health disparities in the United States are linked to inequalities in education and income. This review focuses on the relation between obesity and diet quality, dietary energy density, and energy costs. Evidence is provided to support the following points. First, the highest rates of obesity occur among population groups with the highest poverty rates and the least education. Second, there is an inverse relation between energy density (MJ/kg) and energy cost (US dollars/MJ), such that energy-dense foods composed of refined grains, added sugars, or fats may represent the lowest-cost option to the consumer. Third, the high energy density and palatability of sweets and fats are associated with higher energy intakes, at least in clinical and laboratory studies. Fourth, poverty and food insecurity are associated with lower food expenditures, low fruit and vegetable consumption, and lower-quality diets. A reduction in diet costs in linear programming models leads to high-fat, energy-dense diets that are similar in composition to those consumed by low-income groups. Such diets are more affordable than are prudent diets based on lean meats, fish, fresh vegetables, and fruit. The association between poverty and obesity may be mediated, in part, by the low cost of energy-dense foods and may be reinforced by the high palatability of sugar and fat. This economic framework provides an explanation for the observed links between socioeconomic variables and obesity when taste, dietary energy density, and diet costs are used as intervening variables. More and more Americans are becoming overweight and obese while consuming more added sugars and fats and spending a lower percentage of their disposable income on food.

Am J Public Health. 2003 Dec;93(12):2105-10. The association of race, socioeconomic status, and health insurance status with the prevalence of overweight among children and adolescents. Haas JS, Lee LB, Kaplan CP, Sonneborn D, Phillips KA, Liang SY.

OBJECTIVES: We examined the effect of race, socioeconomic status, and health insurance status on the prevalence of overweight among children and adolescents. METHODS: We studied an observational cohort from the 1996 Medical Expenditure Panel Survey Household Component. RESULTS: In the younger group, both Black and Latino children had a greater likelihood of being overweight compared with White children. Among the adolescent group, Latinos and Asian/Pacific Islanders were more likely to be overweight. Among adolescents, lacking health insurance and having public insurance were both positively associated with the prevalence of overweight. A relationship between insurance status and overweight was not observed for younger children. CONCLUSIONS: There are substantial racial differences in the prevalence of overweight for children and adolescents. Health insurance status is associated with the prevalence of overweight among adolescents

Posted by: jml on June 3, 2004 08:22 PM

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"The projected imbalances in government retirement programs are indeed worrisome, and it is unfortunate that progress was not made in addressing them during the 1990s."

I.e., it was unfortunate that our boss, President Willie, LIED HIS A** OFF about Medicare during the 1995 fight with Congress, even opposing a Gingrich-proposed Medicare reform after CLINTON HIMSELF had proposed the identical reform JUST MONTHS EARLIER.*

*I refer of course, to the proposal to keep seniors paying 31.5% of their drug costs under Medicare Part B, rather than let it drop to 25% as earlier legislation has scheduled. Gingrich proposed the idea 8 months after President Clinton had.

"The shutdown was triggered late Monday when Mr. Clinton vetoed a short-term spending bill, saying he objected to an increase in the Medicare Part B premium that was attached to the bill." - AP, 11/16/95

Brad refuses to even deal with this issue, because he will not admit the truth, that his boss lied and harmed America's long-term fiscal well-being for his own short-run political gain. Brad does his readers a disservice by not facing up to this.

Posted by: Keith on June 3, 2004 08:32 PM

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Hey, thanks for sharing JG and Keith, but I don't see how Clinton's politicking on Medicare drug policy reform can be compared to Bush admin maro policies. And can either of you make the case that any reforms proposed in the 1990s would have solved long term Medicare financing problems? Could J Glass say in a concise, comprehensible way, what should be done rather than posting incomprehensible, incherent screeds (and yes, if he does, I will take that back even if I do completely disagree with his proposals).

Anyway, Bush macro policies as making situation he faced in office better or worse is topic here, as far as I am concerned. So check out following for another view:

http://www.brook.edu/views/papers/gale/20010521.htm

Posted by: jml on June 3, 2004 08:58 PM

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OK, before anyone web-yells at me, gosh, I guess this post is about analyzing Clinton macro policies. Still seems to me that Medicare issues raised in Keith's post are not major issues. Whether seniors pay 25 or 30% of their drug costs under Medicare Part B will not determine Medicare's fate. And, as usual, I cannot figure out what J Glass' point is, other than that he likes to rant about everything.

Posted by: jml on June 3, 2004 09:12 PM

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A few words about the plan to "save Social Security first", since the phrase may make it sound like there was a bigger and braver plan than there was. Not only did it not arrive for five years when the unexpected surpluses did, but it was mighty timid then.

There are only two ways to close the SS funding gap, cut benefits or raise taxes (or both). The plan certainly didn't cut benefits, and its authors went out of their way to hide the fact that -- consisting of jiggering more bonds into the trust fund in a left-handed way, as it did -- it simply promised to raise future taxes.

E.g. at Larry Summers' confirmation hearing, this worthy fellow who normally got into trouble for being too outspoken and candid, famously ran 'round and 'round the mulberry bush rather than answer questions from Sens. Kerrey and Moynihan about where the money to pay off the bonds would come from. Finally Moynihan said, "Say 'taxes', Larry", and Summers said yes, and they moved on to confirming him.

Now, I'm not sure how well the word "reform" applies to hiding a promise to raise taxes on somebody else's watch later.

So I'm still trying to figure out the problems the writers have with Samuelson's review.

"Samuelson criticizes the Clinton administration for failing to address [the central budget] problem by scaling back Social Security and Medicare."

OK. Samuelson says the Clinton people were weak on retiree benefit reform, in light of its tremendous future impact on the budget.

They respond by criticizing Samuelson both for not realizing that Medicare is the real problem, rather than Social Security, and not appreciating the merits of the Clinton efforts.

Which efforts consisted of doing nothing for eight years about Medicare (and scuttling the one real bipartisan reform commission we've had on it, or will have on it as far as we can see); and of putting the lesser problem of SS first, belatedly and only fortuitously, with a timid and well-disguised promise to put more taxes into SS later, hoping nobody would notice. Which also amounted to zero in the end, when people did. Nothing accomplished, total.

This wasn't weak?

Posted by: Jim Glass on June 3, 2004 09:17 PM

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never forget where samuelson came from. he was donnie graham's acolyte[sic] at the harvard crimson.

just another influential ho. old round heels bob.

Posted by: albert champion on June 3, 2004 09:41 PM

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OK, I agree that Clinton was weak on SS and Medicare. But I think Bush has been worse than weak on those issues, and on tax policy as well.

For a more complete analysis of SS and Medicare costs and fiscal implications, than that done by the SS trustees, take a look at this page:

http://www.ceda.berkeley.edu/papers/rlee/

I think the following papers are particularly interesing (they all can be downloaded):

Quantifying Our Ignorance: Stochastic Forecasts of Population and Public Budgets,

Sustainable Social Security: What Would It Cost?, National Tax Journal, v. 56, n. 1, part 1, pp. 27-43

Saving, Wealth, and the Transition from Transfers to Individual Responsibility: The cases of Taiwan and the United States,

The Fiscal Impact of Population Aging in the US: Assessing the Uncertainties, James Poterba, ed., Tax Policy and Economy, v. 16

The Fiscal Impact of Population Aging

Posted by: jml on June 3, 2004 09:56 PM

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"Brad refuses to even deal with this issue, because he will not admit the truth, that his boss lied and harmed America's long-term fiscal well-being for his own short-run political gain. Brad does his readers a disservice by not facing up to this."

YES! It is ALL, ALWAYS Klinton's fault! 9/11? Klinton. Chalabi? Klinton. Plame? Klinton. Abu Ghrab [sp]? Klinton. Bike wreck and pretzel? Klinton.

Record surplues, record employment, and longest economic expansion? Reagan and W's time machine.

Posted by: MattB on June 4, 2004 08:31 AM

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Although the Bushies seem bent upon changing the system, last time I checked, the person occupying the Oval office wasn't a dictator. When posters say the Clinton Administration didn't do anything about the upcoming crisis in Medicare, et al, they seem to forget that Congress just might have had (and in fact had a huge impact) a role in "nothing being done."
I think the letter/statemetn is useful. And I also wonder why it is that programs like Social Security/Medicare/Medicaid seem to be placed in a different category, then say, corporate subsidies (direct, indirect) or military spending. As if any "social" or "entitlement" program (i.e., that benefits many instead of a few) is somehow suspect, or spending bucks on programs like Head Start or pollution control. While spending billions on deploying insufficiently tested weapons (i.e., Bush's "missile defense" program) seems relatively uncontroversial. As are the many corporate subsidies (it's taken two decision from the WTO to force the US to look at revoking one kind of huge corporate tax break).

Perhaps it's time to look at the assumptions underlying these attitudes. I see no obvious reason why subsidizing large or huge corporations is inherently a "better" or wiser governmental function then ensuring that most citizens/legal residents have access to a decent level of health care without going bankrupt. Other G7 nations don't seem to question the wisdom of doing so. So why does the US?

As for preventative health care, it's a nice idea, too bad all the developers of the 60's through the 90's developed for cars not pedestrians. And too bad most insurers could care less. I pay for my own health insurance and the policy I have pays for very little preventative care--does not pay for vaccines (except through its "well baby" coverage), does not pay for smoking cessation programs of any kind (not at all), pays for no outpatient mental health counseling (and perhaps 10 days of inpatient), and now pays for only 80% of the gyn check up, if that. For tests that are advised for people over 50, it does not pay at all unless the deductible (a high one) has been used up. No nutritional or diet assistance.
Sure, I can go to the library and find out all i want to know about nutrition, diets, cooking good meals, etc., and weight's not a problem anyway. But one would think if there was truly an interest in preventative care, it would start w/the health insurance industry. Instead, it's just, we'll pay for no preventative care other then what's mandated by state law (i.e, any requirement the industry hasn't been able to lobby legislators to decide "isn't necessary" since everyone knows since Reagan that business knows best) and if you file too many claims, we cancel.

Given the attitude of the US government, it's no wonder the US has one of the highest infant and mother mortality rates of the industrialized countries.

Posted by: azurite on June 6, 2004 11:28 PM

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