A Waste of the Crisis

Moisés Naím / El País

The good news is that the US economy is recovering. The bad news is that, now that the crisis is easing off, the motivation to make the changes needed to stabilize America’s fiscal situation has evaporated. The imbalances between US government spending and its income will go on being problematical until reforms are made to increase the rate of saving, diminish the costs of the healthcare system, and reduce inequality in income.

An important, little-mentioned factor in the debate on the country’s precarious fiscal state is that both households and the public sector are saving very little. The effect this has is to weaken the fiscal accounting system. In 2011, net national saving in the United States as a percentage of the total size of its economy was less than 0.7 percent. To put this in perspective: in Germany, the analogous rate was 6.1 percent; in Japan, 6.6; and a surprising 40.6 percent in China. During the years prior to the financial crisis, economic growth, high employment, and cheap and abundant credit hugely stimulated household consumption in the United States.

But this is not the only cause of the country’s very low rate of saving. The government not only collects fewer taxes than in other developed countries; its fiscal system taxes income more heavily than consumption. This further stimulates consumption, inhibits saving and reduces one important source of income that the state might have.

Moreover, the United States ought to do something to curb the huge transfers of funds deriving from the taxes paid by younger people, which are then spent mainly on older people. These transfers take place in spite of the fact that the old are comparatively better off, and spend more money than young people do – especially on their health. This huge expenditure is in turn due to the fact that the United States has the world’s costliest healthcare system, and, among developed countries, one of the least efficient.

Healthcare consumes an amount equivalent to 18 percent of the total size of the economy, which is 80 percent more than the average spent on health in most of the planet’s prosperous democracies. But in spite of this immense cost, the results in the United States are much worse than in comparable countries. While per-capita income in the United States is some 40 percent greater than the average of the rich countries in the OECD, the United States is below them in life expectancy, child mortality and the other indicators that measure the quality of a healthcare system. The inequality in terms of access to healthcare is only one example of a far wider range of socio-economic barriers that have long been building up in the country.

The United States has the greatest economic inequality among all the advanced countries, and its indices are almost as bad as those of Mexico, Turkey and Chile – all these lands having a terrible reputation with regard to inequality. In 2012, the richest one percent in the United States received 20 percent of the country’s total income, a record that had not been seen since 1929.

If the United States carried out reforms to its tax system and spending policies, thus taking the country halfway toward the norm in advanced countries, the 10 percent of the population with the highest income would have to pay taxes that were nine percent higher. However, if that additional fiscal income were transferred to the lowest-earning 10 percent, the yearly income of the poorest would rise by 36 percent, thus allowing millions of people to form part of the middle class. Even after these changes, the income of the richest 10 percent would still be 10 times greater than that of the poorest 10 percent.

This example becomes even more dramatic if applied to the richest one percent, a group whose incomes are 260 times greater than those of the lowest 10 percent. Thus, a mere four-percent increase in income taxes paid by the highest-income one percent would yield funds sufficient for a 50-percent rise in the income of the poorest 10 percent.

Obviously, to increase the taxes of those who earn and own the most, and to distribute those resources among those who make the least money, works more easily in theory than in practice. Indeed, such redistributive policies may have some very damaging indirect effects. In any case, the above figures are merely aimed at putting the country’s fiscal problems in a different perspective – a perspective whose central message is that, given the present political climate in Washington, the most necessary economic reforms are also the ones least likely to happen.