–Some thoughts on closing the financial gap.

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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Whether for moral or for practical reasons, most of us would like to see the large gap between the rich and the poor reduced. But how? We could try the “Robin Hood” approach: Take money from the rich and give money to the poor. The progressive income tax code already is a take-from-the-rich device. Taxes on highest earners could be raised even further, as President Obama wishes to do. But, all taxes remove money from the economy. So if higher tax rates were effective money collectors, they would slow the economy, which ultimately hurts then poor.

Taxes could be increased on inheritances and on high-end purchases (furs, jewelry, boats, luxury cars, expensive homes). But, this too removes money from the economy, and past attempts have impacted the businesses supplying these luxury goods, which has impacted employment. The property of the rich simply could be confiscated and distributed to the poor. This has been attempted in several countries, most recently in Zimbabwe, to disastrous results for the poor.

All things considered, take-from-the-rich does not seem to be an effective device for closing the gap between rich and poor.

Alternatively, the federal government can deficit spend. This can lift the poor, though it probably does not close the gap, as it would lift the rich, too. We could eliminate FICA, which falls most heavily on the lower-paid employed, though this also would help the rich who own the businesses paying FICA. We could raise the minimum income for federal taxing. This would help lift the poor, but help the rich business owners by giving the poor more spending money. We could increase federal assistance to Medicaid, food stamps, “affordable” housing, etc. This would help lift the poor, and also help the rich owners of pharmaceutical companies, groceries, builders, etc.

In all, perhaps no attempt to transfer money directly from the rich, or directly to poor, does much, if anything, to close the wealth gap. Giving money to the poor helps the rich. Taking money from the rich, hurts the poor. And the gap remains.

If the gap is to be closed, the poor themselves may have to close it, and I suspect the device is education. Of all the differences between rich and poor, perhaps none is more important than level of education. Today, primary and secondary education are available free to everyone. Sadly, the quality of this education differs markedly, between rich and poor. A college education and an advanced degree are not feasible for a poorly educated child, and despite scholarships, they are not affordable for most poorly financed families.

Affordability might be accomplished if the federal government were to pay for college just as the states and cities pay for primary and secondary education. Even then, some parents want their children to go out into the working world, to bring back support for the family, which can doom the child to a life of menial labor. This problem might be addressed by offering federal support to families who allow their children to attend college. Universal college might put all young people on a more even footing, and help close then financial gap.

There have been many attempts to address differences in educational quality among primary and secondary schools, with NCLB (No Child Left Behind) being the most obvious. The program has supporters, detractors and difficulties. Many teachers’ unions resist quality evaluations. Many families do not have an educational ethic. Many children come from dysfunctional families and neighborhoods. The problem is not just one of poor schools. It is a community-wide problem, requiring a community-wide solution.

School administrators must be given the power, the motivation and the know-how to bring principals, teachers, parents and students — the entire neighborhood population — together as one cooperative force to improve educational quality. Private schools, magnet schools and some religious schools demonstrate that education of the poor can be improved.

The problem is difficult and far beyond the scope of this post and the expertise of this writer. But, assume we could create a nation of outstanding primary and secondary schools, motivated families and free colleges. Let’s say we could close the financial gap. Is this economically wise? That is, would our economy grow better, and would our population live better, happier, more rewarding lives overall, if there were little or no gap?

I hope to write more about this, and meanwhile I welcome your thoughts.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

34 thoughts on “–Some thoughts on closing the financial gap.

  1. How about practicing subsidiarity? Where I live our kids have 5 layers of educational bureaucracy. 1) Federal, 2) State, 3) multi-county educational community, 4) local school district, 5) school. My tax dollars are spent on too many levels that do no good. Books and teachers educate kids. Not bureaucrats. Remove the top 3 or maybe 4 layers and perhaps our educational system could be more effective.

    As for the income gap, who cares? We need people performing work at all levels of society. Giving people a college education in psychology or accounting does no good for someone who is a mechanic or groundskeeper.

    I’ve often thought that it doesn’t make sense for someone to leave high school, go to college to learn something and then try to gain entry into that profession. In my estimation, 60% of college education is wasted and not used. How about instead attend a junior college of 1 or 2 years, giving a young adult a chance to learn the job/industry, etc., and once getting a job within this field, the employer is incentivised to continue this person’s education.

    By the way, the only reason 60% of college education is wasted is due to a financial aid system that removes the pain in paying for college. It is a classic malinvestment and thanks to this our college education system now costs way to much for anyone to go it alone without financial aid help.

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  2. I am not worried about the difference between rich and poor, per se. It provides a reward structure for people’s efforts and ambitions.

    However, as you indicate, the lack of opportunity for the children of the poor is unfair for them, and robs the rest of us of the benefit of their achievements. That is a difficult problem with no obvious solution.

    Also, there is a problem that the U. S. economy shares with the economy of the 1920s. Wealth is so concentrated at the top that the average household resorts to debt to maintain its standard of living. An economy based upon private debt is prone to boom and bust. This degree of inequality was implicated in both the Great Depression and in our current difficulties.

    As for the role of taxation, I have a question. It is true that taxes take money out of the economy. However, if money is being hoarded, rather than being lent or spent, could taxing the hoarders be a part of economic stimulation, when combined with deficit spending aimed at people and institutions that would spend the money instead of hoarding it? In the current circumstances, this would be a transfer from banks, corporations, and the wealthy to the poor, unemployed, and at least some small businesses. Such taxation could serve, not only to reduce the gap between rich and poor, but to improve the flow of money through the economy. The idea would not be simply increasing the money supply, but increasing its velocity. What do you think? Thanks. 🙂

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    1. Min, it isn’t possible to hoard money. Money moves continually. If you put money in your bank account, the bank immediately invests it or lends it.

      It’s possible to hoard physical assets, but not money (except if you put dollar bills in a box).

      I agree that an economy based on private debt is prone to boom and bust. See: FEDERAL MONEY

      Rodger Malcolm Mitchell

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      1. Sure it is possible to hoard money. Banks and corporations are doing so as we speak. Why is the velocity of money so low? The ultimate in hoarding is putting money in the ground or under the mattress, but there are degrees of hoarding. 🙂

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          1. Rodger, “hoard” is a non-technical term. I’ll not split hairs over it. The key is the velocity of money. 🙂

            From what I read, the velocity of money in our economy is low, and that banks and corporations are bottlenecks in the flow of money. Do you disagree?

            If you agree, do you think that taking money away from them and transfering it to people who will spend it would help increase the velocity of money?

            Thanks. 🙂

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    2. Min,

      If you tax people on hoarding (which has been proposed)you will drive money out of the banks and to the mattress. This will result in less lending and less money as the ‘hoarders’ will not earn interest. Another unintended effect might be more crime as criminals being no dummies will realize that more cash is being kept in homes.

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      1. These days the amount of money that you can put under the mattress is miniscule by comparison with the rest. 🙂

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    1. “Voucher” is a misnomer for all of the private payment proposals that I have heard of in the U. S. “Discount coupon” is the correct term.

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  3. Jason, the voucher concept is quite complex and controversial in implementation, results and legality. Taken to its extreme, one might envision a solely voucher system — all private schools and no public schools. Schools would compete for students in the way that retail stores compete.

    Some believe the better schools would win, and the teaching would improve. But does this happen in the real world of retail? Are McDonalds the best restaurants? Are Walmart stores the best sources of groceries?

    Of the many questions, one is: How high should the vouchers be? Too low, and the educational equivalent of McDonalds would win. Too high, and many schools would be overpaid, with little incentive to improve.

    In my original post, I mentioned methods for distributing the wealth, but the real purpose came at the end. Is reducing the gap a worthwhile goal?

    Rodger Malcolm Mitchell

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  4. Min,
    Using misleading terms like “hoard” (as well as “debt,” “deficit,” “unsustainable” and “fiscal prudence”) does one thing: Mislead.

    Velocity is one of those terms. It merely is a description, not in itself a problem or a solution. Velocity = GDP / money supply. So, one quick way to increase velocity is to decrease the money supply.

    The government needs to pump more, not less, money into the economy, which initially will reduce velocity, while stimulating growth. The key to economic growth is money supply growth, not velocity.

    Rodger Malcolm Mitchell

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  5. I think you arguments are pretty thin here. You show opinions, not facts, which shows your bias.

    Sure you can close the gap by taxing: tax the rich more! You say it will strangle the economy: simply inject money into economy not to decrease the money supply, problem solved. And there are ways to inject to target the poor: the govt builds affordable housing and runs welfare programs, instead of prisons it finances school lunches, like in most of civilized world.

    The maddening thing in US is how narrow the debate is, people seem to be unaware that the outside world exists. Some things are argued to be “impossible”, but it turns out they are very much possible and done for decades elsewhere. Take Germany, rose from the ashes, has much less resources and worse climate for agriculture, yet it caught up with US quickly, and there are no “dysfunctional neighborhoods” there. I am not sure about Germany but social mobility tops the US one in such boring places like Denmark (also no poverty there to speak of).

    Closing the gap is possible, it is a different thing if desireable – i think it is a matter of taste.

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  6. Piotrek,

    At one time, the highest tax rate was above 90% (!). It did nothing to help the poor.

    You say, “. . .the govt builds affordable housing. . .” The rich will receive the building contracts.

    You say, ” . . .finances school lunches . . .” The rich own the food service companies.

    History shows that no matter what the government gives the poor, eventually the money winds up in the hands of the rich. The solution seems to be to institute a process for the poor to help themselves, and I suggest this process is education.

    Why do you think the poor are poor? Poverty is a symptom. You can’t cure a symptom. You have to cure the cause. My suggestion for curing the cause is education, but perhaps you have another suggestion.

    Rodger Malcolm Mitchell

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  7. Thanks for the response.

    My take:
    80% of the poor get affordable housing, 0.1% of the rich own construction companies. It is a transfer to the poor.
    100% of the poor children get a free lunch, 0.2% of the rich own food service companies.

    Even when the rich get the same monetary reward, the fed poor can put up an even fight, have some chance, also in education, which I agree is the key. But hungry people have trouble focusing on books.

    What you write about history and the rich reaping rewards of any intervention – it is true by definition, the rich are richer, but are these the same people, and is the gap as wide? Not necessarily. Again, let’s look at western Europe where what you say is impossible actually happened. Sometimes the gap is narrowing, so the rich benefit, but not as much as the poor.

    I wholeheartedly agree on education, just giving the poor money and housing will change nothing, the culture has to change, and nothing changes culture like education. For education to have a chance of working you need to take the parents off the treadmill too, increase safety, restore dignity by giving working class some rights in the workplace, not locking up 20% of males etc. What they did in western Europe. I think you need to look beyond education. Even things like attitude of society towards crime and punishment matters. Outside US “prison” means reeducation, resocialization, yeah, i know, it is expensive and “unjust”, why would we pay more to give chances to “bad guys”?, but it helps people never to come back behind bars.

    Your emphasis on education implies that only highly educated people are not poor. Again, not so in Europe: cashiers, barbers, ditch diggers etc. are not poor.

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  8. Piotrek

    Your math is suspect. If 80% (?) of the poor get affordable housing, what % of the affordable housing is build by the rich? And what % of the food service companies are owned by the rich.

    As for how to keep from locking up so many people, education could help a bit. Educated people might be less likely to roam the streets selling drugs and shooting people.

    In life, there are no total solutions, only partial solutions.

    Rodger Malcolm Mitchell

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  9. I know my math is suspect 🙂 But so is yours, I think. It is not so simple. Eg. subsidized housing ties some resources building it, so non-subsidized homes are in scarcer supply: the rich pay more for their houses. It is hard to disentangle losses and benefits of both sides.

    Your arguments can be also put on their head: if eg. we use the printing press (I wanted to say “taxes” but bit my tongue) to bail out bondholders and shareholders of banks with no strings attached, I say it is a transfer to the rich, but using your approach one could say: the rich spend the money getting their shoes shined and lawns mowed, and who shines shoes and mows lawns? The poor! so the money ends up with the poor.

    So I think it does matter where you inject the money. Whether you inject to Wall Street or get the lawn mowers’s kids free lunches. There will always be some redistribution, but not 100%.

    One more example: if you build a public library, the poor get access to books. But the books were published by the rich. The rich get $25 for the book and a poor get access to a $25 book. No wealth transfer. Yet I would argue it levels the playing field: the benefit of $25 is much more meaningful to the poor in this case.

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      1. I think we see it differently due to cultural reasons :). You as American think that the rewards are distributed justly to the most able, and argue for increasing supply of able people, hence education. As an Eastern European I tend to think that rewards may have much to do with the power structure, eg. the balance of power between labor and capital, in US it is much more to capital’s favor than in western Europe (it was different in the 50s, so the gap was narrower). The govt redistribution acts against it, but very weakly so the gap is widening.

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  10. That’s not what I think at all. The number of blue collar jobs has decreased and will continue to do so. People without an eduction will continue to be less able to find work.

    Rather than bemoaning the unfairness of the powerful taking advantage of their power, I offer a solution — at least a partial solution.

    If your solution is to hope that somehow, the wealthy will begin to use ditch digging people rather than ditch digging machines, or hoping Marxism returns, it simply is not going to happen.

    For the poor, it’s educate or die.

    Unless you have a better idea.

    Rodger Malcolm Mitchell

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    1. Even if all people are better educated, there will always be the lowest quantile. The question is, at what level of existence are these people supposed to live? It is a function of the social system, not the level of education.

      To go to extreme: even if all slaves got PhDs, without changing the economic system that had all the rewards to flow to the owners, nothing would change.

      I think to deal with poverty, the culture would have to change. Americans are simply OK with mass poverty, it is a part of the culture. And tinkering with culture is dangerous, because you can “break” the beneficial traits of the American psyche.

      You press for ideas: a real democracy would be a start, not a system in which big money decides who is allowed to run for office. Under “communism” we had more candidataes than Americans to choose from, but all were previously accepted by the Central Committee of the Communist Party, like here by Big Money, the system was similar in essence. Also, “lobbying”, a practice elsewhere known as “corruption” and illegal, should be curtailed in US. Working class-friendly parties would emerge and the “intractable” issue of poverty would be taken care of. It would entail much more than education: access to cheap mass transit (the joke of public transport in US is also a big barrier for the poor to get to better jobs), health care, paid vacation time, and other dignity-building benefits would be needed too.

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  11. Checkout this Econtalk podcast: http://www.econtalk.org/archives/2010/03/newman_on_low-w.html. There is a discussion of a “shadow economy”. One where everything is done on barter and cash. I think we’ll see more of this. Separations of society where classes of people work with each other to succeed in their own way. I don’t see anything wrong with this really. It is work ethic that brings people up from their current level. Yes, education plays a role. If one were to read 1 hour a day on a subject that they know nothing about, in 1 year they’ll know as much as a Phd. You gotta have want-to first (as in wanting to pick up a book) before anything else comes.

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  12. You lie when you say “all taxes remove money from the economy”. This is conservative red meat that is ridiculous on its face.

    If I take $1M from a rich guy and use it to build a bridge, I have not “removed” money from the economy, I have shifted it. The $1M is clearly still in the economy, and the populace perhaps better served, but that’s a judgment call.

    You do no one a service by publishing banal generalizations.

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  13. Mr. McAllister,

    Taxing and spending are two separate processes. Taxing removes money from the economy; spending adds money to the economy.

    Taxing anyone, whether rich or poor, removes money from the economy. The government neither needs nor uses tax money for spending, because the government has the unlimited ability to spend, without levying taxes.

    Rodger Malcolm Mitchell

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  14. I think your arguments touch on the underlying problem that you are not discussing in full detail. Any change that can be made benefits the rich in some way because they have so much money (and thus power). Even if their tax rates are raised they will find a way to avoid them and benefit from this change. They may even make more income and profits then they do now in this situation.

    I do not think the question is “should we close the wealth gap” but rather “Is it even possible to close the wealth gap without a complete restructing of the capitalistic system or the way of thinking of Americans”.

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  15. The government hardly has an unlimited ability to spend. It has an enormous ability to spend and, in the short term due to borrowing, that ability is not tied to tax revenue so it is often expedient to view it as unlimited. However, in the long term spending is limited by tax revenue, the money has to come from somewhere, and borrowing or printing unlimited amounts is not a viable option. By your logic we should simply have a 0% tax rate…

    As McAllister states removing $1M from the economy via taxes and the government subsequently spending $1M in a way that puts it back into the economy has no net effect other than to redistribute it. You may be technically correct that pure taxation with no spending is removing money from the economy. But that’s simply twisting words, the entire purpose of taxation is to turn around and spend it.

    If the stated goal is redistribution of wealth then an increase in taxes on the rich and a commiserate increase in spending on the poor would seem to do just that. I agree that the natural action of the economy is to pump money from the poor to the rich. But disagree about that being a reason to simply give up the thought of using a progressive tax system as a means of wealth distribution. The entire point of a progressive tax system is to cancel out the natural movement of money towards more money. If it’s not effective enough it’s only because it’s not being employed to a sufficient degree.

    Ideally you’d have a setup where the two factors are in balance. Money is collected by the rich from the poor due to natural factors in the economy and siphoned to the poor from the rich at an equal rate due to taxation and spending. With tax rates tuned so that each block of the populace (ie. top 1%, 95-99%, bottom 50%, however you want to break it up) maintains an equal share of total wealth. Individual wealth still varies dramatically but the “gravitational” power of money is largely counteracted.

    Not that it’s as simple as all that. There’s waste, liquidity, and the simple matter of whether that’s even a worthwhile goal to contend with. But please don’t pretend that taxing the rich and equal spending on the poor takes money from the economy or is not an effective means of wealth redistribution.

    As for education I don’t think anyone is going to disagree that more education is a good thing. However, I’d say that it is also not a complete solution. The disproportion in income is far greater than disproportion in education. And the correlation becomes especially blurry near the top, the top 1% are not significantly (if at all) better educated than say the 90-99% group.

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  16. Allen,

    There are two facts beyond question:
    1. The federal government has the unlimited ability to create money.
    2. Neither taxation nor borrowing supports federal spending.

    If taxes and borrowing were $0, this would not affect by even one penny, the government’s ability to create money and spend.

    When you, as a vendor, send an invoice to the government, they send you a check. You give the check to your bank, which sends it to the Federal Reserve Bank. The Fed approves your bank’s crediting your account.

    Meanwhile, the Fed debits a balance sheet account misnamed “debt.” The account should be called “money created.” This account really is just a list of the net federal money created.

    When the federal government creates a credit in your bank account, money is created. The federal government can do this endlessly, without taxes or borrowing.

    Visualize a brand new country. It has no money. The government supplies this new country with money by spending, i.e. by “printing” money. There are no taxes, but the government can print endlessly. Why would a government that can print money endlessly, ever need to borrow or tax any of it back?

    Ever since 1971, taxes and borrowing have not supported federal spending. That said, I do not recommend that all federal taxes be eliminated — at least not immediately. Such a sudden move would shock the economy.

    But over time, there is no doubt that federal taxes and federal borrowing could be eliminated as they now serve no post-1971 function.

    Rodger Malcolm Mitchell

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  17. Except what you describe would cause uncontrollable inflation and destroy any semblance of international trade. A new country that prints money is essentially imbuing that money with the value of its land and contained natural resources. By printing additional money now we dilute the value of every other dollar in existence. The money supply has grown over time but so has the intrinsic value of the resources the United States controls (silicon computer chips are intrinsically more valuable than the sand they’re made from). Whether the ratio has stayed (even close to) constant is debatable. But value certainly has not and will not grow at a rate that would enable the government to meet necessary spending levels on merely printing alone without extreme and continued devaluation of the currency.

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    1. What is your evidence? The federal debt has grown 1500% in just the past 30 years. Inflation has been exactly what the Fed has wanted it to be.

      Taxes are not a source of money for the federal government. Taxes merely represent the destruction of money the government already has printed.

      Our last major inflation occurred when the deficit was relatively small. Inflation moderated when the deficit rose dramatically.

      To treat economics as a science, requires evidence.

      Rodger Malcolm Mitchell

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  18. In other words you can basically safely print your yearly GDP growth each year without risking inflation. But we currently tax somewhere around 18% of GDP and spend about 28%. But we only grown around 4% a year this decade. Assuming we want to stay around a 2-3% inflation rate what you suggest simply will not come even close to working. If we did institute it we’d start to see a 25% yearly inflation rate. And that’s completely ignoring the effects on trade.

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  19. “In other words you can basically safely print your yearly GDP growth each year without risking inflation.”
    Your “other” words, not mine. I don’t even know what “. . .print your yearly GDP growth . . .” means.

    “If we did institute it we’d start to see a 25% yearly inflation rate.” Do you have any evidence for this, or is it just a number you’ve tossed out? My evidence that deficits have not caused inflation is at: INFLATION.

    I do believe there is a deficit level that would lead to inflation, but the evidence shows we are nowhere near it.

    Rodger Malcolm Mitchell

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  20. For the poor, it’s educate or die.
    Then some of them will die, because no amount of education can save them all.
    I wouldn’t want to live in a society that has no problem with allowing a segment of its population to perish as a result of economic factors. Hence the need for a full employment program as a necessary option. Perhaps work sharing may also be needed if advances in technology relegate a greater percentage of the workforce into unemployment.

    China and India also recognize the benefits of an educated workforce. Modern communications allows knowledge-based work to be outsourced to wherever the talent is located. As countries with lower labor costs improve the quality of their engineers and technicians, work requiring high levels of education in the US may no longer be secure.
    The economic impact of technology is such that nothing can be taken for granted.

    Countries that enjoy a more egalitarian society generally have a progressive tax system, with higher levels of taxation as well as more generous benefits. They provide greater access to education, as you suggest. Their business and labor sectors are less antagonistic and attempt to work together. Some countries also don’t pay their CEO’s ridiculous sums of money, or do not base their economies on finance. In summary, you will find a number of social and structural differences that do not exist in the US.

    I’m not aware of any countries that have eliminated poverty. That is an ambitious goal. If you have a society where everyone can enjoy a modest standard of living, or dignity, then the wealth gap becomes less of an issue. When it is an issue, a serious issue for a majority of people, it is usually resolved. Politically or through revolution.

    Doctors are not exempt from the laws of labor supply and demand. A glut of doctors and health care would reduce cost under any economic system.

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