Beyond Efficiency…And Government Failure

1. Beyond Efficiency…And Government Failure

2. It’s Not Just Efficiency • Other values matter in determining what achieves the “good society”

3. Social Welfare • Importance of an index of social utility • Utilitarian • Consequentialist • Greatest good (not for the greatest number) • Rawlsian • Maximize the minimum • Greatest benefit for least advantages • Veil of ignorance…original position • Multiplicative • Maximize average utility

5. Problems with Social Welfare Function • Can it be observed? • Idea of no envy • Social welfare function must be specified • Ultimatum study (back to last week and Pareto allocations) • Limits in information and cognition will hinder practical use • Tend to focus only on immediate consequences

6. Different Types of Utilitarianism? • Act • Rightness of an act depends on the utility that it produces • Rule • Rightness of an act depends on its adherence to general rules or principles that advance social utility • Post-Katrina example…

7. Ways to Measure Social Welfare • GDP • Market value of the output of final goods and services produced within the country in a specific time period • Real GDP and NDP • Unemployment • Inflation • Balance of Payments • Infant mortality? Crime rates? Adult life expectancy? Smog-free days in air sheds? Educational achievment?

8. Substantive Values Beyond Efficiency • Human Dignity • We need something to participate in a market • Society needs to help people compete • Minimum level of consumption is the bar • Equality of Outcomes • Vertical equity? • If we reallocate, people will be less productive • Need to control for this • Does a rising tide raise all boats? • Role of fairness in policy compliance

9. Measurement Issues • Look at income… • Not all wealth is fully reflected in measured income • Tax and transfer programs play a role • How do we factor in housing or health care?? • We normally consume as members of household, not individuals

11. Index Issues • Need indices if we are talking about distributions • Mean and median don’t work • Gini index • Lorenz curve • Rank the population by a trait and ask what percentage of that goes to the poorest X percent of the population? • Gini index is proportional to the area between perfect equality and the Lorenz curve for distribution • 0 is perfect equality; coefficients closer to 1 correspond to less equality

13. Categorization Issues • Difficulties in drawing inferences from intergroup comparisons • We also have silent losers • Unexpected losses • Lack of connection between losses and policy • Losers may be silent

14. Instrumental Values • Political feasibility • Politicians favor policies favored by their constituencies • Revenues/Expenditures • Less public expenditures will be more likely to happen • Expenditure levels can be viewed as a measure of governmental effort

15. Government Failure • We need to be careful advocating for public interventions in private affairs • Some market failures shouldn’t be fixed; some distributional goals simply cost too much • Government failures are problems inherent in four general features of political systems • Direct Democracy • Representative Government • Bureaucratic Supply • Decentralized Government

16. Direct Democracy • If voting was the best proxy, public policy analysis would be VERY easy • Even more difficult if we allow for opportunistic voting • Sophisticated voting • Controlling the agenda is a key to getting to manipulate the social choice

18. Direct Democracy • Preference Intensity • The bridge building example • Landslide victories do not indicate mandates • Defense spending and trade examples

19. Representative Government • Must choose between good society and preferences of constituencies at times • Hold own private interests • Individuals must monitor them • Party discipline can play a role

20. Rent Seeking • Using government to restrict competition is perhaps the oldest form of rent seeking • Setting price floors • Problem is, once government guarantees a price above market clearing levels, price of the land will rise to match it

22. Other Issues with Representation • District-based Legislature • Heterogeneous preferences • Imagine 100 legislatures each representing 100 constituents… • District v. national welfare • Logrolling • Electoral cycles • Will choose policy options that have immediate impact, even if it may fail in long-run • Vulnerability and opponent matter as well • Posturing to Public Attention • We rely on the media to monitor public affairs • Policy windows • Policy agendas as a result do not always match social welfare • Different views of sunk costs

23. Bureaucratic Supply • Nature of public agencies makes monitoring difficult and inefficiency likely • Agency loss (PrincipalAgent) • Discretionary budget • Difference between allocation and minimum cost of meeting outputs • Why does this relate to bureaucracy? • Difficult to value outputs • X-inefficiency in bureaucracy?

24. Bureaucratic Supply • Difficulties in innovations • Imitation • $ • Civil service rules (ex ante controls) • Emphasize hiring • But too much time is bad too • Organizational public goods • Reputation • Central stock • Personal use of resources

25. Decentralization • What is it? • Brings citizens closer to public decisions • Hinders implementation • Why? • Positive and negative fiscal externalities