Transcript Beyond Efficiency…And Government Failure

Beyond Efficiency…And
Government Failure
It’s Not Just Efficiency
• Other values matter in determining what
achieves the “good society”
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
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
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…
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
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Unemployment
Inflation
Balance of Payments
Infant mortality? Crime rates? Adult life
expectancy? Smog-free days in air sheds?
Educational achievment?
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
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
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
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
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
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
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Direct Democracy
Representative Government
Bureaucratic Supply
Decentralized Government
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
Direct Democracy
• Preference Intensity
– The bridge building example
• Landslide victories do not indicate mandates
– Defense spending and trade examples
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
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
Other Issues with Representation
• District-based Legislature
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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
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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
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?
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
Decentralization
• What is it?
• Brings citizens closer to public decisions
• Hinders implementation
– Why?
• Positive and negative fiscal externalities