After examining the contexts of Public Policy outlined in chapter two of course text, as well as the note on the Theories of Public Policy posted by instructor, briefly discuss the contexts, and show
Notes from Cochran and Malone (1999), Public Policy: Perspectives and Choices. 2nd Edition. Boston: McGraw-Hill PUBLIC CHOICE THEORY ABSTRACT Government involvement in the economy occurs when the private market fails to allocate necessary goods and services. The U.S. government acts through a distinctive set of institutional arrangements to develop a public policy response to market failure. The theory of rational public choice was developed to explain how governments operate in developing public policy. Public choice theory makes it clear that government policy making, like market allocation, may not result in the best attainable outcome. Though government wants to promote the general welfare and protect against externalities, its overall ability to counteract market failure is often lacking. Many naively believe that most societal problems have been caused, or at least made worse by government policy. Others, with equal naiveté, belief that government makes optimal decisions in response to shortcomings in the private market. That is, they expect that government will adopt appropriate policies to address societal problems. For government to respond to societal problems with optimal solutions is not easy. There are limits to the ability of government to provide optimal solutions just as there are limits to the effectiveness of market activity. In chapter three, we analyze the government decision-making mechanism and explore problems that arise in this procedure. Beginning with the idea of rational self-interest, we proceed to the difficulties that arise in applying decision-making tools from economics such as cost benefit analysis to policy issues. We then explore the problem of majority rule in democratic forms of government. We look at complications that arise when public choices are delegated to political entrepreneurs, who in turn delegate the implementation of policy choices to government bureaus. Topics addressed include: rational choice tragedy of the commons cost benefit analysis majority voting the voting paradox logrolling the median voter voting and the political marketplace bureaucratization of the polity a critique of rational choice Public choice theory is the study of collective decisions made by groups of individuals through the political process to maximize their own self-interest. One may think of the struggle that takes place in the political arena as a kind of game, which involves various individuals and groups contending for their own self-interest. The players may police themselves as they do in card games, or they may use a third party referee, such as the government, to resolve disputes and enforce the rules. In addition to serving as a referee, the government may provide public goods, regulate activities that involve externalities, or redistribute income. Public choice theory has two fundamental assumptions: that individuals act rationally and that the political arena is competitive. Rationality presumes that individuals act out of self-interest and that all self-interest is equally valid. By applying this assumption to the public sector, political entrepreneurs act the same way as economic men and women. Competition in the U.S. democracy is hampered by the fact that ours is a two party system. In a two party system actors have limited choice. Rational or public choice does take the issue of fairness into account. The members of society involved in the competition do value fairness. Fairness can be viewed in terms of the procedural rules. That is, is the process fair to all the participants? Some people insist that if the process is fair, then the results of the game must be fair by definition. The fact that the rewards for the winners and the penalties for those who lose create great inequalities is not important. Many modern day conservatives believe that the basic egoistic drive of self-interest in the market place is what the “game” is about so the only rules should be those of the marketplace. They support a laissez faire government. They believe that democratic government should be a referee to enforce the rules of the game, such as the enforcement of contracts, but should not implement any new rules that would reduce the inequalities resulting from the competition. Fairness can also be viewed from the perspective of the outcome of the game. Is the outcome of the game reasonable and just? Modern day liberals often argue that even fair rules will not result in a just outcome if the players do not have an equal chance at the beginning. For example, what if certain players begin the game with fewer chips (dollar bills) than others? If fairness is based on the notion that every player has an equal chance to win, differences in the inherited starting positions before the race even begins should be taken into account. If it is important that the result be fair, the government can adjust the rules to bring about what is viewed as a fairer outcome. Rules can affect the way the game is played. For example public policy regarding minimum wage laws, or pollution controls are rules that affect the way the game is played. These rules influence the price of certain goods and how much is used in the market place. Such rules directly affect how the game is played. Other rules redistribute how rewards (and penalties) are distributed after the game is over. For example tax policy, whether progressive, flat, or regressive redistribute wins and losses after final exchanges have taken place. Such choices about the rules of the game are public choices. Public (or rational) choices are made by voters in democratic societies. The rules of the game are determined by democratic principles. The game being played is that of capitalism, which left to its own devices, would be played under the rules of rugged individualism. Rational public choice provides an analysis and an explanation of society as it is. It explains why individuals with high incomes are more likely to vote than those with low incomes and why they are more likely to be active members of special interest groups. Chapter three considers different theories about players in government decision making and policy growth. It also explains why government failure occurs. This chapter investigates the government decision-making process and examines problems that arise in the process.   IDEOLOGIES AND INSTITUTIONAL CONTRAINTS ABSTRACT This presents material regarding the differences between liberal and conservative ideologies. Anthony Downs’ states that an ideology is a “verbal image of the good society, and of the chief means of constructing such a society.” The two main political ideologies that divide their followers into conflicting perspectives of preferred futures in the United States are liberalism and conservatism. Liberal and conservative prescribe their respective views of not only the desired end state, but also which choices along the way will best ensure that we arrive at the appropriate destination. The ideology, or shared vision, is the cement that holds their movement together. While political science tries to calmly and analytically understand the political world, political ideology is concerned with trying to bring about the shared visions of their constituencies through applications in the political world by moving from the abstract to the applied. However, even political scientists organize their values and goals in ways rarely in the dead center of a political spectrum. They too have tendencies of thought that place them to the right or left of center. Since ideologies are visions of social change to provide what Aristotle termed “the good life,” they have a strong economic component. Economics is the basis for social and economic improvement in democratic capitalist societies. To trace the origin of the major philosophical and ideological division in America we develop core, and sometimes contradictory, themes in liberalism and conservatism. Some philosophical and psychological attributes of the two perspectives are developed. As these elements of thought evolved, a switching of labels between classical and modern liberalism and conservatism has occurred. The study of public policy is also influenced by the perspective of analysis. The two most widely utilized perspectives of analysis in the United States are that of Pluralist Theory and that of Elite Theory. Both models have merit in the study of public policy. We conclude that Elite Theory is a better representation of how policy is made in the United States. The models are not mutually exclusive however and they may overlap in many areas. There is ample evidence that ideological divisions have sharpened in recent years. The tone of American politics has become much sharper with political struggles increasingly carried on outside the electoral process. The Clinton period has been marked by endless borderline scandals pursued by a flock of prosecutors with unlimited resources, spending millions of dollars over many years. Two weeks after the 1998 elections, Kenneth Starr conceded that he failed to find impeachable conduct in the President’s involvement in the Arkansas land dealings known as Whitewater, nor was impeachable conduct found in the Travel Office firings, or in the F.B.I. files ordered by White House personnel in the Security Office. Former Agriculture Secretary Mike Espy was acquitted on all counts brought by the special prosecutor regarding gift-taking. The President’s lying about his relationship with Monica Lewinsky, in what to some seemed like perjury entrapment, seemed more a form of political harassment until articles of impeachment were voted by the Judiciary Committee. The fundamental conditions of combative behavior remain with special interest groups ready to exploit the next event that has the potential to make headlines. There are journalists, political pundits (experts), and politicians anxious to make headlines and the evening news. Partisans bent on exposing ethical lapses, see their effort as justified while dismissing the idea that they are merely damaging the public’s faith in politics as beyond their purview. Such spectacles encourage public cynicism about politics.   The Impact of Institutions on the Present and Future In addition to ideology’s impact on American society, the institutional character of American Government affects public policy today. The purpose of this chapter is, among other things, to point out how past decisions constrain current policy making. It summarizes the founding experience of the U.S. government and characterizes the philosophical outlook of men like Jefferson, Madison and Hamilton. Students review the structure of government and link it to the belief systems of our early leaders. Ideas like limited government, separation of powers, checks and balances all reflected a deeply held conviction that government rests on the consent of the governed. The Constitution was viewed as a social contract and therefore the key element of the classical liberal philosophy embraced by our Founding Fathers. Classical liberalism was a revolutionary philosophy well suited to the political conditions of early America. Today, the decentralized system envisioned by men like Thomas Jefferson makes policy making a difficult process. The chapter emphasizes the tradeoff between the efficient, centralized model of policy making and the representative, decentralized system developed at the Constitutional convention. It also describes the historic shift in power from the states to the central government and from the legislative to the executive branch of government. Part of the reason for this shift is the modern day reality of politics. Increasingly the media plays a significant part in the policy making process. Negative campaigning and investigative reporting have cut away at the traditional electoral system. Symbolic politics has often replaced substantive policy discussions. Faith in government and in elected leaders has declined. Consequently what was already a difficult operating environment has become one plagued by policy gridlock and divided government. This is evident in patterns of voting behavior where voters choose to split the difference by casting votes thus sending inconsistent information about policy options. The Founding Fathers disliked the idea of factions and had an antipathy (opposition) to political parties. Therefore they did not foresee the partisan wrangling based upon political parties that has afflicted Congress. They did anticipate the possibility that gridlock could result from clashing interests within both houses, and between the House and Senate. They expected that the Senate would be a more conservative body than the House and would provide a check on that chamber’s more radical tendencies. Examples of gridlock include behavior by the Republicans, aware of President Clinton’s vulnerabilities who proceeded to oppose his proposals for campaign financing reform, to restrict lobbyists, to revise the 1872 Mining Law, and to revise the Superfund law to clean up toxic waste dumps, and the tobacco bill. Impeachment, Ideology, and Institutions The impeachment of President Clinton provides an excellent example of the different themes of this chapter. A defining aspect of a democracy is in the routine transfer of power to the winner of a Presidential election. In this regard, the first truly defining moment in American history was in 1801 when the Federalist incumbent, John Adams, was defeated by Thomas Jefferson, the leader of the new Democratic Party. President Adams, quietly packed his belongings and returned home. Many nations of the world have not achieved this level of democratic maturity. There is often an unwillingness to concede defeat and work within the confines of being a minority party. Some argue that the impeachment of President Clinton was the culmination of a six-year period in which partisan “warfare” was conducted by Republican members of Congress in a manner unequaled in American political history. Starting in 1992, Senate Minority Leader, Bob Dole, indicated that the Republican party would filibuster any important legislation proposed by Clinton, forcing him to win 60 votes for passage in the Senate. In 1995, after winning majorities in both the House and the Senate, Congressional Republicans engaged in more direct challenges to Constitutional procedure. They forced the shutdown of the federal government.   The Constitutional process for resolving disagreements between the legislative and executive branches of government is that Congress passes a bill, if the President vetoes it, Congress may try to override the veto with a two-thirds majority. If there are too few votes to override the veto, Congress must accept the decision. In 1995 the Republicans endeavored to force the President to sign legislation against his will by forcing a lapse in funds to pay for government operations, rather than trying to find the votes to override a veto threat. In 1994, the Republicans orchestrated the dismissal of Robert Fiske, the independent counsel investigating Whitewater because he was considered insufficiently aggressive. Fiske was replaced with Kenneth Starr who was involved in discussions with Paula Jones, a plaintiff suing the President in a civil suit. Starr’s investigation led to President Clinton’s impeachment. The Republican majority now seems sincerely baffled over the lack of public support for the impeachment process. Some analysts claim that Congressional Republicans had been in the minority for so long that they perfected the technique of “guerrilla warfare” against some of the institutions of government. Now having gained a majority status, they continue to act like “insurgent” partisans seeking to exploit cracks in the system, rather than looking for ways to utilize the institutions of government to make the system work.   ECONOMIC THEORY: BASIS FOR PUBLIC POLICY ABSTRACT Public policy exists at the confluence of economics and politics. To understand the public policy process requires some understanding of economic theory. This chapter presents a chronology of the economic ideas, which contribute to our thinking about the process and the substance of public policy. The chapter begins with a reminder from Chapter one that economic choice is the basis of any market economy. It is important to emphasize to students that the economic system is neither moral nor immoral. Rather it is an inanimate system that lies outside the realm of morality. The market system generally provides an efficient way to ration scarce goods and resources. Those with rationing coupons (money) are able to pay and satisfy their desires. If the consequences are deemed to be unfair or inequitable, or if they offend our moral views, then we may decide to modify the way the market works. While the system may be amoral, observers have long debated the consequences of the outcome. Adam Smith, a moral philosopher, undertook to defend the market system against the charge, by the nobility, that the result of the market system was unfair and created chaos. He argued that the free market resulted in more equitable outcomes than government dominated mercantilism. Smith’s theory of capitalism was very supportive of free markets precisely because he believed the outcome was far more just than that of mercantilism. His support of workers was really remarkable for its time. And he was scathing (scornful) in his denunciation of rapacious (greedy) capitalists whose greed he detested. Unfettered capitalism would work precisely because greedy capitalists could not control this impersonal system. They were driven by impersonal market forces to produce as cheaply as possible and turn their profits back into investments. The result, Smith theorized, would be an equal distribution of the necessaries of life. It is important to emphasize the fact that markets do work effectively when relative prices (which determine production goals), accurately reflect consumer desires, and when those prices accurately reflect the costs of production. In situations where these conditions are not met, where there are imperfections, the market will not work efficiently. Such market imperfections can arise from the degrees of defects in competition such as monopolistic competition, oligopolistic (controlled by a few competing sellers to large a number of buyers) competition, or the existence of monopolies. Imperfections can also arise from too few consumers in the market due to an “ineffectual distribution of demand.” These conditions result in what is termed market failures. This is a very important part of the public policy debate. It is important to be aware of the importance of markets and with their imperfections because a good part of public policy debate deals with how the market functions, market failures, and with how to improve the market. Government intervention is typically designed to remedy market failures to achieve societal goals. When we do this, we trade market solutions for political solutions. When political solutions do not improve upon the market we have what is known as political failure. Political failure can occur when political entrepreneurs fail to reach an agreement on the appropriate remedy for market failure or because of unanticipated responses to policy selection. Adam Smith’s 18th century writing laid the theoretical foundation for modern capitalism. Adam Smith once observed that: “I have never known much good done by those who affected to trade for the public good.” If Smith had little faith in good intentions, he did have an abiding faith that selfish intentions could lead to public good. In his work The Theory of Moral Sentiments (1759), Smith tried to show that altruism could come out of self-interest. In his more famous work, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), he tried to show how the individual pursuit of self-interest could be transformed through the invisible hand of the free market into the public’s benefit by producing wealth and harmony (and not chaos). Smith went on to examine the source of the wealth of nations. He held the division of labor to be the most important source of wealth. His example of the pin factory has become the classic example of the dramatic increase in productivity that can result. The division of labor does not occur because individuals perceive its ultimate benefit to society. Rather it occurs merely because it is in each individual’s self-interest to specialize and exchange. He said: “The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance…capable of carrying on the society to wealth and prosperity.” In addition to the theme of the “invisible hand” and the “division of labor,” Smith’s support of individual economic freedom against the mercantilist policies was very evident. He believed that governmental attempts to guide or regulate actions of individuals for the benefit of the government would end up doing more harm than good. Adam Smith was especially harsh on legally protected monopolies. Smith’s theory, a radical departure from the thinking of his day, claimed that self interest and competition would guide the market as an invisible hand and thus provide constant improvement for all. Smith’s critics contend that his model may have fit a mercantilist English government in the late 1700’s, but it does not fit modern countries like America today – where the state plays a large role to encourage overall economic growth and large corporations have replaced small shopkeepers. Smith believed that if his qualifications were met (no monopolies and an effectual distribution of demand), markets would self adjust, goods achieve a natural price and benefits trickle down, all with a minimal level of government intervention. Smith’s optimism is contrasted with the melancholic view of Thomas Malthus and the radical critique of Karl Marx. Adam Smith clearly broke with the prevalent thinking of his day in his support for the poor whom he referred to as “the innocents” in his work, The Theory of Moral Sentiments. That Smith was also concerned with the well being of the working class is often lost on modern day advocates of this neoclassical view. For many, The Wealth of Nations remains a laissez faire “bible.” The gloomy prognosis offered by Thomas R. Malthus suggested that the burdens of poverty had no social cause. Rather the poor remained poor because they continued to procreate. Their only hope was moral reform. Government intervention would only exacerbate the dreadful condition of poverty. Marx, also reacting to the poverty and working conditions of his day, argued that the market system was doomed to failure. Marx saw history as a continuing struggle between elite and masses. Capitalists (elites) increased their profits at the expense of the workers (masses). Social tension pervaded the market place so that ultimately the system would collapse. Despite his unrealized predictions, Marx’s analysis underscored the social pressures that free markets generate. Government’s role is apparent in the Marxist critique. John Maynard Keynes was an unabashed supporter of the market system. His lasting contribution to economic theory grew out of his effort to shake loose the unfailing optimism expressed by free market theorists during the Great Depression. Keynes’ The General Theory of Employment, Interest and Money argued that there is no self-correcting property in the market system, which will return a stagnant economy to growth and full-employment. In time, a new understanding of market forces, in particular the “natural rate of unemployment” replaced the notion of a trade off between unemployment and inflation. The chapter concludes with a review of the misguided policies of recent administrations. Supply side economics, a classical re-run with a new twist, offered tremendous appeal to corporations and upper income groups. Its quiet demise, along with the failures of monetarism brought the expectations of the 1980s to a diminished close. By remaining faithful to these policies, President George Bush also closed out his political career. We end the chapter with an elaboration on factors, which compel government involvement in the market. In addition to these factors, the chapter points out that government can act on the authority of its universal membership and its ability to enforce the law. These advantages give government a unique ability to intervene in the market place to restore the economic balance that purely competitive forces are unable to produce. Others besides Adam Smith laid the foundation of economic thought. David Ricardo’s theory of comparative advantage demonstrates how specialization and trade are advantageous to countries despite differences in opportunity costs. A lecture, which provides this overview can lead to a discussion of U.S. trade policy and the various arguments for and against restricting trade. Smith wrote in The Wealth of Nations about the potential the monopolist has to set price. Today the effort to identify what constitutes monopoly is very complex. Essentially though the greater a firm’s ability to set price, the greater its monopoly power. What types of government response to monopoly are there? How do monopolies set price? What are the evils and the advantages of monopoly power? Is there any parallel in the public sector? Students might discuss these questions and then ask why government at times creates monopolies to respond to a public need.   ECONOMIC POLICY: STRATEGIES FOR TIGHT BUDGETS AND NEW SOCIAL NEEDS ABSTRACT As the title implies, this topic focuses on what is arguably the most trying problem that policy makers must face, the deficit. Lowering budget deficits and the overall national debt, without imposing painful costs on citizens seems unachievable. In fact, policies aimed at reducing the deficit without raising unemployment have proved far more successful than many would have thought possible a few years ago. This topic looks at the two models used by decision-makers contemplating appropriate economic policies to either attempt to stimulate the economy or to reduce inflation. The neoclassical model is simplicity itself. It assumes that the market will work best if left alone. They recommend laissez faire economic approaches including reducing taxes and the role of government in the economy. It would be difficult to overstate the importance Keynes’s economic theory had as a political doctrine. Keynesian theory provided the intellectual framework that justified state activism through monetary and fiscal policy to guide the economy toward growth and stability. Prior to Keynesian theory, policy makers who increased spending during economic downturns were charged with being fiscally irresponsible and threatening to bankrupt the nation. As a practical matter today, conservatives and liberals accept a larger role for government today in managing the economy than prior to the 1930’s. However, conservatives would lean more toward the use of monetary policy as the most effective instrument of policy, while remaining highly critical of fiscal policy interventions. Liberals are more inclined to believe that monetary policy is more effective in cooling off the economy than in stimulating it, while fiscal policy can be more effectively used to stimulate the economy. Liberals are also more likely to insist on a close coordination of monetary and fiscal policy to maintain economic stability. Since the 1930’s, various administrations have used monetary and fiscal policies primarily to stimulate the economy and reduce unemployment. Those policies designed to reduce unemployment frequently result in an increase of inflationary pressures. Consequently, those policies that increase employment opportunities may be opposed by those for whom unemployment is not a concern, because inflation would reduce the value of their capital. High levels of inflation (price increase) bring about conditions of financial uncertainty and are therefore harmful to an economy. At the present time deflation has become a serious worry in the international economy. A decline in the price of goods and services can also threaten the economy. Deflation frequently accompanies serious economic downturns. The last major case of deflation occurred during the Great Depression when prices fell by over 6 percent per year for over 5 years straight. Budgets and Deficits To distinguish between deficit and debt, one might use the analogy of running water in a tub. By running water in a tub (running a deficit) the volume of water rises (debt). When you let water out of the tub (run a surplus) the debt falls. This analogy reminds students that deficit is a flow and debt a stock. Deficit spending is neither new nor harmful. As mentioned in Chapter 5, Keynes encouraged deficit spending to stimulate the economy. When the economy stops growing at a rate faster than the government is spending, problems begin. We point out some of the common misconceptions about the debt. For example, economic chaos will not occur. Policy makers have options, unpopular as these options might be. All debt is not bad. Such a judgment is dependent upon the reason for which the debt was incurred. For example, increasing the debt to finance the war effort during WWII was clearly the only rational approach. To incur debt to finance growth and development may also be justified. Unfortunately the current deficit and debt levels reflect policy decisions made during the 1980s. Prior to the Reagan administration, the accrued debt resulted from economic downturn and the cost of financing wars. What distinguishes the deficits and the resulting debt incurred since the 1980s is that they were a direct result of tax cuts primarily for the affluent without a corresponding decrease in spending. The debt service reduces money available to fund current programs. In addition prospects for long term economic growth have decreased while reliance on foreign investment has increased. The current problem of the deficits is not a problem of overspending. The problem can be traced to the tax cuts primarily for corporations and the affluent in 1981 that was not viable fiscally in the long term because of the resulting deficits. After a decade of unparalleled deficits caused by tax cuts without cuts in spending, Republicans denied any culpability. Instead they attacked the government as irresponsible. With their attack upon government irresponsibility, as evidenced by the deficits, they proposed to cut taxes and spending. What can be done about the deficit? There are just three ways to reduce the burden of the deficit: raise taxes, reduce spending, and stimulate the economy to grow at a faster rate than the accumulating debt. The traditional fiscal polices, raising taxes and reducing spending are politically unpalatable. Discretionary spending has been cut to the bone. Cuts in certain entitlements, defense spending and increases in taxes invite political suicide. One hope is that stimulative policies will encourage the economy to grow at a faster rate than the deficit. But the discretionary spending needed to stimulate growth has been sharply reduced since the 1980s. In 1985 Congress passed the Gramm-Rudman-Hollings Act, which established declining fixed annual deficit targets and required a balanced budget by 1991. Unfortunately, both Congress and the President found ways around the law. The Budget Enforcement Act, (BEA) passed in 1990, replaced Gramm-Rudman-Hollings and has been somewhat more successful in enforcing its deficit requirement actions. Nonetheless, the real solution comes down to making hard choices about cutting entitlement programs and raising taxes. The latter part of Chapter 6 reviews the nature of entitlement programs and options like “means testing” which could lower their cost. The authors argue that tax increases are unavoidable in taming the debt monster. Unfortunately the social cost of increased taxation is great. Many voters believe that money collected in taxes is wasted. A comparative view of tax burdens demonstrate that the portion of income paid in taxes in the United States is still well below the percentage paid by workers in other countries. Principles of fairness and efficiency guide tax policy. Efficiency suggests that unless there is adequate justification, there should be as little interference as possible with market allocation. When the government does intervene it does so to promote fairness. The benefit principle and the ability to pay both reflect philosophies about what constitutes fairness. Taxes are characterized as progressive, proportional, regressive. Though the U.S. tax system is progressive, tax loopholes and deductions, along with the 1980 tax decrease, have contributed to growing inequality of income. Income inequality affects voting and electoral behavior. Studies show that what the affluent lack in numbers, they more than make up for in voter turnout, money and organization to ensure that their views are publicized and candidates supporting their positions are elected.