Service Learning in Public Economics

Welfare (income redistribution), comes in many forms, but generally in two different categories: money and in-kind transfers, which are payment in goods, such as food stamps or subsidized housing. In-kind transfers of welfare are often seen as less efficient than simple cash gifts because the recipient cannot choose the form of the resources he or she is receiving. If the recipient would have preferred to use 10 dollars cash on cereal instead of receiving $10 worth of cheese, this is not possible. To maximize the utility of the recipient, he or she should be able to choose how these resources are used. From the recipient’s stand point, it makes sense to allow the person who knows best to make the decisions: would I prefer ham or chicken? Bread or cereal? Naturally, it seems as though the choice should be left up to the recipient of these resources, so therefore cash is the best option when giving welfare payments.   However, what is lost in this discussion is that welfare is resources given to the recipient by the government. And the government has no money ‘of its own.’ All the money that the government possesses is, in fact, taxes taken from citizens. Therefore, it is not only the ability to maximize the utility of the recipient that should be taken into account. The utility of those persons to whom the money actually belongs should be consulted, because it is their utility that would suffer most if the money is spent in a way that is not welcome. Those whose money is being used for welfare would generally not want it to be used for something like gambling or alcohol or any number of other uses that do not sustain the life of an individual in economic distress. In this way, transfer payments make the most sense. It is probably politically unfeasible to give welfare payments only in cash, because the public would be outraged that its money could be used in ways in does not approve. Therefore, politicians (to save their office) have not allowed all welfare to be paid in cash, but to be given in a way that is more publicly palatable. 

A couple of classes ago, we learned about the Gini coefficient and how it is constructed. The Gini coefficient is a measure of income inequality in a country. It is created by the ratio between how income is actually earned by individuals and an equal distribution of income among all members of a society.  This construction assumes that an equal distribution of income is the preferred outcome in any society because it is the ideal standard which the actual is compared. Distribution is used to refer to equal income being received by all people because it will never happen that way voluntarily or naturally in a market system, where production and earning are linked. Therefore the income is not earned, but distributed by someone else so that everyone gets a certain equal amount. Is an equal distribution of income to all persons in society actually the best outcome for any society? Is it the pinnacle of human achievement? Is it the best form of equality, the one that is most important?

My answer is no. Equal distribution of income assumes that the government should favor certain individuals over others by taking different shares of the income they have earned and giving it to people who didn’t earn it. Equal distribution assumes that those who earn more money have less of a right to their money (property) than those who earn less. In other words, it assumes a lack of equality before the law between persons who earn large or small amounts of money. Amount of income is just another false distinguishing factor that can be used to undermine equality before the law, which is supposed to be the birthright of every American citizen. It is for this reason that I believe equal distribution of income inherently creates legal inequality and therefore is not the best form of equality to attain. 

One of the most important ideas in what is termed “welfare economics” is The Second Fundamental Theorem of Welfare Economics. Our book puts it this way: “society can attain any Pareto efficient allocation of resources by making a suitable assignment of initial endowments and then letting people freely trade with each other” (p44). The book also quotes an interesting explanation of the theory by author Tim Harford in his  The Undercover Economist on the 100 meter sprint: 

“If your goal is to have all the sprinters cross the line together, you could just change the rules of the race, ordering the fast runners to slow down and everyone to hold hands as they cross the line. A waste of talent. Or you could move some starting blocks forward and some back, so that although each sprinter was running as fast as he could… the fastest had to cover enough extra ground that he would end up breaking the tape neck-and-neck with the slowest [pp 73-74].”

This theorem does sound great, but I think it is fundamentally false. Changing the starting blocks is no different from making people slow down and hold hands to cross the finish line together. The only difference is that the first one is a more blatant waste of talent. Just to be clear, what is meant by “moving the starting blocks” and “making suitable assignment of initial endowments,” is taking money from one person and giving it to another. In the context of one 100 meter sprint, this moving the starting blocks may sound like a great idea, but what about in the context of multiple sprints? Wouldn’t someone catch on and not work as hard, if they know that no matter what they do, they will merely end up in the same place as everyone else at the same time?

The thing that people forget when using such examples as the race is that to have money to give out as “initial endowments” the government would have to have taken it from someone already. The government cannot create money out of thin air (and it if does, we have the examples of pre-WWII Germany and present-day Zimbabwe to show the consequences). Those people whose money was taken away are very much aware of why it was taken away from them and given to other people. They may run as fast as they can for a while, but life is not one sprint, it is a multitude of sprints and marathons. In game theory, we might say that there is an infinite number of repetitions of the game being played. When that happens, people learn what the rules are and therefore what incentives exist because of them. In other words, this whole theorem lacks the context of human psychology and even worse, incentives, which are supposed to be the foundation of economics itself. If everyone has the same amount of money in the end, if all work ultimately ends in the same reward, then there is little incentive to sprint as fast as you actually can or work as hard as you might. The only thing that still gives incentive to strive is pride in accomplishment and your own work. This incentive will not last long, however, when there is no reward for it and sloth is on equal footing with excellence. Creating a system of incentives that promotes lack of effort and effectively punishes talent and excellence is no better than forcing people into slowing down and holding hands over the finish line. Both such systems are a waste of talent. The second only lacks the honesty of clear intention. However, they are not only a waste of talent, but also a waste of human potential. 

Sarah’s post about our field trip to see the redevelopment of Lynchburg in action made me think about why I don’t agree with much of the redevelopment that is ongoing. The argument against aesthetic improvements to the downtown area isn’t that beautification is useless. Beauty has a value, even if it is not easily defined. The argument is against governmental beautification of downtown. Increasing beauty is not useless. People generally are happier and more comfortable in clean, well-kept environments. However, is making people happier truly a legitimate function of government? Despite our book’s theoretical analysis about ‘maximizing total welfare’ aside, is this what the government should be looking at? Even though this is a local government project, does making a person happier rank up there with national defense, police force or a system of laws upheld by courts? Does this country have so few other problems that making public spaces pretty so that some people will be happier is a priority? The argument against beautification is about priorities and the role of government, not about usefulness. Redevelopment of abandoned buildings downtown is a great thing, but one that government, even local government, should at most facilitate through the transfer of abandoned property to someone who wants to use it.

While studying for my exam in this class, I came upon something called the “regulatory budget,” which is a theoretical budget measuring the economic burden that the federal government imposes on the economy. For obvious reasons, such a document doesn’t exist, but it reminded me of something that I wanted to share with the class that is relevant. Even though a direct measure of this impact would be impossible to calculate, one crude measure of the burden is looking at the amount of legal code that the Federal government forces people to follow. While interning at the Cato Institute, I put together a page count by Federal Agency of the Code of Federal Regulations. This was not my most exciting task, but it was one of the ones that I gained a great deal of insight from. In total, I counted more than ninety thousand pages of Code to be followed, of which the Internal Revenue Service accounts for more than thirteen thousand pages by itself. This amount of legal code is nearly impossible for professional tax experts to grasp and keep up to date on, let alone normal citizens whom this Code directly affects every day. The extensiveness of this regulatory code means that business people spend more time thinking about the legal and specifically tax consequences of a decision than the economic consequences for their shareholders and consumers. That cannot be a good thing for the economy. 

After reading about the Edgeworth box and the theories behind it, I can’t say that there is any fundamental flaw in the ideas behind it. It is true that there may be a way goods can be distributed differently that would increase one person’s utility while not harming anyone else’s. However, this begs the question: who is going to be determining what someone’s utility is? An appointed czar? A duly elected committee? Each person’s own mother? What are the mechanics of this operation?

            The second question that comes to mind is a fairly simple one. If the way goods are distributed in society is somehow fundamentally lacking on the basis of social justice, what does that mean? Who gets to decide if that is the case? A simple majority? What constitutes social justice anyhow? Our textbook talks about social justice as if everyone already has a clear understanding of what this means and that something must be done to bring it about. However, I don’t know what this term means, let alone whether it is something that should be brought about by government or a concerted effort of individuals.

            So far, the textbook has only emphasized my lack of answers to these questions.

I’ve wanted to take Public Economics since my first year and am glad to be able to finally have this opportunity. Issues of taxing and spending have been intriguing to me for some time and I regularly spend my free time reading about tax policy. As a libertarian, I see taxation as the most direct and fundamental interaction between the individual citizen and that state. It is therefore a crucial policy area that I seek to understand as much about as possible. Last summer I interned at the Cato Institute in the area of budget and tax policy and learned a lot about how tax policy is used in the States. Now I am excited to learn about some of the ways in which tax and spending policies are evaluated in an academic manner. In addition, it is exciting to learn about how a community development organization can help more people become successful homeowners.