All Lecture Notes Compiled Together

Political Science 104 November 19, 2007 Bureaucracies Division of labor Responsibility broken into smaller tasks Individuals responsible for defined tasks Typically hierarchical in nature Standard Operating Procedures Organized to carry out most common tasks according to regular processes Advantage: efficiency Disadvantage: ask them to do something different, and they look at you like you?re from Mars Public vs. Private Organizations Wilson: public agencies (government) are very different from private agencies (associations, corporations, etc.) McDonald?s vs. The DMV McDonald?s Efficient, courteous service Happy customers DMV Workers are rude Ruin your day The standard critique of government bureaucracies Government agencies are big spenders Government agencies have too much red tape (make it too complicated) Government agencies hire too many people McDonald?s Minimum wage staff Teenagers Lots of rules Complex bureaucracy Sufficient staff Attractive, clean DMV Well paid staff H.S. graduate adults Lots of rules Complex bureaucracy Understaffed Poor facilities There are some major differences in how the organizations operate, because one is public, the other private Differences, according to Wilson Retention of the benefits of earnings Control over the factors of production Control over the organization?s goals Public vs. Private Organizations Some other important differences as well Standards of evaluation Consequences for poor performance Lack of ?market discipline? in public organizations In short: difficult to run government agencies ?like a business? Government Better than Business? Hacker: social insurance a clear example of where the public sector does better than the private sector could Private income not adequate to cover social needs Private market for social insurance is also not transparent, leading to: Adverse selection Moral hazard Public social insurance solves these problems (and private insurance cannot) Compulsive power: spreads risks widely, lower costs Size of program gives government negotiation leverage (Medicaid) More equitable Quality control/improvement Thus, private market can also fail to be efficient, if only in a different way The Executive Branch In theory, the White House Office and Executive Office of the President assist the president in managing and governing the whole of the bureaucracy Approximately: 2 million employees $1.8 trillion budget Hundreds of units/agencies of varying size Growth of bureaucracy raises questions: Accountability Political responsiveness Congress and president battle for control Ideally, we want a bureaucracy that is: Neutral (no explicit political role of its own) Competent (effective in carrying out assigned tasks) Responsive (remains accountable to public and political changes) What the President Wants An executive branch that is immediately responsive More Problems of Public Org?s They cannot do all of these things simultaneously Increased responsiveness means decreased neutrality and competence Increased neutrality means decreased responsiveness and accountability Who should the bureaucracy be accountable to even? Congress or the president? Or the public, directly? The bureaucracy is an agent with multiple principals Presidential Responses No easy solution to responsiveness/neutrality questions Civil service reform (1883) designed to create neutral public employees Presidents attempt to centralize policymaking in White House (especially since Nixon) Presidents try to leverage political appointment power Presidential Appointees Gets to appoint several thousand top-level people Idea is use them to set overall direction but rely on civil servants to execute details Problems: Some appointees require Senate confirmation Career civil servants outlast appointees Appointees ?go native? Difficulty insuring loyalty Increasingly difficult to attract quality people to government service November 26, 2007 Policy Making and Implementation Goals and Objectives: What do you want to accomplish? Policy Tools: How do you get there? Evaluation: Which policy will get you there fastest, cheapest, and most efficiently? Implementation: How do you carry out the specific tasks? Assessment: Did it work? The Stewie Axiom There is an obvious and objectively correct answer to any policy question. The inability to identify and implement that answer is due to the venality and stupidity of (pick one): Government bureaucrats Corrupt members of Congress Etc. Example One way to evaluate policy is to compare costs of a policy against the benefits Easy example: flu shots. Little cost, large benefit (among at risk populations). Cost: administering vaccine, administration, infrastructure, side effects Benefits: fewer major illnesses, deaths, hospital stays (but not completely ambiguous) Less clear benefits among healthy people under 65, but still substantial Tougher: Seat Belts and School Buses Policy Question: should school buses have seat belts? No brainer? Average of about 15 children killed each year while riding on school buses So what?s the problem? How many deaths/injuries would seat belts prevent? How much would it cost? School buses surprisingly safe Most fatalities in school bus accidents are in the other cars or pedestrians (90%) Most children killed while getting on or off bus (2/3 of fatalities) Many more children killed in accidents while riding to/from school in cars Most fatalities occur in collisions with large trucks, in side impacts Compartimentalization Would seat belts make a difference in catastrophic crashes (bus-train, for example) NHTSA Study: marginal safety increase with lap or shoulder belts Must be work properly Can increase some other injuries (stiffer seat backs) Costs Retrofitting would cost between $1,000-$2,000 per bus (there are about 500,000 school buses in the US) Seat belts would reduce the capacity of most buses, which would mean more children traveling to school with alternative transportation What other ways could that money be spent? What do you conclude from this? More Complex Policy How do you handle more complicated issues? Disagreement and uncertainty about goals Uncertainty about tools and methods Disagreement over distribution of costs? Options Comprehensive assessment of all goals, tools, outcomes, and possible strategies (obviously not feasible) Muddling through Example: Global Warming Consensus that global climate is warming Questions (some scientific, some political, some economic) Is it anthropogenic or natural? Prevalent (though not unanimous) view among climatologists is that it is due to carbon emissions What will happen if nothing is done to reduce carbon emissions? What are the economic effects of major reductions in carbon emissions? What are the best methods of reducing carbon emissions? How Certain? Important to get the solution right: If GW is man-made and we do nothing, risk global catastrophe If GW is natural and we absorb the costs of reducing carbon emissions, we?ll b e warmer, but poorer What level of certainty do you need before you act? Implementation Execution/implementation of policy Almost always requires specific organizational capabilities Identification of specific tasks needed to carry out policy Management and organization Assessment ?Bureaucracies? are about the only way to do this Specific organizational type with identifiable characteristics Bureaucracies Division of labor Responsibility broken into smaller tasks Individuals responsible for defined tasks Standard Operating Procedures Organized to carry out most common tasks according to regular processes Advantage: efficiency Disadvantage: ask them to do something different, and they look at you like you?re from Mars Controlling Bureaucracies Distinction between ?politics? and administration Routine executive of administrative tasks governed by objective management principles Insulation from political influence Distinction not so simple Administrative tasks have political consequences (voter ID?) Balance insulation against accountability Control Once Congress creates an agency to implement a policy (say, health care reform?), immediate questions: How do you insure that it will carry out the policy that you intended? How do you protect against political influence from the other side? How do you insure the legitimacy of the resulting decisions? Principal-Agent problem! Administrative Controls Civil service Political appointees (loyal to president) Congressional oversight/budget Administrative process controls (public comment, judicial review, standards) Ongoing tension between neutrality and responsiveness November 28, 2007 Economic Policy Few things are more central to evaluations of government (and presidents, especially) Few policy areas more complex Few policy areas deal with more fundamental questions of government power (maybe civil liberties) Economic Policy Questions How can government best insure stable economic growth? (i.e. increases in national wealth?) What should the government do to create the ?best? mix of unemployment and inflation? What is the relationship between economic policies and the economic interests of different constituencies? Tools of Economic Policy Three main categories Fiscal policy ? composition of the federal budget, details of tax policy Monetary policy ? interest rates, supply of currency Regulatory policy ? conditions imposed on private economic entities (the rules of the game that prohibit or discourage certain activity, i.e. pollution control or minimum wage) Don?t Tell Anybody Government has limited authority to affect economy, especially in the short term No ?magic bullet? policy that will achieve the right balance between economic growth, inflation, employment, wealth ?Economy? composed of trillions of individual transactions, not all of which are affected by government policies Medium and long term effects more likely Timelines of Economic Policy To late 19th Century ? government largely absent from economic affairs Fits the needs of a relatively simple, agrarian society and economy Federal control held back by judicial interpretation of commerce clause Most economic regulation took place at the state level 1880-1933: beginning of regulatory state Concentrations of economic power (railroads) Increasing complexity of economic relationships Emergence of regulatory institutions Interstate Commerce Commission (1887) Sherman Antitrust Act (1890) Pure Food and Drug Act (1906) Federal Reserve Act (1913) 1933-1970s: Rise of the Welfare State Expansion of government involvement in economic affairs Keynesianism as model of government economic intervention (use government spending to smooth out natural ?highs? and ?lows? from market economies) Rapid growth in number of institutions Agricultural price supports SEC, FDIC, etc. National Labor Relations Board 1970s-1990s: The Era of Regulation Advantage of regulatory policy is that it places the cost of compliance on private economic actors; government doesn?t bear costs Rise of regulatory strategies, especially in workplace safety and environmental areas: Environmental Protection Agency OSHA Consumer Product Safety Commission Nuclear Regulatory Commission National Highway Traffic Safety Administration Economic Policy and Ideology Views of government involvement in economic affairs depend critically on broader ideological considerations As a general rule: ?Conservatives? place more emphasis on market forces and limited government intervention. Tend to oppose regulation ?Liberals? place less emphasis on market forces, and support broader government involvement to produce socially desirable outcomes A Moderate Analogy When is regulation an appropriate policy? When should government constrain economic activity for the public good? Conservatives: rely on markets Liberals: markets don?t always work Moderate Position: regulation appropriate when markets break down What is the Right Balance? Subprime mortgage meltdown Over the past 4 or 5 years, lending (specifically mortgage) companies got loose with requirements to borrow money Led to more and more people unable to pay mortgages Income inequality Socially undesirable Hedge fund managers and the capital gains tax Use of tax policy to influence behavior Reward certain types of behavior December 3, 2007 Current Events Supreme Court will hear oral argument on Wednesday in a case about the habeas rights of Guantanamo detainees (Boumediene v. Bush) Background: in 2006, in Rasul v. Bush, the Court held that the president could not set up military tribunals because he did not have congressional authorization Congress granted that authority in the Military Commissions Act Now the question is whether detainees have a constitutional right to a judicial habeas hearing, in which they can challenge their detention Mike Huckabee may be leading Republican Iowa caucus Authentic Conservative No religious baggage (like Mit Romney) Clinton leads Democrats at around 70% with O?Bama at 20% Mit Romney leads Republicans in Iowa Electronic market at 40% What is the Right Balance? Subprime mortgage meltdown Income inequality Hedge fund managers and the capital gains tax Use of tax policy to influence behavior Comments on Regulating Financial Markets Origins of ?subprime? mortgage crisis Combination of Loose lending practices, which provided mortgages to people who could not afford them Inaccurate rating of mortgage-backed securities, ,which disguised the level of risk Declining home prices, which means foreclosures rather than flips Result: billions in losses, financial instruments that nobody really understands, ?liquidity? crisis, and calls for federal regulation The Federal Reserve Greatest short term influence over the economy, and the most independent of any political control What it does: Controls the amount of currency in circulation and the reserves of banks, through buying and selling of government securities Determining interest rates (set by rate Fed charges for short term loans to member banks) Fed Independence Risk of political influence on Fed activities (try 0% interest rates in an election year) Independence assured by 7 Directors, each of which serve 14 year terms President cannot remove directors except for cause Fed self-financed, and does not require congressional appropriations Current Issues: Fiscal Policy FY 2008 spending: $2.9 trillion (est.) FY 2008 receipts: $2.66 trillion Excess of spending over revenues (deficit) $239 billion National debt: $9.6 trillion GDP: $14.5 trillion Taxation and Deficits General view that deficits (all other things being equal) are bad Increase interest rates Borrowing against future income Concrete cost ($211 billion in FY 06) People aren?t so crazy about taxes, either Argument: tax cuts stimulate economic growth Much more complex than this Recent Tax Cuts In 2001, Bush signed into law changes to tax law that will reduce the overall tax burden by about $1.4 trillion over 2001-2010 How? Reduction in marginal tax rates Repeal of estate tax Increasing deductions Tax Cut Argument Critics argue that: Tax cut gives benefits largely to the wealthy (CTJ argues that richest 1% would have taxes cut by $53k per year, most people about $300-400 Will make it harder to pay for Medicare drug plan, or protect social security/medicare Supporters argue that: Will foster economic growth, offsetting reductions in short term Wealthy already pay disproportionate share (top 1% pay about 37% of all income taxes) Individual Income Tax Distribution of Income Levels (2004) Top 1% - $328,000 Top 5% - $137,000 Top 10% - $99,000 Top 25% - $60,000 Top 50% - $30,000 Percentage of Individual Income Tax paid Top 1% - 37% Top 5% - 57% Top 10% - 68% Top 25% - 85% Top 50% - 97% Question Is the tax system fair, or not? Should the tax cuts be rescinded? Should we use the tax system to reduce income inequality? Are levels of inequality increasing, decreasing, or staying the same? Is this a debate that can be settled with data? Definitions Social Policy: programs designed to protect and meet the social welfare needs of the population Examples: Income maintenance (welfare, social security) Health care (Medicare and Medicaid) Food stamps, housing programs December 5, 2007 Welfare vs. Insurance Social policy raises fundamental questions about individual vs. government responsibilities When should individuals be responsible for their own needs, and when should government step in? ?Deserving? vs. ?Undeserving? poor Timelines of Social Policy Constitution is silent on responsibility for welfare programs Pre 1930s Little federal government involvement Most programs at the state level, or involved private charitable organizations ?Soldiers and mothers? 1930s Depression made it clear that existing framework was inadequate First wave of federal welfare policies Public works programs Social Security and AFDC (Aid to Families with Dependent Children) (1935) These programs did not significantly reduce poverty rates, although this wasn?t widely recognized until the 1950s Second major expansion in the 1960s Recognition that poverty rates were still very high among some groups Economic opportunity programs Dramatic expansion of public assistance: housing, food stamps, AFDC expansion, Medicaid Expansion of social insurance: social security expansion, Medicare These programs did succeed in reducing poverty Welfare Reform By the 1980s, the consensus for public assistance had fractured; support eroded Social Security/Medicare FY 2008 Spending (Estimates) Social Security: $615 billion Medicare: $392 billion 34% of total spending FY 2012 Spending Social Security: $799 billion (+30%) Medicare: $487 billion (+24%) 39% of total spending Benefits Social Security: Retirement benefits (62, 65) Survivor benefits Disability Average monthly benefit: about $900 Medicare Hospital and outpatient medical care Prescription drugs (new) About 47 million recipients of SS (all forms) Funding Payroll tax (tax on wages) 6.2% of wages up to $97,500 (social security, indexed for inflation) 1.45% of wages (Medicare, no ceiling) Employer and employee each pay this, with a total tax rate of 15.3% ?Average? worker pays about $2,700-3,000 per year About 134 million workers pay these taxes Middle Class Entitlements Social security not ?means tested? In FY 2000 $35 billion in benefits went to households earning more than $100,000 $107 billion to households over $50,000 Favorable tax treatment of social security benefits (taxed at lower rate than ordinary income) Medicare prescription drug benefit: estimates are $1.2 trillion in 2006-2015 So What? Key factors: Social Security/Medicare not means tested Benefits paid out of current funding Long term solvency depends on: Number of people receiving benefits Number of people paying into the system (Right now 3 to 1) Demographic projects are unfavorable Over the next 50 years, the number of people receiving benefits will go way up, and the people paying into the system will drop The Future of Social Security After 2008 Spending increases even faster as The number of retirees grows (increased life expectancy) Medical costs continue to increase Baby boomers begin to retire (a person born in 1946 will be 62 in 2008) Benefits continue to rise (annual COLA?s tied to Consumer Price Index) The Mother of All Entitlement Problems That Doesn?t Sound Good At the same time that benefits are going up, the number of people paying into the program will be declining (relative to the population of recipients) The Baby Boom Generation born between 1946-1964 Increase in birth rate brought about by end of World War II and economic growth This generation will begin retiring in 2008, with a wave of retirements between 2008-2030 The number of beneficiaries will double by 2040 Social Security Administration routinely projects these population figures out 75 years Spending in the 21st Century Baby boomer retirement 2008-2030 (roughly) Spending projects aren?t in dollar amounts, but expressed as a percentage of GDP 1997: 7.38% of GDP Now: about 8% In 2080: about 17.6% Kerrey Commission (1995): entitlement spending alone will require all tax revenue collected by the federal government by 2020 Reforms? Major difficulty: every potential reform has major transition cost Options ?Trust fund? payments (current strategy) Partial privatization (PRAs) Cuts in benefits, means testing, increasing retirement age The ?Trust Fund? Since 1983, payroll taxes exceeded benefits Surplus invested in special treasury obligations Idea Build up balance in these obligations (trust fund) Use trust fund balances to pay benefits when benefits exceed revenues (which will happen starting in 2011 for Medicare and about 2018 for Social Security) Problem There?s nothing in the trust fund The trust fund is made up of government obligations; that is, an IOU backed by the ?full faith and credit? of the federal government These obligations are not cash. In effect, the government loaned money to itself, made a promise to repay it, and then spent the funds on current budget programs. In order to make good on these obligations, the federal government will have to fund them with some combination of either taxes or benefits cuts So that means that these obligations are really nothing but a paper promise to pay future benefits, that will still have to be funded like any other kind of spending Current balance of the trust fund About $1.8 trillion Reminder: the problem All current benefits are paid out of current revenues Can?t change revenue formula without affecting benefits Privatization: Allow people to give up future benefits, in return for being able to control some of their current taxes Original proposal: up to 4% combined with reduction in benefits for wealthy Have to find a way to pay current benefits until the first group of ?privatized? people retire December 10, 2007 Final Exam Wednesday, Dec 19th, 12:25PM Rooms Last Name A-L          272 Bascom Last Name M-Z         165 Bascom Normal policies apply.  Please be on time. Review Session Monday, Dec. 17, 7PM, room TBA Study guide distributed on Wednesday Contemporary Events Supreme court ruled Sentencing guidelines for crack cocaine are not binding on federal judges; Kimbrough v. United States Trading a gun for drugs is ?using? a gun in the transaction (it is a separate crime to use a gun in drug deals), but trading drugs for a gun is not; Watson v. United States In 2005, the CIA destroyed videotapes of interrogation of two terrorism suspects that occurred in 2002 The Washington Post reported that congressional leaders (including Pelosi) were briefed on interrogation techniques in 2002 (including waterboarding), and that no one objected Foreign and Defense Policy Difference from domestic policy Distribution and evolution of powers Challenges of contemporary policy Foreign vs. Domestic Policy Domestic government power based on theories of legitimacy and sovereignty Connection between government and governed Ultimate authority located in ?the people? in the US understanding Internationally, these conditions do not hold Basis for ?international law?? Collection of sovereign entities: who makes decisions? Based on what theory? International Behavior, Law and Treaties Explanation for state behavior: Realism (power politics) Interests Norms and values International Behavior, Law and Treaties International agreements to constrain government behavior UN Treaty Geneva Conventions Kyoto protocol (not ratified by US) Arms control agreements Reflect shared norms about behavior Often premised on mutual constraints Question: to what extent should foreign and defense policy be about self interest? Defining and protecting U.S. Security Interests Preventing Genocide (Rwanda, Bosnia) Moral vs. Utilitarian calculations Foreign Policy and Democratic values Foreign Policy Powers Congress Declare war Raise armies and navies Regulate foreign commerce Confirm ambassadors and ratify treaties President Commander in chief Appoint and receive ambassadors Negotiate treaties Executive power (controversial) Courts ? generally reluctant to intervene, although will place limits on government power (esp. executive) Evolution of these roles President now dominant in foreign and defense policy Commitment of US military without congressional authorization Control of institutions (military, intelligence) Public debate Assertions of constitutional power Secrecy Congressional disadvantages in this debate Theory of the ?unitary presidency? Security in the Post Cold War World Cold War paradigm National security as a function of military strength Active US intervention/international presence ?Bi-polar? world Clear view of our security interests, what the threat was State-centered threats Nuclear parity (Mutual Assured Destruction) lowered likelihood that conflicts would escalate Post 9-11 Presented new type of threat Non-state actors (Al Qaeda not a government) Threat of WMD use Inadequacy of deterrence Asymmetric warfare Cold war, state-centered policy no longer valid New National Security Strategy Released September 2002 Preemption (actually, prevention) Possibility of catastrophic attack without any warning Ballistic missile defense (small scale launches) In practice? Identification of ?axis of evil? (Iraq, Iran, North Korea) War in Iraq Iran? North Korea? Problems of Intelligence 9/11 exposed significant problems in the intelligence function Inability to share information with law enforcement (legal problems) Institutional biases and routines Competition among the different institutions Failure to identify threats Major intelligence reorganization after 9/11 Commission Establishment of Director of National Intelligence to report directly to president (above CIA director) National Counterterrorism Center Produces National Intelligence Estimates on key policy questions December 12, 2007 Iowa Democratic Market Obama rises due to Oprah influence and Clinton missteps Clinton at about 57% Obama at about 34% Republican Democratic Market Guiliani leads at about 38% Romney is at about 24% Huckabee is at about 21% Huckabee is winning in Iowa Review Session: Monday, 12/17, 7 PM, 2103 Chamberlain Problems of Intelligence 9/11 exposed significant problems in the intelligence function Inability to share information with law enforcement (legal problems) Institutional biases and routines Competition among the different institutions Major intelligence reorganization after 9/11 Commission Establishment of Director of National Intelligence to report directly to president (above CIA director) National Counterterrorism Center Produces National Intelligence Estimates on key policy questions Failure is Inevitable Most accounts conclude that intelligence failures are inevitable, even under the best of circumstances Intentions of potential adversaries are difficult to assess Ambiguous information and difficulty of identifying patterns Costs of hypervigilance Examples: Pearl Harbor Bay of Pigs Iraq (1990) 9/11 Iraq (2003) Iraq (2007) November 2007 NIE Concludes with ?high confidence? that Iran halted its nuclear weapons program Maintains that country could restart the program, potentially able to create weapon sometime between 2010-2015 Criticism Conflicts sharply with 2005 NIE, in which intel community believed that Iran was determined to obtain nuclear weapons Critics claim it is part of broader bureaucratic fight with the White House (charge that key authors were former State Department officials with axe to grind) Raises questions about when White House knew How Are We Doing in Iraq? Justification for war: WMD Connection to terrorism Regional democratization/liberalization Defiance of UN resolution Primary justification was the threat of WMD Iraq Post-war mistakes Number of troops ?De-Baathification? Rebuilding Process Harder than the Administration thought (nation building isn?t easy) Inadequate security/stability Cost ? hundreds of billions Public vs. private authority (prison abuse, contractors) Role of the United Nations Closer to Home Major transformation in domestic security institutions Bureaucratic Reform ? Department of Homeland Security Relationship between law enforcement and intelligence Homeland Security Threat of domestic attack 9/11 was 1st time since war of 1812 that an attack occurred on US soil Inherent vulnerability of an open society Department of Homeland Security (DHS) created in January 2003 Consolidated numerous security and law enforcement agencies Coordination with state and local offices (first responders) How will it Work? Difficulty in enacting major bureaucratic reform (why?) Why would agency officials see their own interests as different than those of political leadership CIA vs. FBI Goal: Intelligence vs. Law Enforcement Orientation: International vs. Domestic (mostly) Goal: Information, Analysis, Prevention, infiltration vs. Convictions, cases solved Initiator: Threat vs. Crime Broader Struggles Intra-agency disputes Contrasting views on GWOT Mueller: Lack of attacks since 9/11 show that threat has been vastly overestimated Terrorist attacks are counterproductive for sponsoring groups Massive effort ?defend[ing] against an enemy that scarcely exists.? Podhoretz (writing in 2002) 9/11 only latest move in a long series of attacks, to which the US failed to respond Decades of attacks linked by radical ideology, with broad public support in the region Victory requires fundamental reform Question Is there a way to resolve this dispute? Final Thoughts There is no meaningful theory of democratic politics that does not ultimately rely on a reasonably informed citizenry December 14, 2007 Reader Notes: Chapter 14 Evaluating Bureaucratic Performance: Can Government Be Run Like a Business? James Q. Wilson: What Government Agencies Do and Why They Do It Argues that government agencies will never operate like a business, nor should they be expected to Compares DMV (government bureaucracy) to McDonald?s (private organization) Agencies are not rewarded if they become more efficient, nor are they penalized for not performing their functions well Private organizations have much more control over their own goals and structure, and they are rewarded with increased profits if they become more efficient A government agency?s goals are often vague, difficult to measure, and sometimes contradictory. In business the goal is simple: to maximize profits The key constraints of public agencies: Government agencies cannot lawfully retain and devote to the private benefit of their members the earnings of the organization Government agencies cannot allocate the factors of production in accordance with the preferences of the organization?s administrators Government agencies must serve goals not of the organization?s choosing Business management focuses on the ?bottom line? (profits), where as government management focuses on the ?top line? (constraints) Key is that there is no incentive for DMV manager to improve his department. There is no payoff, and even if he doesn?t try to improve conditions he won?t lose any customers. Jacob Hacker: Bigger and Better Argue this does not mean that private organizations are always better than public ones Governments are almost always more efficient that private entities when it comes to health care, disability, or other broad-based insurance programs Insurance companies can screen applications or deny coverage for certain people, which makes economic, but not social sense. This is where government does a better job because they can spread the risk so widely and avoid the adverse selection problem (only high risk people buying insurance) and moral hazard problem (insured people behave in riskier behavior than they would otherwise) that insurance companies face. Considers Medicare efficient because it spends less on administrative expenses. Social Security only spends 1% overhead, far less than any financial services company. A private company could not do this at such low cost Although most things are more efficient in private form, some social programs such as medical insurance are more efficient if handled completely by the government Chapter 16 Economic Policy: Should Government Reduce Income Inequality? Anna Bernasek: Income Inequality, And Its Cost Believes that the ?alarming? growth in income inequality is a significant economic problem She cites studies that find inequality producing undesirable effects on health, corruption, and work effort, all of which have damaging implications for the economy These effects mean that inequality begets further inequality Feels policy change is necessary because current policies appear to be worsening the situation Donald Luskin: Still Movin? On Up Agrees that income inequality may be on the rise, but this has always been true in periods of high prosperity at the outset of economic revolutions The income gains of the rich have not come at any one else?s expense, as income has increased among all segments of the population Argues that income equality is useful to liberals for political purposes, as justification for policies they would support even if inequality were decreasing The Economist: Inequality and the American Dream The editors stake out a middle ground in the debate They argue that inequality is not inherently wrong, so long as society is getting richer, there is support for the poorest, and meritocracy-where rewards depend on one?s skills and talent-is vibrant Feel that government should allow the economy to remain vibrant and reward risk takers, but health care and the retirement system should be repaired to make sure that rapid economic change and job displacement does not leave individuals without vital coverage in these areas They believe that rather than try to maniupulate the economy to produce less income inequality, or artificially hold back the income of high earners, government must redouble its efforts to improve the education system to boost up those in the lower and middle portions of the income ladder Chapter 17 Social Policy: Who Wins and Who Loses If Social Security Is Privatized? Andrew G. Biggs: Stock Market Declines? Effect on the Social Security Reform Debate Sides with the belief that social security should be privatized Believes there is no alternative, because the entire system is currently structured as an unsustainable pyramid scheme, in which each generation?s retirees are funded through the next generation of workers Allowing people to take responsibility for their own accounts would lower costs, spur savings, and give individuals a much higher rate of return on their contributions Private accounts would save the system, which otherwise will require huge tax increases or harsh benefit cuts Brooke Harrington: Can Small Investors Survive Social Security Privatization Points out that most people lack the skills and knowledge necessary to make good investment decisions Feels that the central problem is one of ?information asymmetries,? in which sellers have more information than buyers Some groups of potential investors, such as women or minorities, are more likely to make conservative investment decisions that will hurt their long term returns, and reduce their economic security under a privatized system