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By John
F. O'Connell, Professor of Economics
 On
entering Holy Cross in the fall of 1960, I took the required
courses in philosophy, theology, Latin and Greek. By the
beginning of my third year it was clear I would have to find
a job after graduation so I enrolled in Principles of Economics
taught by Jim Gross. Many of my classmates and some of my
teachers were convinced that I had thrown in the intellectual
towel. Economics did not have the status of many, if not
most, other majors. But it was only one course, I protested,
and I might get hold of myself and become a dentist.
I felt inferior to my friend Jack Kavanaugh who was in pre-med; or Tom Wall who
was going on in philosophy; or George Hill, who, like most, asked whether he
had a vocation, but, like so few, answered affirmatively; or Charlie Amelin who
was so much better in mathematics; or Charlie Abdella whose oratorical skills
foretold judicial success, while I still waited for my voice to change. But like
each of them, I, too, cared about people and enjoyed pondering basic moral, ethical
questions about the role of the individual in society. Much to my surprise I
found economics utilized my talents and interests, that it was and continues
to be intellectually challenging and rewarding, and, though we may be hesitant
to admit it,
that economics plays a major role in all of our lives.
While historians will debate the Clinton legacy, it was during his term that
the welfare system was dramatically and irrevocably transformed. Summarized in
the cliché "from welfare to workfare," the change represents a case
study of the many parts of the science of economics. Let me summarize some of
the economic research that has driven the debate about welfare reform. Begin
with the premise that we want the highest level of well-being possible for the
members of our society. Early economists argued that this involved maximizing
the total happiness (utility) of the citizenry. But does that mean that each
member should be equally happy? If so, how do you measure happiness between optimists
and pessimists? Alternatively, should we provide everyone with equal resources
and leave
their use up to the recipient? But isn't it better to give more to those likely
to produce more? Or given different innate abilities, might some need more than
others to achieve the same level of happiness? What is a
feasibly "just" economic society? There is little consensus among economists
about economic justice. Some conclude that because there is not a clearly defined
goal, an objective function, then government policy cannot be effective and certainly
cannot be evaluated. Maybe policymakers know that.
But let's assume that we are able to settle on an objective (economists are great
at assuming they know the answer). How then do we make choices regarding alternative
ways of reaching that goal? In a democracy that might appear obvious: we vote
for political candidates who support what we think is best. But can we be certain
that individual preferences will in some way be collected and translated through
the voting system into a consistent social or collective ordering? Will special
interest groups be able to manipulate the voting system to serve their own purpose?
All the recent talk about political fund raising would lead one to believe that
politics is much more than a mechanism for collecting preferences.
The difficulty of arriving at an objective and making policy choices to reach
that goal is clearly illustrated by the social welfare system in the United States.
By the early 1980s, the costs of the myriad income support programs had grown
exponentially. Even
the staunchest supporters of the "Great Society" and "New Deal" wondered why
there seemed to be so little bang for the buck. Despite large injections of money,
the problems of poverty and unemployment remained and in some cases, for certain
groups, became more severe.
Where had the policymakers gone wrong? They undervalued the supremacy of the
individual and the effect of incentives on individual behavior. Each of my classmates
freely chose a career path that would yield a happy and rewarding life. In each
case what was good for the individual was also good for society. Rational people
know what's in their best interest and they behave in a way that is best for
them. If the government pays me more in a training program than I would make
in the actual job, there is little incentive to take the job and leave the program.
When welfare benefits are cut pari passu with increases in employment, the incentive
to work is lessened. On the other hand, an incentive structure that encourages
and rewards productive activity benefits both the recipient and others as well.
It is not a question of caring or not caring for the less well off, but of how
best to help those in need.
Economists believe that markets can be used to answer this question, at least
in part. But is it "just"? Potentially it is, because market efficiency
means we have the greatest amount of goods
and services to satisfy consumer needs. There are two theorems in welfare
economics. The first says that a competitive market system will exhaust all those
trades that are mutually beneficial to buyers and sellers (the direct theorem).
The second says that an efficient economy can be reached using market prices
(the converse theorem). Government policies, no matter how well intended, that
alter market prices lead to inefficiencies; the pie gets smaller even if the
piece going to certain groups gets bigger. Prices convey information and if you
tamper with the informational content
of the price you distort efficiency.
But what about the option for the poor? What about those people
who in a market economy will be locked into low wage, high turnover
jobs with little upward mobility,
or will be unemployable? Surely the government can and should help
these people. Economists who believe that the government has
such a responsibility suggest
the following: (1) policies should allow for individual choices
rather than be imposed; (2) policies should encourage individual
initiative and reward productive
behavior; and (3) policies should use the market system rather
than obstruct the workings of the market.
For the market to work, the good or service traded must have
clearly defined property rights. Policies that give people
ownership rights empower in ways other
aid programs do not. Let me be more specific. Public
housing in the United States never lived up to the expectations
of those that thought it would
improve welfare. But tenants in public housing have no incentive
to maintain the units or report acts of crime or vandalism. If
the rent took the form of
a mortgage,
an ownership right, it would be in the owner's best interest
to maintain the property. They would have an equity stake in
the unit that they could use at
some later time. The Earned Income Tax Credit is another example
of a policy that receives widespread support. Low-income families
earn tax credits (pay less
taxes) because they work. The disincentive effects of the tax
system are replaced with a positive incentive to be employed.
Economics is not about making legal decisions, like Charlie (the judge), or moral
decisions, like George (the priest) and Tom (the philosopher), or decisions about
one's health, like Kav (the doctor). Its argumentation is certainly not as analytical
or scientific as that of Charlie (the mathematician). But economics affects all
of them
in subtle, one might even say insidious, ways.
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