The Economic Analysis of Public PolicyA critical analysis of public policy decisions requires a far greater depth of knowl-edge than one receives from news reports and political speeches. Issues such ashow best to reduce traffic congestion, reduce acid rain, improve airline safety, ordevelopaparceloflandarebetterunderstoodbyorganizing,measuring,andweighing the effects of alternative policies. William K. Bellingers new text bookis an ideal introduction to benefitcost analysis, the economics of efficiency, riskanalysis, and present value discounting for those with only a modest backgroundin mathematics and economics.DrBellingerpresentsthekeyconceptsforanalyzingpublicpolicywithfrequentproblems,discussionquestions,andcasestudiesthroughoutthebook.Placingagreatemphasisonteachingaswellassharingknowledge,thisbookencouragesitsreaderstobothunderstandandapplyeachconceptandlearntoappreciate policy analysis as part of an interdisciplinary, analytical, and politicalprocess that can lead to better government policy decisions.ThisbookisanidealteachingtoolforundergraduateandMastersstudentsengaged in Public Administration, Public Economics, and Public Policy.William K. Bellinger is Associate Professor of Economics at Dickinson College,Pennsylvania.The Economic Analysis of Public PolicyWilliam K. BellingerFirst published 2007 by Routledge2 Park Square, Milton Park, Abingdon, Oxon 0X14 4RNSimultaneously published in the USA and Canadaby Routledge270 Madison Ave, New York, NY 10016Routledge is an imprint of the Taylor & Francis Group, an informa businessAll rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means,now known or hereafter invented, including photocopying and recording,or in any information storage or retrieval system, without permission inwriting from the publishers.British Library Cataloguing in Publication DataA Catalogue record for this book is available from the British LibraryLibrary of Congress Cataloguing in Publication DataBellinger, William Kenneth, 1950-The economic analysis of public policy / William K. Bellinger.p. cm.Includes bibliographical references and index.1. Policy sciencesEconomic aspects. 2. Political planningEconomic aspects. 3. Economic policy. I. Title.H97.B4655 2007320.6dc222006102504ISBN10: 0-415-77277-X (hbk)ISBN10: 0-415-77278-8 (pbk)ISBN10: 0-203-94648-0 (ebk)ISBN13: 978-0-415-77277-8 (hbk)ISBN13: 978-0-415-77278-5 (pbk)ISBN13: 978-0-203-94648-0 (ebk)This edition published in the Taylor & Francis e-Library, 2007.To purchase your own copy of this or any of Taylor & Francis or Routledgescollection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.ISBN 0-203-94648-0 Master e-book ISBN 2007 William K. BellingerContentsAcknowledgments xiPART IPolicy analysis, politics, and ethics 11 The meaning of policy analysis 3A brief history of U.S. policy analysis 4The goals of public policy 5The steps in policy analysis 6Views of government and the roles of the policy analyst 7Critical thinking as a policy tool 10Critical thinking about policy analysis 16Conclusion 17Review questions 182 Ethics for policy analysts 21Ethical goals 22Utilitarianism 26John Rawls and the difference principle 30Robert Nozick and the ethics of the minimalist state 33A graphical representation of income redistribution and ethical theory 36Conclusion 44Review questions 46vi ContentsPART IIEconomics for policy analysts 493 A review of markets and rational behavior 51What is perfect competition? 51Demand 53Supply 55Equilibrium 56The price elasticity of demand 58The net benefits of consumption 59The net benefits of production 64The net benefits of markets 68Rational consumer choice and the role of incentives 69Incentives and policy problems 76The limits of consumer surplus 78Conclusion 82Review questions 824 Efficiency and imperfect markets 87What is efficiency? 87Pareto optimality 88Other efficiency concepts 92The competitive market and Pareto optimality 95Market imperfections and inefficiency 96Numerical examples of net gains and deadweight loss 107Public goods 113Conclusion 114Review questions 1145 Efficiency and the role of government 118The minimum role of government 119Taxes in competitive markets 119Other forms of government involvement 122A case study: agricultural subsidies 125Government intervention in imperfect markets 129Public choice and government failure 136Conclusion 143Review questions 144PART IIITools for analyzing public policy 1496 An introduction to benefitcost analysis 151The process of benefitcost analysis 152Decision criteria for benefitcost analysis 153Types of policy decisions 155Benefits and costs using efficiency concepts 161Cost-effectiveness analysis 162Weighted net benefits 165Conclusion 168Review questions 1697 Net benefits over time and present value 173Investment versus saving 174If you save: compound interest 175If you invest: foregone interest and present value 177The present value formula 180Present value with infinitely long net benefits 182Alternatives to present value 182Inflation and the discount rate 185Examples of federal government discount rates 186Choosing among alternative projects 187Conclusion 189Review questions 189Appendix: The Forrest Center for the Arts, an extended case study 1908 Choosing a discount rate 197The ideal market for loans 197Distortions in the loans market 200The shadow price of capital method 204An extended case study 205The weighted discount rate 207Other issues in choosing a discount rate 207Long-term policies and intergenerational equity 210Conclusion 214Review questions 215Contents vii9 Policy analysis involving risk and uncertainty 217Measuring risk and uncertainty 218Expected value 219Decision trees 221The expected utility model 225Risk aversion and the willingness to pay for insurance 228Option value and expected net benefits 232Risk and the discount rate 235Uncertainty and policy analysis 238Conclusion 242Review questions 24210 The value of life and other non-marketed goods 245Methods of valuing non-marketed goods 245Explaining the value of life 247How to estimate the value of life 250Case study: child safety seats in autos 252Another case study: child safety seats in airplanes 253Alternatives to the dollar value of life 255Other non-marketed goods 260Conclusion 262Review questions 26211 Economic impact analysis: macroeconomics in a micro world 265An overview of economic impact analysis 266Estimating direct spending 267The Keynesian multiplier and secondary economic impacts 269Economic base models 271Inputoutput models 275Measuring indirect and induced spending 277Measuring an institutions effect on local government 278The role of spending surveys 279Economic impact case studies 280Conclusion 284Review questions 285viii ContentsPART IVPublic policy cases 28712 Urban transportation policy 289Related economic concepts 290Modal choice and transportation demand 291Highway congestion 293Transportation data 294Highway construction and congestion 296Policies to reduce rush-hour driving 300Urban mass transit 303Case study: MARTA and the Atlanta Inner Core Study 304Location and development options 308Conclusion 309Review questions 30913 Pollution control policy 312Economic views of nature and pollution 313The benefits of pollution control 316Benefitcost analysis of reducing pollution 320Policy goals: how much and where to reduce pollution 322Direct regulation and pollution control 325Incentive approaches to pollution control 327Comparing direct regulation and incentives 332Pollution policy examples 332A note on the politics and rhetoric of pollution control 336Conclusion 337Review questions 33714 Poverty and income support policies 340What is poverty? 341The United States absolute poverty measure 343Criticisms of the U.S. poverty line 345Relative poverty 346Broader measures of inequality and poverty 347Who are the U.S. poor? 350Analyzing U.S. public assistance 350The 1996 U.S. welfare reform law 356In-kind versus cash benefits: the food stamp problem 361Conclusion 363Review questions 363Contents ix15 Policies for the working poor: training, worker subsidies,and the minimum wage 366The problem: skills and the labor market 366A brief history of U.S. public sector job training 369Evaluating training programs 372Job training studies 375The minimum wage 377A debate over the minimum wage 380The earned income tax credit 382Conclusion 384Review questions 385Appendix: a more complicated training case 387Your Turn solutions 391Notes 411Bibliography 417Index 427x ContentsAcknowledgmentsWhile hundreds of former and current students and dozens of local and regionalprivate and public sector officials provided indirect and often unintended inspira-tionforthisbook,asmallernumberofindividualsprovidedmoredirectandsubstantial aid in its completion. I particularly wish to thank Jonathan Rogers, aformer student, who contributed many of the review questions found in this bookaswellasanundergraduatespointofviewontheclarityandsubstanceofthetext. I also owe a debt of thanks to Drs. Stacy Dickert-Conlin, Nicola Tynan, andKristinSkrabisfordetailedcommentsonselectedchapters,andtoRobertLanghamforencouragingmyassociationwiththepublishers,Routledge,andgreasing the wheels of the editorial and review process. Also, I wish to expressmyappreciationtoformerinstructorsandcolleaguesforintroducingmetothedisciplinary, interdisciplinary, and applied contexts of policy economics. W. KipViscusi,GeraldGoldstein,CyrilDwiggins,MaraDonaldson,ChrisGulatta,JamesHoefler,andEugeneHickokwereparticularlymemorableinthisregard.Finally, I wish to express my thanks and love to Jane, Brian, and Lynne. Even thetiniest fleet needs a home port.Part IPolicy analysis, politics,and ethicsThe first chapter of the book introduces the reader to the basic meaning of policyanalysis and its various uses in the political process. The chapter also discusses theprocess of critical thinking about the arguments and evidence presented in policyresearch and political discussion. The second chapter introduces the reader to a setof basic ethical goals for public policy, as well as three theories of distributionaljusticethatcanbeproductivelyappliedtosomeapplicationsofpolicyanalysis.Thosewhowishtogetrighttotheeconomicsmightbetemptedtoskipthissection. In my view the costs of that choice will ultimately outweigh its benefits.1 The meaning of policyanalysisDonotbelieveinanythingsimplybecauseyouhaveheardit.Donotbelieveinanythingsimplybecauseitisspokenandrumoredbymany.Donotbelieveinanything simply because it is found written in your religious books. Do not believein anything merely on the authority of your teachers and elders. Do not believe intraditionsbecausetheyhavebeenhandeddownformanygenerations.Butafterobservationandanalysis,whenyoufindthatanythingagreeswithreasonand isconducivetothegoodandbenefitofoneandall,thenacceptitandliveup to it.1 (Gautama Siddharta, the founder of Buddhism)my way is to divide half a sheet of paper by a line into two columns; writing overthe one Pro and over the other Con. If thus proceeding I find where thebalance lies I come to a determination accordingly. I have found great advan-tage from this kind of equation, in what may be called moral or prudential algebra.2(Benjamin Franklin)At the most general level, efforts to weigh the benefits and costs of a public orprivate decision involve some version of the type of rational analysis presented inthisbook.Atoneextremethisdecisionprocesscantaketheformofalistofpluses and minuses, as in the quote by Benjamin Franklin. At the other extremethe decision process can include efforts to measure all relevant benefits and costsusing a common scale such as dollars in order to determine the wisdom of a deci-sion. In either case, the goal is to organize and compare the various effects of adecision in order to choose the action that most effectively improves individual orsocietal well-being.YourTurn1.1: Createalistofthebenefitsandcostsofattendingcollege. Include benefits that will occur in the future as well as the pres-ent, effects on others and on society as a whole as well as yourselves,and non-monetary as well as financial benefits and costs. After makingsome judgment about which benefits and costs are most important, doyour benefits outweigh your costs?If policy analysis involved only lists of positive and negative effects of decisionssuch as attending college it would not warrant an entire semester of your time oryourpurchaseofthisbook.Moreover,asimplelistofpositivesandnegativeswould not answer the following crucial questions: (1) Are the total benefits of thispolicy greater than the total costs? (2) Does this product or policy offer greaternet benefits than another alternative? (3) How large a budget is required for thispolicy?Adetailedanalysisofpolicyalternativescanhelponetoanswersuchquestions.The degree of accuracy and detail of professional policy analysis depends ontheamountofinformationavailabletotheanalystandthesettinginwhichtheanalysis takes place. The most thorough form of policy analysis is benefitcostanalysis, which attempts to estimate dollar values for all benefits and costs, evenwhenthegoodinquestionisneveractuallyboughtorsoldandhasnoexplicitmarket value. For example, the benefits of a new section of highway include timesavings for travelers as well as possible reductions in energy use and air pollutiondue to the lessening of congestion. Costs include construction spending, the lossof the benefits of alternative projects, added noise, increased danger from higherspeeds, and an increase in road kill. Most of these benefits and costs are not deter-minedinthemarketplace.However,somecommondenominatorisneededinorder to compare the projects benefits and costs. Policy analysis usually relies onestimateddollarvaluesforjudgingbenefitsandcostsevenwhenmarketpricesarenotavailable.Thisdollarvaluationofnon-tradedgoodsisamongthe mostdifficultandcontroversialaspectsoftheeconomicapproachtopolicy analysis.A brief history of U.S. policy analysisPrincetonUniversityprofessor,andlaterU.S.president, Woodrow Wilsonledamovement for the scientific administration of government in the late 1800s, andthe explicit goal of achieving positive net benefits from a United States govern-mental program dates back at least to the 1930s. However, the main proliferationof policy analysis in the U.S. federal government began in the 1960s. The foun-dationfortheU.S.federalgovernmentsregularuseofpolicyanalysiswasprovidedbythePlanningProgrammingandBudgetingSystem(PPBS)estab-lishedintheDepartmentofDefensebythenSecretaryofDefenseRobertMcNamara. Policy analysis became an established part of other agencies opera-tions during the mid-1960s War on Poverty. Policy analysis offices were estab-lishedintheOfficeofEconomicOpportunityandtheDepartmentofHealth,Education,and Welfareduringthattime(seeRadin2000:13-27). Atthesametime a large number of studies of the Johnson administrations War on Povertysjob training programs were undertaken by university professors. Academic analy-sis remains one of the most common sources of information about public policy.Also,independentresearchinstitutes,orthinktanks,spranguporincreasedinnumberandresearchemphasisduringthisperiod,andover100suchorganiza-tions currently exist around the Washington DC area (Radin 2000: 39).4 Policy analysis, politics, and ethicsResearchinstitutesvaryintheirdegreeofspecializationandtheirideologicalframework. Some specialize in a limited range of policy areas, such as the environ-ment, transportation, or defense policy, while others offer analysis and opinion on awiderangeoftopics.Someofthemostprominentoftheseorganizationshaveevolved into ideological combatants on a wide range of policy issues. A few exam-ples of organizations with identifiable ideologies and a wide range of policy concernsaretheCatoInstitute(http://www.cato.org/)andthe AmericanEnterpriseInstitute(http://www.aei.org/), which tend to produce conservative analyses of a wide rangeof issues, the Brookings Institution (http://www.brookings.edu/), which is consideredmore centrist in ideology, and the Economic Policy Institute (http://www.epinet.org/),which has a liberal or progressive viewpoint. Because the ideology of such organiza-tions is often aligned with that of a subset of one of the major U.S. political parties,thepoliticalindependenceoftheseorganizationsissometimesunclear.However,comparing the work of various think tanks can be an illuminating experience for anystudent,sincetheirworktendstobefarmoresubstantivethanthatofgeneral-interest publications, television and radio news, or political debates.The goals of public policyWhile this book will occasionally consider the role of institutions and interest groupsin policy debate and implementation, its primary role is to present and apply a set ofbasic economic concepts that can be used to judge and compare alternative publicpolicies.Policyanalysisanalyzesalternativepoliciesaccordingtoatleastthree criteria: efficiency, equity, and political practicality. Each of these concepts involvessomedegreeofcontroversyregardingmeaning,measurement,andrelativeimpor-tance. In the case of economic analysis, efficiency is usually the dominant policy goal.EfficiencyAccordingtoeconomictheory,asocietyachievesallocativeefficiencyifitprovides the greatest possible level of well-being for society given a limited set ofresources. Atthelevelofanindividualpolicy,efficiencyisgenerallytranslatedinto maximizing the difference between the total benefits and total costs of thatpolicy.Thesebenefitsandcostsincludenon-monetaryaswellasmonetaryfactors, and both direct and indirect effects. While the economic theory of effi-ciencyiswellestablished,theanalysisofefficiencyofteninvolvessignificantchallengeswhendefiningandmeasuringspecificbenefitsandcosts. Also,thegoal of efficiency may conflict with other policy goals such as equity or fairness,producinglegitimatedebateamongthoseondifferentsidesoftheissue.Efficiency will be discussed in much greater detail in Chapter 4.EquityAsagoalofpublicpolicy,equitygenerallyinvolvesthepursuitofoneormorebroad goals such as income equality, minimum standards of treatment, or freedom.The meaning of policy analysis 5Aswithefficiency,determiningapolicysabilitytomeetequitygoalscanbedifficult, and conflict between ethical and other policy goals presents a frequentchallenge for policy makers. For example, equality can be divided into multiplesubtopicsincludingequalincome,equalrights,equalopportunity,andequalaccesstopublicservices.Manyofthesedimensionsofequalityaredifficulttodefineormeasure,andinsomecasesthesealternativedimensionsofequalitymay be contradictory.Furthermore, there are many ethical theories with conflicting conclusions andpolicyprescriptions.ThreeexamplesofethicaltheorieswillbepresentedinChapter 2. The lack of an accepted ethical paradigm for policy analysis tends tolessen the practical importance of ethical theory, yet the view of this book is thatethical goals provide an important basis for weighing the legitimacy of compet-ing political positions. Since many policy debates involve claims of injustice orimmorality, the failure to include ethical considerations in this text would leavethe student without the means of judging these frequent, and frequently misused,claims of right and wrong. The challenge for those who wish to seriously considerthe moral dimension of public policy is to learn enough about ethical theories tobeabletologicallyanddispassionatelyjudgetheclaimsofrightandwronginpolitical debates. That process will not be completed in this book.Political practicalityA third goal of public policy is political practicality. A policy will be politicallypracticalifithassufficientsupporttobepassedintolawandpracticebythelegislative and administrative branches of government. Political practicality alsoinvolves meeting the broader rules and norms of government, such as the UnitedStates Constitution or British Common Law, in order to survive a possible judi-cial review. In addition to passing constitutional review by the courts, a success-ful policy must achieve popular and legislative support in order to pass into thelegal code, and must then be effectively administered in order to have a signifi-cant effect on the public. There are many possible barriers to the establishment ofa fully effective law or public program. A brief review of the economic analysisof the political process and its challenges is included in Chapter 5.The steps in policy analysisA useful guide to the policy analysis process is provided by the U.S. governmentsOfficeofManagementandBudget(OMB).3ThefivestepsforpolicyanalysissuggestedbytheOMBare:(1)statethepolicyrationale, orthegoalofthepolicy,(2)explicitlystatetheassumptions usedintheanalysis,(3)evaluatealternatives, includingdifferentprogramsizes,programmethods,andpublicsector involvement, (4) identify and measure benefits and costs, and (5) verifyresults throughfollow-upstudies.AmorecompleteandreadablelistofstepscomesfromEugeneBardach(2000:1-47),whosuggestsaneight-steppolicyanalysis process. These steps are: (1) define the problem, (2) assemble evidence,6 Policy analysis, politics, and ethics(3)selectcriteriaformakingthedecision, (4)constructalternatives,(5)predicttheoutcomeofeachalternative, (6)confrontthetradeoffs,(7) make recommendations, and (8) tell your story. I reversed Bardachs steps 3and4inordertoseparatethegeneralanalysisoftheproblemmorecompletelyfrom the analysis of a specific policy.These two lists of steps overlap in several ways. For example, stating a policyrationale generally requires one to identify the problem being addressed and howthe policy will reduce or eliminate that problem. Explicitly stating ones assump-tions is part of defining the problem and the criteria for judging alternative solu-tions. Given imperfect information about a problem and the effects of alternativepolicies, assumptions are usually an important part of ones measurement of bene-fits and costs, particularly when predicting the future effects of a proposed policy.TheprimarydifferenceinthetwolistsisthattheOMBproceduresdonotinclude policy recommendations. This difference is a matter of debate within thefieldofpolicyanalysis,andreflectsdifferentviewsoftheroleoftheanalyst.Withingovernmentagencies,decisionsregardingpolicyareusuallymadebyhigh-ranking officials with political as well as administrative responsibilities. Inthis context it is often not the place of a staff economist or policy analyst to makerecommendations regarding policy. On the other hand, there are situations withingovernment where analysts conclusions and recommendations can be part of theprocessofadvisingdecisionmakers. Also,analystsworkingoutsideofgovern-ment have fewer constraints on their role, and often include policy recommenda-tions in their analysis.Views of government and the roles of the policy analystLike policy professionals from any field, economists have several potential rolestoplayinthepolicyprocess.ThreesuchrolesarediscussedinanarticlebyRobert Nelson (1987). These roles are based on differing theories of governmentthat have been popular at some point during the past century. Nelsons first rolefor the policy analyst is the progressive neutral expert (1987: 52). This role isbased on the progressive eras4view that the administration of government shouldbeabovecorruptinginterestsandbasedonsoundmanagementprinciples (see Wilson 1941, reprint). In this vision of government, the rational analysis ofpolicy has a powerful role in determining governments course of action. Whilethegrowingimportanceofbenefitcostanalysisoverthepastfewdecadessuggestsacontinuingroleforthisview,realitysuggeststhatpoliticalpowerremains a more important force in the success of a policy initiative.Robert Nelsons second role for the policy economist is labeled the entrepre-neur for efficiency (1987: 54). The entrepreneur for efficiency conducts policyanalysis and also actively promotes economics or efficiency-based policy designs.Thismoreactiverolefortheanalystisbasedonanewertheoryofgovernmentbehavior that was developed in the 1950s and remains influential today. This viewseesgovernment,andparticularlythelegislativeprocess,asastruggleamongcompeting groups promoting their own self-interest (Truman 1941, reprint).The meaning of policy analysis 7Withinthisviewofgovernmentpolicyanalysisservesatleasttwopurposes.First, the evidence provided by policy analysts serves as support for arguments infavorofparticularpolicypositions.Studiesandresearchfindingsareregularlyusedasevidencebyadvocatesofaparticularpoliticalpartyorprivateinterestgroup, and such groups often fund research that is likely to support their point ofview.Ontheotherhand,independentpolicyresearchmayservetomediateorresolvedebatesamonginterestgroups. Atsomepointdecisionmakersmaybepersuaded by evidence that one or both sides are offering inaccurate or misleadingfacts or argument in a policy debate.Nelsons third role for the government economist is the ideological combatant.This role is based on the idea that ideology as well as self-interest guide policymakers, and that the battle of ideas may be as important as the battle of interestsindeterminingpublicpolicy.Intheintellectualarena,theprimaryideologicaldebates between economists and others often occur over the role of markets andincentivesinpolicydesign,theroleofprivatebusinessinajustsociety,and theeconomists effortstoplacedollarvaluesonnon-marketedgoodssuchasenvironmental resources and human life.Nelsonsprimaryexampleofanongoingideologicalbattleoccursbetweeneconomists and non-economists in the area of environmental policy. Many envi-ronmental policy arguments combine scientific evidence of environmental harmwith relatively absolute views of right and wrong. Environmental advocates oftenframe their discussion in terms of greedy corporations and the infinite value ofnature and human life. This approach leads to support for stringent environmen-tal standards and the rejection of any consideration of the costs of such standards.Ontheotherhand,environmentaleconomistsusuallyadvocatetheimpartialweighingofallbenefitsandcostsofenvironmentalpolicies,includingnon-environmental factors such as jobs and income. These different values and meth-odstendtoproducedifferingconclusionsregardingtheappropriateamountofpollution reduction. Non-economists often support the greatest technically feasi-ble level of clean-up, while economists tend to support the greatest level of clean-upforwhichthebenefitsoutweighthecosts. Anotherdimensionofthedebateover environmental policy is the method by which pollution is to be controlled.Economiststendtofavorincentive-basedapproachessuchastaxesorpollutionpermits,whilenon-economistswithlessfaithinself-interestormarketforcestendtoadvocateexplicitregulatorystandards.Elementsofthisdebatearepresented in Chapter 13.Advocacy and analysisNelsons entrepreneurs for efficiency and ideological combatants operate withinaworldofpartisanpoliticsandpoliticalinfluence.Inthecontextofcompetinginterests and ideals, conflict often exists between relatively objective analysis andpoliticaladvocacy.Anadvocate isonewhopleadsthecauseofanotherorsupports any cause by argument (Websters 1939). Most modern legal systemsarebasedonopposingadvocatesfortheprosecutionandthedefense,asystem8 Policy analysis, politics, and ethicsthathasitsrootsinRomanlaw. Thedutyofalegaladvocateistobuildacasesupportingonesideinatrial.Thedutyofthejudgeorjuryistoweightheevidence and argument from the two sides in order to render a balanced decision.Inthecaseofpublicpolicy,advocacyinvolvesthesupportofaspecificpolicygoal or point of view, and also tends to act by building a case for one side of eventhemostdebatablepolicyproposals.Advocatesforaparticularviewpointarelikely to be biased in a number of ways, and being able to identify these sourcesof bias is crucial if a student is going to be able to think critically and objectivelyabout policy.5Most policy debates among advocates are likely to involve disagreements overvalues, definitions of the problem, evidence, and policy conclusions. Advocatesfor a particular interest group or ideology will provide a set of value arguments,definitions,evidence,andpolicyrecommendationsdesignedtosupporttheirpoint of view. Of course, the use of policy analysis as part of a persuasive argu-ment requires that the findings in the policy study are consistent with the goals ofthe advocate. Hence, selective use of policy analysis and other evidence is a nearcertainty in political debates.Inadditiontotheselectiveuseofevidence,itispossiblethatpolicyanalystsmight be pressured to modify their results or the way they are expressed. In orderto reduce the probability of such political influence at the federal level, U.S. staffanalystshaveprotectionfrompoliticalinterferenceotherthaninthechoiceoftheirresearchassignments.ThefederalgovernmentsOfficeofPersonnelManagement acts under the following policy statement:Federal employees are hired, promoted, paid, and discharged solely on the basisof merit and conduct their ability to do their job. They provide special protec-tions for veterans, victims of discrimination, and those who expose Governmentwasteorfraud. Theyalsoguaranteeourpublicemployeesdueprocessinanyaction that threatens their employment, as well as the right to join unions andbargaincollectively.Withtheseenablingprinciples,ourcivilservicesystemensures that politics and political party, as well as other non-merit factors, haveno bearing on the tenure of our civil servants, from the entry level clerk to thecareer members of our Senior Executive Service who lead them.6This system of protection from political pressure is supported by a system of dueprocessforhandlingcomplaints.However,effortstoinfluenceresultsmaystilltakeplace.TheUnionofConcernedScientists surveyoffisheriesscientistsreported that nearly one-quarter of respondents had been pressured to alter or cuttechnicalinformationfromareport(Smith2005).ThedirectorofPublicEmployeesforEnvironmentalResponsibilitystatedthatitsWashingtonofficereceived three complaints per day from government scientists during the ClintonadministrationandaboutfivecomplaintsperdayduringtheGeorgeW.Bushadministration(Smith2005). Academicresearchersaremorelikelytobeinde-pendentofdirectpoliticalinfluence,butallresearchsupportedbyprivateorpublic funding sources could be subject to some degree of financial influence.The meaning of policy analysis 9Anotherinterestingdimensionofpolicyanalysisisthatresultscanbestoredandreconsideredwhenacrisisemergesortheissuebecomesnewsworthyforsomeotherreason.Forexample,intheaftermathofHurricaneKatrinain2005somelookedatimagesofthelargelysubmergedcityofNewOrleans,sawapredominantlyAfrican-Americanpopulation,andrespondedwithargumentsabout race, class, and the lack of access to transportation for the poor. Others sawvisionsoflootingandviolenceamongsomeofthesamepopulationanddrewconclusions regarding the moral decay of at least some parts of American society.Environmentalistspulledoutoldpapersonthecostsoflosingwetlandsandbarrier islands. Macroeconomists pulled out their models and forecast macroeco-nomicslowdownsandhigherenergyprices.EngineeringstudiesofsouthLouisianas system of levies were reconsidered and widely quoted. Very little ofthisanalysiswasactuallycompletedafterthehurricane,butthenewevidenceprovidedbytheaftermathofthestormcreatedimportantapplicationsforolderanalysis, as well as a catalyst for the re-emergence of old political debates.Interdisciplinary analysisAnotherimportantpartofthepolicyanalystsjobistheneedtoconsiderideasfrommultipleacademicdisciplines. Aneffectivepolicyanalystmustbeabletotrade ideas with engineers, other social scientists, lawyers, government officials,andthegeneralpublic.Forexample,theanalysisofinfrastructureinvestmentssuch as highways or mass transit systems requires input from transportation engi-neers,whiletheanalysisofcrimepolicymayrequireinputfromcriminologistswith backgrounds in sociology or other social sciences, as well as experts in lawenforcement. Informed discussions of environmental policy require informationfrombiological,chemical,geological,orenvironmentalscientists.Inaddition,communication with public administrators, elected officials, and other interestedparties is essential to the effectiveness of policy analysis, in part because one ormore of these groups is probably sponsoring the analysis, and also because theyhave an active role in implementing legislation or regulations related to the policyin question. When communicating with administrators, an economic analyst mayhave to defend, or at least explain, the method and results of benefitcost analysis.Inthatsenseanalystsalsotaketheroleofteachers.Thesamecommunicationability applies to ones interaction with clients in the private sector.Critical thinking as a policy toolThe rest of the chapter will critically review some of the elements of argumenta-tion and critical thinking, and then briefly critique benefitcost analysis in lightoftheseelements.Soundpolicyanalysisdependsononesabilitytoorganizeanalysisusingestablishedprinciplesoflogicandevidence. Abriefreviewofafewimportantcriticalthinkingconceptsmayimprovethequalityofyourownanalysis,aswellasimproveyourabilitytocriticallyanalyzetheanalysis ofothers.Theseconceptsareusefulwhenanalyzingseverallevelsofpolicy10 Policy analysis, politics, and ethicsanalysis from the sound byte in a political advertisement to professional journalarticles.Models and assumptionsAnalyticalmodelsprovidetheunderlyingdefinitionsandlogicthatarepartofanywell-constructedargument. Thesemodelsmaybebasedonsocialscience,physicalorbiologicalscience,legalscholarship,moralphilosophy,orotheracademicfields. Anyanalyticalmodelwillcontainthefollowingcomponents: (1)underlyingassumptionsandvaluejudgments,(2)definitionsofterms, (3) causal relationships, and (4) logical conclusions.7Models usually are judgedontheirabilitytoexplain,predict,orproductivelyguidehumanactions.Inthesocial sciences the conclusions of theoretical models take the form of predictionsabout human behavior or the effects of policy alternatives.Assumptions,definitions,andcausalrelationshipsareworthyofadditionaldiscussion.Assumptionsareprobablythemostcontroversialcomponentsofeconomic models. Assumptions are stated or unstated value judgments, defini-tions,andinterpretationsoffactthatareusuallymadewithoutsupportingevidence. Their primary role in an analytical model is to simplify and focus theanalysis. For example, economists often assume that markets are competitive andefficient unless otherwise noted. Similarly, Marxists assume a set of social rela-tions between classes that include elements of oppression and exploitation of theworking class. Finally, analysis based on race, class, gender, or other categoriesof the population implicitly assumes that members of a given group are similarenoughtobeanalyzedwithoutexplicitreferencetoindividualdifferences.Aswiththeeconomicassumptionsofpurecompetition,thesearesimplifyingassumptions that are essential to creating a relatively clear analysis. Assumptions,whether or not they are explicitly stated, are absolutely essential as the foundationofanysubsequentargument.However,becauseassumptionsarenotsupportedwith logic or evidence, they should always be used with care and humility.Interpreting evidenceAstrongargumentmustbesupportedbyevidence. Thissectionwillpresentabriefreviewoftypesofevidenceandtheirlimitations. Thereareatleastthreegeneral categories of evidence used to support policy analysis and policy recom-mendations.Theyarecasestudies,expertopinionandresearch,andgeneralstatistics. Each will be discussed briefly.Case studiesA case study involves a detailed evaluation of an individual person, firm, industry,orgeographicarea.Casestudiesaredeliberatelylimitedinscopeinordertoemphasizedetailedinformation.Casestudiescanbeusefulforidentifyingtheprocess through which a problem develops. For example, case studies of sexualThe meaning of policy analysis 11harassmentintheworkplacecanidentifywaysinwhichharassmentoccursaswellasthepsychologicalandphysicaleffectsoftheharassmentonitsvictims.Because of the individual detail possible in case studies, they are uniquely capa-ble of displaying the human effects of a particular problem, and thereby can bringforth an emotional response from the public and the decision maker.The primary weakness of the case study is its inability to answer a few funda-mental questions about a policy problem. Most obviously, case studies are inher-entlyincapableofidentifyinghowfrequentlyaproblemoccurs.Itisusuallynecessary to know the frequency of a problem in order to determine the resourcesneeded to deal with it. Similarly, the broader causes and effects of a policy prob-lem, such as total costs or global impacts, cannot be addressed effectively throughcasestudies.Also,thesubjectsofcasestudiesmightbechoseninabiasedmanner and therefore may be misleading or unrepresentative. Whether or not thecase chosen for analysis is actually biased, the limits of the case study make sucha charge difficult to refute without further evidence. Overall, case studies can playa positive role through their ability to add detail and a human touch to ones argu-ment, but because they cannot determine the frequency or seriousness of a socialproblem,theyaremosteffectivewhenusedincombinationwithmorebroadly-based forms of evidence such as scientific studies or broadly-based statistics.Expert opinion and research findingsExpertise is usually measured by ones academic degrees, publication record, andexperience. However, an experts opinions can be subject to the same ideologicalbias as those of a layman or politician, and can be analyzed using the same typeofquestions.Forexample,isanexpertsconclusiontypicalofresearchinthatarea? Is her argument fully supported by logic and evidence, or is it weak in oneorbothrespects?Suchquestionshelpguideonescriticalthinkingaboutanyissue. Advocatessometimeshavearangeofexpertsorstudiestochoosefrom,and their choice is likely to be highly influenced by their policy goals and pointsof view.Anotherdimensionofinterpretingpolicystudiesinvolvestherangeofesti-matedeffectsofagivenpolicyorproblem.Whenoneconsidersaliteraturereview of a policy topic, he or she should pay attention to the range of results inaddition to the typical median estimate. For example, at this time there is a rela-tively wide range of estimates of the expected rise in global temperatures over thenextcentury. Awiderangeofestimatesimpliesasignificantdegreeofuncer-tainty about the facts and models related to an issue. Environmental advocates arelikelytotellstoriesbasedonrelativelyhighestimatesoftemperaturechange,while a common position of environmental conservatives is to argue that the widerange of evidence suggests that further study is needed before any action shouldbetaken.Sometimesacloserlookcanleadtoanarrowingoftherange.For example, a review of the employment effects of the minimum wage (Brown et al.1982) found that while a relatively wide range of predictions exists, more sophis-ticated studies tended to cluster near the bottom of the range, indicating that the12 Policy analysis, politics, and ethicsemployment effects of the minimum wage tend to be relatively minor, at least inthe short run.Occasionally you will hear that a particular study has disproven an entire set ofprevious studies about a particular topic. In some cases this type of statement maybe true, but often this is a slanted conclusion based on ideology. For example, poli-tical supporters of a higher minimum wage sometimes argue that a study by Card andKrueger (1994) disproved the idea that a higher minimum wage causes a decrease inemployment. After many decades of research about the minimum wage, it is a ratherlarge leap of faith to suggest such a conclusion based on one or a few contradictorystudies. The minimum wage is discussed in greater detail in Chapter 15.Official statisticsStatistics from the government and other public and private organizations provideanother prime source of evidence for public policy analysis and debate. In someways,officialstatisticsareattheoppositeextremefromcasestudies.Theirprimary strength is their ability to identify the frequency or breadth of a problembased on large samples of the population.8Anyone who has taken a basic statis-tics course should understand that even official statistics are estimates rather thanfacts. However, given the large samples used for most national statistics, measure-ment error is likely to be small. The controversies surrounding government statis-tics are usually based on their definitions or their use by advocates rather than theirmeasurementaccuracy.Understandingthelimitsofcommonlyusedstatisticsisimportantforcriticalthinkingaboutproblemsrelatingtothosemeasures.Otherissues arise regarding how statistics are presented, and in some cases which statis-tics are used. Each of these sources of controversy will be discussed in turn.Thedefinitionsofcommonofficialstatisticsaresometimesarbitraryandcontroversial. In other cases the specific statistic has been found to offer a biasedor incomplete interpretation of the problem it is meant to assess. Sources of biasincommonlyusedmeasuressuchastheinflationrate,theunemploymentrate,and the poverty rate have been studied in detail. The inflation rate is discussed inmoredetailinChapter9,whilethepovertyrateisdiscussedinChapter14.Another example of potentially biased statistics based on a limited definition isthe unemployment rate, which will be discussed below.The unemployment rate is based on a very specific and somewhat arbitrary setof definitions and assumptions. In the U.S. the unemployment rate is defined asthenumberofpersonsunemployeddividedbythenumberofpersonsinthelaborforce,multipliedby100percent. Apersonisconsideredunemployed ifsheisnotcurrentlyworkingforpay,butisactivelyseekingemployment.Similarly,apersoniscountedasin thelaborforce ifheiseitherworkingoractivelylookingforwork.Inotherwords,thelaborforceismadeupoftwogroups: the employed and the unemployed. However, not everybody who doesntworkispartofthelaborforce.Retirees,full-timestudents,homemakers,andothers who are neither working nor actively looking for work are considered to beout of the labor force.The meaning of policy analysis 13Your Turn 1.2: Based on the previous paragraph, answer the followingquestions: (1) If a lawyer is currently working as a cashier at K-Mart, isshecountedasunemployed?(2)Issomeonewhowantstoworkfulltimebutonlyworksonehourperweekunemployed?(3)Isafull-timestudentwhoisnotcurrentlyworkingforpayunemployed?(4)Areyoucurrently unemployed?Despite its widespread use as an indicator of economic health, the unemploymentrate is actually a relatively narrow statistic that measures only one aspect of labormarket conditions. One problem that the unemployment rate does not measure isunder-utilizedskills,aswiththelawyerabove. Theunder-utilizationofskillsissometimeslabeledunder-employment.Similarly,peoplewhoareinvoluntarilyworkingparttimearestillemployed,asarethoseworkingforverylowwages.Finally, those who are not currently looking for work are not included in the laborforce and are therefore not unemployed. Individuals who are not actively lookingforworkbutwouldtakeajobifofferedarecalledeithermarginallyattachedworkers ordiscouragedworkers, dependingontheirreasonfornotactivelysearching for work, and are now measured separately by the U.S. Bureau of LaborStatistics.Critics of the unemployment rate are often displeased with its inability to meas-urebroaderlabormarketproblems.Thesignificanceofthisexampleisthatasingle benchmark number such as the unemployment rate may provide an indica-tion of trends in the labor market or in the national economy, but it cannot definethe entirety of the issue it is meant to represent.The presentation of statisticsAnother aspect of critical thinking about statistics lies in observing how they arepresented.Onemightdiscussunemployment,poverty,profits,orvirtuallyanystatistic as a total number or as a percentage of some larger sum.Your Turn1.3: Considerthesestatements: (A)Raisingtheminimumwagebyonedollarwilldecreaseemploymentby270,000jobs.(B) Raising the minimum wage by one dollar will decrease employmentbyonlyone-fifthof1percent. Whichpieceofevidencesoundsmorereasonable to you? Why?Statistics presented as large totals often sound more impressive than percentages.Oneimportantsuggestionregardingtheinterpretationofstatisticsisto bewarethe big number. In a large economy, billions of euros or thousands of people donot always represent socially significant sums. For example, corporate profits areoftenpresentedaslargeannualtotals,butalargeannualtotalprofitdoesnot14 Policy analysis, politics, and ethicsnecessarily mean the company is exploiting the consuming public or its workers. Alarge company might have an annual profit level in the billions but still have a lowpercentageofprofitstototalsalesortostockholders equity.Forexample,Wal-Mart profits totaled $10.27 billion for 2004. These profits amounted to 3.56 percentof total revenue, which is not an unusually high level (Pacific Business News 2005).Advocacy and statisticsAmuchmoredifficultissueininterpretingstatisticsinvolvesdeterminingwhether the statistics are accurate. First, both the advocate and the actual sourceofthestatisticsmaybebiased.Ideologyandself-interestmayaffectwhoischosen to do the research, and possibly how the actual research is undertaken. Soanotherquestiontoaskwhenconsideringpolicyresearchiswhatgroupspon-sored the research, and how do the conclusions of the research relate to the spon-sorsideologyorself-interest?Ideologyorself-interestalsomayaffectwhichresults are actually quoted by an advocate, and how they are presented.Anotherdifficultyininterpretingstatisticsisthatdifferentstatisticswithcontradictory trends are sometimes used to identify the same problem. For exam-ple,thereisacommonperceptionthattheU.S.manufacturingsectorisbeingreplacedbyforeignproduction.However,untilrecentlyevidenceforthistrendwasmixed. Thetrendsinemploymentandoutputprovidedbelowsuggesttwovery different patterns.YourTurn1.4: Thefollowingtable(source: EconomicReportofthePresident, 2000) presents data on the relation between durable goodsmanufacturing and the total economy. Durable goods are things that lasta long time, such as cars or major appliances.(A) Try to explain the difference between the trends in the percentageofproductionandthepercentageofjobs. Alsodiscussthedifferencesbetween the total number and the percentage of durable goods manufac-turing jobs. Which sets of data suggest that the U.S. is de-industrializing?The meaning of policy analysis 15Table 1.1 U.S. output and employment trendsYear U.S. durableU.S.Durable Total DurableDurablegoodsgross goodsU.S. jobs goodsgoods jobsoutputdomestic production(thousands) jobs (% of total($billions) product (% of GDP) payroll jobs)1959 95.3 507.4 18.8% 53,270 9,342 17.5%1960 96.9 527.4 18.4% 54,189 9,429 17.4%1998 1,567.8 8,759.9 17.9% 125,826 11,170 8.9%1999 1,643.6 9,248.4 17.8% 128,610 10,986 8.5%Outputisfrom TableB-8andequalsfinalsalespluschangeininventories.Employmentisfrom Table B-44 in the 2000 Economic Report of the President.Continued(B) Look up more recent data for total output by sector and total employ-ment by industry group at the Economic Report of the Presidents website(http://a257.g.akamaitech.net/7/257/2422/17feb20051700/www.gpoac-cess.gov/eop/tables05.html). Based on more recent figures, is the erosionoftheU.S. manufacturingsectorworseninginthenewcentury?Finally,does the use of total goods production instead of durable goods produc-tion change these conclusions?Another common fallacy in the use of evidence is to assume that when two eventsare correlated, one event caused the other. This is referred to as post hoc, propterhocanalysis, orfalsecausereasoning. Provingacause-and-effectrelationshiprequiresacombinationoftheoryandevidence,andcannotbeaccomplishedthrough a statistical correlation alone. For example, opponents of free trade in theU.S. sometimes claim that free trade is counterproductive because the U.S. expe-rienced its primary industrial revolution in the 1800s while under a system of hightariffs. This historical correlation is true. However, proving a causal relationshipbetween tariffs and growth requires that (1) growing U.S. industries would havebeen subject to debilitating competition from foreign producers in the absence oftariffs; (2) that our industries couldnt successfully compete with those of othercountries without the tariffs; and, most importantly, (3) that the resources investedinthoseindustriescouldnthavebeenusedmoreproductivelyelsewhere.Lessplausibleexamplesoffalsecausereasoningcanbefoundinanynumberofsubjects. For example, the hemline theory of stock prices hypothesized that ave-ragestockpricescouldbepredictedbasedonthatseasonsskirtlength(risinghemlinesmeantrisingstockprices).Anotherlessthanscientificmodelof stock prices is the Super Bowl theory, which predicts that a victory by the U.S.footballs National Football Conference leads to rising stock prices.Politicalinterpretationsofeventhemostvalidstatisticsshouldgiveanyonereason for caution. The supporting evidence used in the arguments of public offi-cialsorinterestgroupsisparticularlypronetobeingchosenselectively,repre-sentedandinterpretedinabiasedway,andpresentedwithtoomuchcertainty.Theevidencefoundinthepolicypapersofadvocacyorganizationsshouldbeinterpreted with extreme caution whether or not you are inclined to agree with theadvocates position.Critical thinking about policy analysisWhile policy analysis has become a relatively common part of the implementa-tionandadministrationofpublicprograms,italsoremainscontroversialandsubjecttofundamentalcriticisms.Theprevioussectiononcriticalthinkinginpolicyanalysiscanandshouldbeturnedbackonthesubjectitself. Amongthemanycritiquesofbenefitcostanalysis,threeseemtobeparticularlycommon.These critiques relate to the utilitarian philosophy that underlies the benefitcost16 Policy analysis, politics, and ethicsmodel,theappropriatenessandaccuracyofassigningdollarvaluestonon-marketedgoods,andobjectionstothemicroeconomicfoundationsofbenefitcostanalysis.ThecritiqueofutilitarianismispresentedinChapter2,while a critique of assigning dollar values to non-marketed goods is presented inChapter 10. Other critiques will be discussed in this chapter.Tworelatedsourcesofcomplaintaboutbenefitcostanalysiscanbecatego-rized as primarily ideological. One is the common view of institutional and radi-cal economists that market forces are dominated more by power and oppressionthan supply and demand (Dorman 1996). If this is true, then measuring benefitsandcostsonthebasisofmarketconceptsislikelytobebothmisdirected andinaccurate.Anotherideologicalobjectiontobenefitcostanalysisarises frompopulists,whoconsiderthedesiresofthepeopletobetheprimarybasis for policy, and any expert analysis to be at least somewhat anti-democratic. In apopulist vision, there may be some justification for policy analysis if the primaryclientfortheresearchisthepublicitselfratherthanbureaucratsorinterestgroups,butforthemostpartthewillandthinkingofthepeopleareseenas trumping any type of professional analysis.ConclusionThis book is arranged in four parts. Following the introductory chapter, the prin-ciples of ethics and efficiency that underlie benefitcost analysis are consideredinChapters2through5. ThetoolsofpolicyanalysisarecoveredinChapters6through 11. These chapters discuss the basics of benefitcost analysis, methodsfor comparing present and future net benefits, benefitcost analysis in the pres-ence of risk and uncertainty, dollar estimates of the value of human life and othernon-marketedgoods,andeconomicimpactanalysis. Thefinalchapterspresentmoredetailedoverviewsofasetofpolicyissues,andaremeanttoaddtwoelementstothetext.Thefirstgoaloftheseappliedchaptersistoexposethestudent to the range of possible policies related to a specific policy problem. Thesecond goal is to expose the reader to breadth and differing sources of knowledgerequiredforspecificpolicyareas.Forexample,inChapter13weconsidertheroleofthephysicalandbiologicalsciencesinanalyzingenvironmentalpolicy,whileinputfromothersocialscientificfieldsisconsideredintheanalysisofpoverty and anti-poverty policy in Chapters 14 and 15.While the main topic of this book is the analysis of public policy, the openingquote of this chapter promotes critical thinking, while the second is about carefulandrationaldecisionmaking. Thesearetotallyappropriatequotesforapolicyanalysis text, for regardless of how many of this books analytical tools or policytopicsareremembered,anysignificantimprovementinonesabilitytoseebeneaththesoundbitesandshallowreasoningofmanyofourpublicpolicydebateswillprovideanimportantbenefit.Ihopethatthisbenefitisworth its cost.The meaning of policy analysis 17Review questionsConceptual questions1. Review each part of Bardachs eight-step process of policy analysis as wellas the five-step procedure of the Office of Management and Budget (OMB).(A) Why might an analyst operating within a bureaucracy such as the federalgovernment feel less free to include policy recommendations as part ofhis or her report? Discuss the pluses and minuses of excluding this stepor leaving it to others.(B) The OMB requires that the goals and assumptions of ones policy analy-sis be stated explicitly. Where might this requirement fit into Bardachslist?Howisastudythatfailstoexplicitlyandthoroughlystateitsassumptions less reliable or more difficult to interpret?2. Discusshowthethreegoalsofefficiency,equity,andpoliticalpracticalitymight apply to the following public policy issues. For each goal, construct alist of relevant questions that might be applied to the case in question.(A) Rebuilding the poorer neighborhoods of New Orleans or leaving someof them as green space after Hurricane Katrina.(B) EstablishingauniversalhealthinsuranceprogramintheU.S.withnofees for any resident.(C) Invading Iraq and establishing a democratic government as a means offighting Islamic terrorism.3. Nelsons three roles for the policy analyst (the progressive neutral expert, theentrepreneurforefficiency,andtheideologicalcombatant)arebasedonthree different views of the operation of government and formation of publicpolicy.(A) Reviewthesethreerolesandtheviewsofgovernmentrelatedtoeach.Which role strikes you as most favorable? Most realistic?(B) Discuss how a policy analyst might react to a proposal to raise the minimumwage. In your discussion, does the analyst favor or oppose such a policy?4. Find a discussion of a common economic policy issue such as the merchan-disetradedeficitortheminimumwageonthewebsiteofaconservativeorganizationsuchastheCatoInstitute(http://www.cato.org/)ortheAmericanEnterpriseInstitute(http://www.aei.org/),andalsoonthesiteoftheEconomicPolicyInstitute(http://www.epinet.org/).Noteindetailthearguments raised and the evidence used to support their conclusions.Computational questionsThisbookreliesonyourknowledgeofintroductoryeconomicsandthebasicmathematicsoftenseenintheanalysisofmarketsandindividualdecisions. 18 Policy analysis, politics, and ethicsThefollowingquestionscanbethoughtofasatestofthebasicconceptsandskills that will be utilized later in the text.5. A market equilibrium can be summarized in the following three equations:(1) Demand curve: Pd100 2Qd, where Pdand Qdequal the demandcurves price and quantity, respectively.(2) Supplycurve:Ps 10+Qs,wherePsandQsequalthesupplycurves price and quantity, respectively.(3) Equilibrium condition: At equilibrium, DemandSupply, whichmeans that PdPsand QdQs.(A) Graph the demand and supply curves in Figure 1.1. Label the endpointsand slopes of each curve.(B) Find the equilibrium values for quantity and price using algebra.(C) Drawlinesfromtheequilibriumpointtothequantityandpriceaxes.Totalspendingequalspricequantity.Identifythisrectangleonthegraph. What is the value of total spending in this market?(D) Consumer surplus is defined as the area beneath the demand curve andabovetheprice.Thisareausuallyformsarighttriangle.Identifythistriangle in the graph. What is the formula for the area of a right triangle?What is the area of the consumer surplus triangle in Figure 1.1?6. Identify the tangency point in Figure 1.2.(A) Atthatpointwhatistheslopeofthestraightline? thecurvedline? (B) About how many cans of each beverage is this person consuming?The meaning of policy analysis 19Figure 1.1 Demand-and-supply curves7. Solve the following compound fractions.(A)3/8 = (B)2/3= 3/32 16/21 20 Policy analysis, politics, and ethicsFigure 1.2 A tangency example2 Ethics for policy analystsIf liberty and equality are chiefly to be found in democracy, they will be bestattained when all persons alike share in the government to the utmost.1(Aristotle)Our task as humans is to find the few principles that will calm the infinite anguishof free souls.2(Albert Camus)All animals are equal but some animals are more equal than others.3(George Orwell)While economics is often thought of as the study of market value, ethics can bethought of as the study of moral value. Ethics is the study of the meaning of rightversuswrongormoralversusimmoralactions,andtheapplicationoftheseconceptstoeverydaylife.InWesternthought,ethicsdatesbackatleasttotheancient Greeks, particularly Plato and Aristotle. General ethical principles oper-ate at the personal and institutional levels and are, or should be, an important partof our lives as well as our policies.Oneimportantchallengeinstudyingethicsarisesfromitsmanyconflictingethical theories. In modern ethics these theories range in time of origin from Platoand Aristotle through the present day and in ideology from highly conservative torevolutionary.Ethicsmayarisefromreligiousorsecularsources,andallmajorreligionshaveoneormorerelatedcodesofethics.Becausetherearesomanyviews of right and wrong, informed ethical choice is often very difficult.Another challenge for the student of ethics arises from the need to think aboutthe meaning of right and wrong with an open mind. This is difficult because aschildren many of us are taught about right and wrong in a rather authoritarian orpaternalistic manner that doesnt allow much room for thought. A final challengeisthat,likestatistics,valuesandvaluejudgmentscanbemisusedormisinter-preted, and must be considered cautiously.Your Turn 2.1: What are your views on each of the following ques-tions? Thinkabouthowyouwouldexplainorsupportyourviews. Areyousatisfiedwiththequalityofyourarguments?Ifpossible,discussthem with friends or classmates.(A) Does an individual have a right to engage in self-destructive behav-ior, and does government have the right to prevent him or her fromdoing so?(B) Doesanaffluentsocietyhavetheresponsibilitytoprovideanadequateminimumlevelofincomeforthosewhocannotsupportthemselves? For those who choose not to support themselves?(C) Is it ethically necessary to provide the highest technically possiblelevel of safety in transportation, factories, and homes, regardless ofthe cost to consumers, taxpayers, or workers?(D) Should income equality be an important goal of tax-and-spendingpolicies? Should the rich pay a higher percentage of their incomein taxes than the poor?Ethical goalsWhilethefieldofethicsincludesawiderangeofideologies,arguments,andways of writing, there are a few common goals for society which guide the writ-ings of most of the great moral philosophers. Three of these ethical goals, in noparticular order, are basic human rights, freedom, and equality.Basic human rightsPhilosopherssometimesestablishethicalprinciplesbasedonasetofminimumhuman rights. Essential questions about human rights include these three:1 What are rights?2 Which rights are basic?3 What is the basis in argument for these rights?Each will be discussed briefly.In this context a right is a power or privilege to which one is entitled. If onehas rights, then others have a corresponding duty to act in accordance with thatpersons rights. For example, if a person has a right to own possessions (propertyrights),wehaveadutynottostealthosepossessions.Ifapersonhasarighttolife, we have a duty not to kill her. In policy terms, rights tend to represent a setofminimumstandardsforanacceptablehumanexistence,andtheconceptofequalrightsmeansthatwehavearesponsibilitynottoviolatethebasicrightsof anyone.22 Policy analysis, politics, and ethicsBut what items should we include in our list of human rights? Different answerstothisquestionarisefromdifferentsources.OnesetofrightsisfoundinJohnLockes theory of the state of nature from which society arises:Thestateofnaturehasalawofnaturetogovernit,whichteachesthat,beingallequalandindependent,nooneoughttoharmanotherinhislife,health, liberty, or possessions.(Locke 1955: 5-6)Thereisacorrespondingsetofresponsibilitiesbasedontheserights.According to Locke, these are to not harm another in his rights. In other words,oneshouldnottakeanotherslife,deliberatelyinjureorsickenanother,restricttheir liberty or take their possessions.ThepolicyroleofbasicrightsandlibertiesistoestablishwhatHenryShue(1980)callsamoralminimumthelowerlimitsontolerablehumanconduct,individualandinstitutional(p.ix).Ataminimum,thesebasichumanrightsrequire us to not actively deprive another of his life, health, liberty or property or,moregenerally,tonotharmotherhumans. Anargumentforwhywechoosetohonor the rights of others comes from Plato: to do wrong is, in itself, a desirable thing; on the other hand, it is not at alldesirable to suffer wrong, and the harm to the sufferer outweighs the advan-tage to the doer. Consequently, when men have had a taste of both, those whohavenotthepowertoseizetheadvantageandescapetheharmdecidethatthey would be better off if they made a compact neither to do wrong nor tosuffer it.(Jones et al. 1969: 26)Doingwronginthiscontextmeansstealingfromorotherwiseexploitinganother person for ones own gain. As advantageous as such actions may seem tothe perpetrator, they clearly harm the victim. Since in an amoral society any of usmightbevictims,itisinourbestinteresttoacceptsocialnormswhichrejectvictimizingothers.WithintheJudeo-Christiantraditionanevenmorefamiliarstatement of the responsibilities consistent with these rights is found in some of theTen Commandments, most notably thou shall not kill and thou shall not steal.Inamodernandmoreaffluentcontext,however,somearguethattherightsto lifeandhealthrequiresocietytoprovidesufficientresourcestomaintainthe lifeandhealthofthosewhomightnotbecapableofdoingsoontheirown(Shue 1980: 22-4). Shues argument that we are morally required to support thedestitute expands Lockes viewofourresponsibilitiesto the poorandiswidelyaccepted in modern policy, in part because the greater affluence of modern devel-oped countries makes such aid less of a burden on others. In conclusion, adher-ence to the principle of basic human rights requires us not to harm other personsrights, and perhaps to provide sufficient aid to those whose basic human rights arebeing inadequately preserved.Ethics for policy analysts 23FreedomFreedom is an important component of basic human rights, yet is subject to manydifferent interpretations. In the most common ethical definition, freedom meansthe absence of limits or constraints on an individuals actions. As Locke states:To understand political power aright, and derive it from its original, we mustconsider what state all men are naturally in, and that is a state of perfect free-dom to order their actions as they think fit, within the bounds of the lawof nature, without asking leave, or depending upon the will of any other man.(Locke 1955: 4)Inapolicycontext,freedomcanalsobeusefullythoughtofasfreedomofchoice, as in the freedom to choose any job, political party, religion, intoxicatingsubstance, or point of view.Of particular importance in a policy context is the distinction that is sometimesdrawn between the phrases freedom to and freedom from , as in the free-domtodosomethingandthefreedomfromaharmfulorunjustsituation. ThemostnotableexampleoffreedomfromasaseparateconceptcomesfromMarxistswhooftenemphasizefreedomfromoppression,exploitation,oralien-ation (Lukes 1985: Ch. 5). Often, however, these phrases do not conflict. One maybe free to vote or free from barriers to voting.Freedom as a basic human right is not the same thing as political freedom ordemocracy.Thefreedomtochoosebetweentwoormoreoppressivepoliticalparties would not impress most defenders of individual liberty. However, freedomto act as we wish has always been understood to be limited in a civilized society.Perhaps the most common policy question relating to liberty involves the degreetowhichgovernmentshouldlimitourfreedominordertoprotectothersfromharm. Ethical theories that emphasize the evils of inequality, exploitation, or sintendtoseeanintrusivegovernmentasanecessarymeansofcontrollingtheseevils.Theorieswhichemphasizefreedomandindividualchoicetendtoseegovernment control as harmful, and individual vice as the lesser of two evils.Another long-standing issue involving the limits of liberty is whether an indi-vidualshouldhavethefreedomtoactinaself-destructiveway.Mostmodernlibertarians argue that no limits should be placed on individual behavior unless itinvolvesdirectandsignificantharmtoothers,butevenamongthegreatestphilosophersoffreedomthereisdisagreementoverthisissue.JohnLocke,forinstance,statesthatthoughmaninthatstate[ofnature]hasanuncontrollableliberty to dispose of his person or possessions, yet he has not the liberty to destroyhimself (1955: 5). On the other side of the issue, Robert Nozick states that, Mynon-paternalistic position holds that someone may choose (or permit another) todo to himself anything, unless he has acquired an obligation to some third partynottodoorallowit(Nozick1974:58).Thequestionofwhethersocietyismorally required to place controls on deviant or self-destructive individual behav-ior is one of many legitimately debatable ethical issues.24 Policy analysis, politics, and ethicsEqualityEthicsalsoinvolvesdetermininghowtodistributetherights,incomes,legalstatus, and other aspects of society which we deem to be important. This dimen-sionofethicsisoftenreferredtoasdistributionaljustice.Equalityisthemostcommon norm in ethics for determining how various rights and resources in soci-etyshouldbedistributed. ThedominanceofequalityinethicsissuggestedbyAmartya Sen:acommoncharacteristicofvirtuallyalltheapproachestotheethicsofsocialarrangementsthathavestoodthetestoftimeistowantequalityofsomething something that has an important place in the particular theory.Notonlydoincome-egalitariansdemandequalincomes,andwelfare-egalitarians ask for equal welfare levels, but also classical utilitarians insiston equal weights on the utilities of all, and pure libertarians demand equal-ity with respect to an entire class of rights and liberties. They are all egali-tarians in some essential way.(Sen 1992: ix)The fundamental issue raised by Sens quote involves the multitude of goals towhichequalitymaybeapplied.TheimplicationsofSensobservationareprofoundindeed,foritcallsintoquestionthecommondebateovertherolesofequalityandlibertyanditsimplicationsforthesizeandroleofgovernment.Those who favor equality of freedoms and individual rights tend to favor minimalgovernmentsincethoseinpositionsofauthorityorpowerarelikelytohavegreaterindividualandlegalrightsthanothers.Thosewhoaremostconcernedwith equal incomes and living standards tend to favor stronger government as themost efficient means of redistributing income and protecting minimum standardsof living. For example, a crucial element in the ongoing debate over affirmativeaction policies in U.S. higher education is the ethical debate over equal opportu-nity versus equal outcomes. Notice that equality is the stated goal of both sides ofthis debate, but the interpretation of the goal is very different.While equality is among the most general theoretical standards for judging theethics of public policy, other distributional goals exist. Maximizing a goodness isalsoconsistentwithmanyethicaltheories,andmeetingminimumstandardsofbehavior is also important for some policy issues. This list of basic philosophicalprinciplesislimitedtoaselectionofgoalsrelatedtopublicpolicy,specificallybasic human rights, liberty, and equality, but others exist, particularly those relat-ing to individual behavior. Honesty, courage, purity, and generosity are examplesof important ethical goals that are more personal in nature.The next section of this chapter will provide an overview of three ethical theo-riesrepresentingawiderangeofethicalgoalsandpolicyimplications.Theprimary purposes of this discussion are to illustrate the diversity and sophistica-tion of ethical theory and to establish a minimal theoretical base for consideringthe ethical challenges that arise in public policy. The theories chosen are secularEthics for policy analysts 25in nature, though religious ethics are equally broad in their implications for publicpolicy and individual behavior. For example, Christian views on policy may rangefromhighlyconservative(Falwelletal.1981)toradical(Miranda1974; Wallis1984). Thethreetheoriesdiscussedbelowareeitherrecentorhavesignificantrecentsupport,andrangefromstronglysupportiveofequality,includingtheequality of incomes, to libertarian and opposed to the involuntary redistributionofincome. ThethreetheoriesareutilitarianismandthetheoriesofJohnRawlsand Robert Nozick.UtilitarianismUtilitarianism is the branch of ethics most closely associated with economics andbenefitcost analysis. Utilitarianism began with the writing of Jeremy Benthamintheearlynineteenthcentury.Otherutilitarianswritinginthe1800sincludeJohn Stuart Mill and Henry Sidgwick. Modern writers associated with utilitarian-ism include J.J.C. Smart, Amartya Sen, and Partha Dasgupta. Brief discussions ofutilitarian ethics usually begin with the famous utilitarian goal, the greatest goodforthegreatestnumber.Themostbasicquestionsthatcometomindwhenanalyzing this phrase are: (1) What do we mean by good, and (2) What is thegreatest number?Utilitarianismdefinesthegoodinaverygeneralandrelativesense.AsBentham defines the term:By utility is meant that property in any object, whereby it tends to producebenefit, advantage, pleasure, good, or happiness , or to prevent the happen-ingofmischief,pain,evil,orunhappinesstothepartywhoseinterestisconsidered.(Jones et al. 1969: 308)Two aspects of this quote are particularly significant. First, utility involves anunusually broad definition of the good, including items such as pleasure which insome contexts might be considered immoral or sinful. According to this defini-tion, something that is useful to a person is good because it adds utility, and some-thing which is pleasantly intoxicating to the same person is also good for the samereason.Secondly, each persons utility is determined by his or her own tastes. Lawsandsocialnormsmayinfluenceapersonsutilitybyimposingfeelingsofguilt, socialpressure,oractualpunishmentonthoseactionswhichviolatesocialrules,butthebasicjudgmentaboutpersonalutilitystillrestswiththeindividual. In this sense utilitarianism is relatively weak in its ability to providemoral judgments about individual behavior. On the other hand, it is unusuallycapable of avoiding paternalistic or authoritarian judgments about what is goodandbadinagivensituation.Thistensionbetweenindividualpleasureandsocial norms has led to varying interpretations of utilitarianism, which will bediscussed later.26 Policy analysis, politics, and ethicsNow let us consider the meaning of the term greatest number. According toJeremy Bentham, the greatest number represents the total number of individualsin a given community:The community is a fictitious body, composed of the individual persons whoare constituting its members. The interest of the community then is thesum of the interests of the several members who compose it.(Jones et al. 1969: 308)Interestingly, there is little support in utilitarianism for the usual limits placedon the size or inclusiveness of a community. Sidgwick, among others, defines theultimate goal of utilitarianism as universal happiness (1962: 413). There is littlebasis in utilitarianism for limiting our analysis to citizens of a particular nation,ethnic group or religion, or even of a particular species.Are we to extend our concern to all the beings capable of pleasure and painwhose feelings are affected by our conduct? Or are we to confine our viewtohumanhappiness? TheformerviewistheoneadoptedbyBenthamandMill, and (I believe) by the Utilitarian school generally.(Sidgwick 1962: 414)Clearly, utilitarianism requires us to consider the well-being of the citizens ofall nations as equally important. Nationalism is inconsistent with utilitarianism.Also,utilitarianthinkingmayrequirethatthewell-beingofnon-humanspeciesbeconsideredwhensettingpolicy. Whenconsideringenvironmentalorinterna-tional policy, the greatest number is a very large number indeed!Perhaps we should consider a more structured interpretation of the meaning ofutilitarian ethics. Sen and Williams (1982) offer three basic principles for utilitar-ian theory. These principles are listed and defined below:1. Welfarism impliesthatindividualutility,orwelfare,isthebasisforassigninganethicalvaluefortheutilitarian.Thereforethevalueofanactionisbasedonthenetbenefitstothoseaffectedbytheaction,asopposed to its consistency with some overarching principle. Furthermore,thebenefitsandcostsofincomeredistributionarebasedontheutilitygained or lost, rather than on the actual dollar amount transferred.2. Sum-ranking meansthatsocietyshoulddeterminetheoverallnetbenefits of a policy to society by adding the utilities of all affected indi-viduals.Itfurthermeansthatallindividualutilitiesshouldbeweightedequally.3. Consequentialismmeans that policy choices should be made with regardto the consequences (ends) of the policy, rather than the means by whichthe ends are achieved.(Sen and Williams 1982: 3-4)Ethics for policy analysts 27The first two principles, welfarism and sum-ranking, are unique to utilitarian-ism, while consequentialism is true of some important alternative ethical theories.Extreme versus restricted utilitarianismScholarslargelyagreethatundersomeinterpretations,utilitarianismcanbeinconsistent with the observance of human rights and even with the basic mean-ing of ethics itself. If one allows the net gains in societys total utility to determinepolicy, no matter how badly one individual is hurt in the process, individual rightsareclearlyatrisk.Becauseofthesetensionsbetweenutilitarianismandbasichumanrights,aswellasdiscomfortwiththeroleofhedonisminBenthamsanalysis, utilitarianism has been interpreted in a more limited way by most of theutilitarianswhofollowedhim.JohnStuartMill,HenrySidgwick,and AmartyaSen,amongothers,mightbebestcharacterizedasrestrictedutilitarians,afterthe terminology of J.J.C. Smart (1956), while Benthams theory would be catego-rized as extreme utilitarianism.Restricted utilitarianism uses the logic of utilitarianism at a general level inorder to establish a set of guiding principles for society. Each of these principlesisjudgedaccordingtoitsabilitytoachievethegreatestgoodforthegreatestnumber, or equivalently the greatest net good for society as a whole, according totheprinciplesofwelfarism,therank-sumrule,andconsequentialism.Ifaruleprovidesthegreatestlevelofpleasureminuspainforsociety,itshouldbeadopted. Once a rule is adopted, however, each individual should act according totherulewhetherornotitisinhisorherbestinterest.Ontheotherhand,inextreme utilitarianisman individual may judge each action according to its util-ity independent of any general rules. If rules exist under extreme utilitarianism,they are not absolutely binding on the individual. Smart describes the differencebetween extreme and restricted utilitarianism as follows:Amoremodestformofutilitarianism[holds]thatmoralrulesaremorethan rules of thumb. In general the rightness of an action is not to be testedbyevaluatingitsconsequencesbutonlybyconsideringwhetherornotitfalls under a certain rule. Whether the rule is to be considered an acceptablemoralruleis,however,tobedecidedbyconsideringtheconsequencesofadopting the rule. Broadly, then, actions are to be tested by rules and rules byconsequences.(Smart 1969: 625-6)Theactualruleswhicharelikelytopasssuchatestvarywiththeauthor,butusuallybearacloserelationshiptobasichumanandlegalrights.Forexample,JohnStuartMillsuggestssixrulesofjusticewhichpromotethegreatergood.These are (1) not depriving people of their legal rights, (2) of their basic humanrights, or (3) of things they deserve. Also, one must (4) not break promises andagreements,(5)showunjustfavoritismtowardsomeoverothers,or(6)treatpeopleunequally(Mill1957:54-7).Writingfromalibertarianperspective,28 Policy analysis, politics, and ethicsHayek usesutilitarianlogictoarguethatlibertyshouldbetheprimarygoalofgovernment:Ourfaithinfreedomdoesnotrestontheforeseeableresultsinparticularcircumstances but on the belief that it will, on balance, release more forcesfor the good than for the bad.(Hayek 1960: 31)Restrictedutilitarianismthereforecanbeusedtoestablishruleswhichdefendbasic human rights by weighing the societal benefits and costs of those rules.An example of how extreme and restricted utilitarianism might differ regard-ing a policy issue is the death penalty. An extreme utilitarian would be willing tosupport the death penalty if the benefits of execution to society in terms of satis-faction,futuresafety,orcostoutweighthedisutilitytotheindividualwhoisexecuted. A follower of Mill or Locke might question the death penalty due to itsviolation of the condemned persons right to life.Weaknesses of utilitarianismBecauseofutilitarianismsroleasthephilosophicalcornerstoneofbenefitcostanalysis, some mention should be made of the many criticisms of the theory. In spiteof its widespread use and wide range of policy applications, utilitarianism is not anideal means of analyzing many moral issues. A selection of critical arguments willbe arranged as they relate to consequentialism, the rank-sum rule, and welfarism.Asstatedearlier,consequentialismsaysthatapolicyisjustifitsresultsarejust, or that the ends justify the means. Because of its consequentialism, extremeutilitarianism offers a relatively poor defense of human rights. If a policy resultsin net gains to society, it is of relatively little importance to extreme utilitarianswhether some peoples rights are violated in the process. Similarly, it matters littlewhether a redistribution of income is accomplished through voluntary charity, orby government policy, or by theft. A consequentialist theory will see little differ-ence between aiding the poor through the Salvation Army, Robin Hoods merrymen, or government, though their methods differ considerably.Whenoneaddstherank-sumruletoconsequentialism,thelogicofextremeutilitarianism permits even tragic consequences for the few to be outweighed bymodest improvements in well-being for the many. The basic logic of the rank-sumrule suggests that a policy is acceptable whenever the added utility to the winnersoutweighs lost utility for the losers, even if the losers suffer a loss of basic humanrights. For example, extreme utilitarian thought might say that a group of starv-ing persons would be morally right to sacrifice and consume one member in orderfor others to survive. Many other theories would disagree.Furthermore,somearguethatutilitarianismisinconsistentwiththegoalofincome equality or with the transfer of income to the poor. Because the utility oftherichandpoorareequallyweightedthroughtherank-sumrule,gainstothepoor through income transfers would be offset by losses to the rich. This argumentEthics for policy analysts 29isntnecessarilytrue,however,aslongastheutilitythepoorgainfromtheincome transfer is greater than the utility lost by the rich. If the economic princi-pleofdiminishingmarginalutilityappliestoincome,theutilitybenefitsofanincometransfertothepoorarelikelytooutweightheutilitylossesbytherich,unless there is significant waste caused by the transfer program. The tendency ofnon-economists to confuse income and utility is the likely source of this critiqueofutilitarianism.However,benefitcostanalysisgenerallyweighsindividualmonetary gains and losses equally, and is therefore more subject to this critiquethan the utilitarian principles on which it is based.Welfarism is also the basis for much criticism. Benthams emphasis on pleas-ure as the basis for well-being is rejected by many moral philosophers, includingrestricted utilitarians. Most religions consider the pursuit of some pleasures to beimmoral. For example, extreme utilitarianism suggests that if a persons pleasurefrom heavy drinking outweighs the pain caused to him and others, then drinkingismorallyjustified.Thesamelogicappliestoanyintoxicatingsubstance.Similarly,becauseutilityisbasedoneachindividualspreferences,utilitarianthoughtincludesalargedegreeofmoralrelativism.Oneisremindedofsuch1960sexpressionsasifitfeelsgood,doit.Individualmoralityisgenerallyconsidered a reasonable goal for society, and extreme utilitarianism offers a rela-tively weak basis for such moral judgments.Furthermore,despiteBenthamsefforttomeasureutilitythroughadetailedcategorizationoftypesanddegreesofpleasureandpain,utilityisusuallynotmeasurable. If one cannot measure the utility gains and losses of an action, onealso cannot add or subtract them. Unless indirect means of measuring utility areused, this problem has the potential to destroy the usefulness of the rank-sum rule.Fortunately for utilitarianism and for policy analysis, economists have developedindirect measures of utility that allow the theory to be applied in a more explicitwaythanmanyalternativetheories.However,thesemethodsareinexactandcontroversial, and present a challenge for utilitarian theory.In conclusion, utilitarianism is the closest thing to a paradigm for analyzing theethics of public policy, but it is subject to relatively serious flaws and limitations.Comparedtomostethicaltheories,utilitarianismtendstobemoreconcernedwith efficiency and its potential to increase the overall wealth of a society. It alsoemphasizesindividualtastesandchoicemorethanmostethicaltheories.Ironically, utilitarianism might be the strongest ethical theory in situations whereethicsisleastimportant.Inotherwords,utilitarianismmaybemostusefulforanalyzing policies if lives are not threatened and the least well-off in society arenot seriously harmed.John Rawls and the difference principleThe next two theories arise from single individuals, John Rawls and Robert Nozick,both of whom published their most influential works in the 1970s. The first of theseworksisA TheoryofJustice byJohnRawls(1971). ThemajorcharacteristicofRawls theory is its strong emphasis on equality of incomes, wealth, political rights,and other outcomes, along with its dominant concern for the least well-off in society.30 Policy analysis, politics, and ethicsRawls strongdefenseofequalitymakeshistheoryrelativelyconsistentwithaliberal political ideology and a highly egalitarian approach to social policy.The original positionRawls develops his theoretical approach through an abstract model that is some-whatrelatedtoLockestheoryofthesocialcontract.Theprimarydifferencebetween the assumptions of Rawls and Locke is that Rawls analysis of the forma-tion of the social contract begins with a set of abstract assumptions, rather than asa set of (debatable) fundamental truths about the state of nature. Rawls goal is tocreate a situation where thought can be applied to the question of distributionaljustice without the corrupting combination of self-interest and social differences.Rawls calls this abstract situation the original position. As Rawls describes it,The original position is a state of affairs in which the parties are equallyrepresented as moral persons and the outcome is not conditioned by arbitrarycontingencies or the relative balance of social forces.(p. 120)Thisoriginalpositionassumesthatallpartieshaveequalrightsandequalaccesstothedecision-makingprocess,sothatanydecisionmadebythegroupwhile in the original position is fair (pp. 128-9).The most important assumption regarding the original position is the informationeach person lacks. All persons in the original position are assumed to be ignorantabouttheirownstatusinsociety,incomelevel,naturalability,andanygroupsorcoalitions to which they belong. Any individual may be powerful or dependent, richor poor, part of an influential group or alone, but in the original position nobodywill be aware of these indicators of privilege or power. This lack of awareness ofones social, political, or economic standing is called the veil of ignorance.This veil of ignorance serves a very important purpose in determining how thegroupwilldecideitsprinciplesofjustice. AsRawlsstates,Nooneknowshissituation in society nor his natural assets, and therefore no one is in a position totailor principles to his advantage (1971: 139). In other words, people behind theveil of ignorance are not in a position to bargain for political, social, or economicadvantages for themselves or others in a similar situation because they dont knowtheirsituation. Therefore,thoseintheoriginalpositionwillhavenoalternativeexcept to choose societys laws and norms in a truly impartial manner.The difference principleRawlssuggeststhatthoseinanoriginalpositionwillchoosetotalequalityasastarting point for their society:Since it is not reasonable for him to expect more than an equal share in thedivision of social goods, and since it is not rational for him to agree to less,thesensiblethingforhimtodoistoacknowledgeasthefirstprincipleofEthics for policy analysts 31justiceonerequiringanequaldistribution.Thus,thepartiesstartwithaprinciple establishing equal liberty for all, including equality of opportunity,as well as an equal distribution of income and wealth. (pp. 150-1)However,equalityofincomeneednotpersistifindividualsdisplaydifferentskills and levels of effort in their work. In such a case, allowing the most produc-tive to earn and keep extra income may help to increase the overall productivityof society. A wealthier society then has the potential to increase the well-being ofthose who are least well off. This brings us to Rawls primary contribution to theconcept of distributive justice, the difference principle:[The difference principle:] All social primary goods liberty and opportu-nity, income and wealth, and the bases of self-respect are to be distributedequally unless an unequal distribution of any or all of these goods is to theadvantage of the least favored.(1971: 303)The most fundamental and controversial part of the difference principle is itscomplete focus on the least well-off person. Only when the least well-off personbenefits from inequality is that inequality justifiable, according to Rawls. The differ-ence principle is also expressed in more mathematical terms as a maxi-min solutionto the problem of social justice, where maxi-min is an abbreviation for maximizingtheminimum,ormaximizingthewell-beingoftheleastwell-offperson. Thisaspect of Rawls theory is discussed in the final section of this chapter.Your Turn 2.2: Assume that you are one of three people in a very smallsociety, and that your group is under the veil of ignorance. You may chooseany of the following three distributions of income. Which income distributiondo you choose? Which distribution is consistent with the difference princi-ple?Ifyourpreferredchoicediffersfromthatofthedifferenceprinciple,discuss why. If not, defend the difference principle against any challenges.Distribution 1 Distribution 2 Distribution 3Person 1 $15,000 $14,000 $13,000Person 2 $15,000 $20,000 $1,000,000,000Person 3 $15,000 $20,000 $1,000,000,000Distribution 1 gives everyone $15,000, distribution 2 gives each persona 2/3 chance of earning $20,000 and a 1/3 chance of earning $14,000,and distribution 3 gives each person a 2/3 chance of becoming a billion-aire and a 1/3 chance of earning $13,000.32 Policy analysis, politics, and ethicsRawls is not concerned with income distribution alone. Liberty, equality, andproductivityareallgoalsinRawls theoryofjustice.Withinthisbrieflistofprimarygoods,Rawlsestablishesdefiniteprioritiesregardingtheirrelativeimportance. The first priority within the difference principle is assigned to liberty,which means that liberty cannot be restricted in pursuit of any other goal exceptlibertyitself.Furthermore,anyrestrictiononlibertymustmeettwoconditions:(a) a less extensive liberty must strengthen the total system of liberty shared byall; and (b) a less than equal liberty must be acceptable to those with the lesserliberty. (Rawls 1971: 302) Once these conditions for liberty are established andmaintained, then society can consider the goals of equality and efficiency. Herealso, Rawls argues that equality should have a clear priority over efficiency, andthat equality should be compromised only if the least well-off benefits.The difference principle implies that once liberty is fairly distributed, the finan-cialwell-beingoftheleastwell-offpersonisofprimaryimportancetosociety.Clearlythisviewimposesagreaterpressureforequalitythanutilitarianism,which weighs the utility of the poorest persons equally with that of others. Indeed,Rawls is among the most egalitarian of all well-known philosophers.Robert Nozick and the ethics of the minimalist stateBothutilitariansandJohnRawlscanbeclassifiedasconsequentialists,meaningthat the justice of an outcome is more fundamental to their theories than the processbywhichthatoutcomeisachieved.Manylibertarianconservativesfindthisapparent lack of concern with the method of redistribution to be unjust. For thoseindividuals,theethicaltheoryofRobertNozickstandsasabeacon.Nozicks ethicaltheoryemphasizestheprocessbywhichsocietyevolvesfromthestateofnature into a civil and affluent society and how this evolution affects