SOCIAL POLICIES IN A MARKET ECONOMY - PowerPoint Presentation

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SOCIAL POLICIES IN A MARKET ECONOMY

Joseph E. Stiglitz

Beijing

March 2006Slide2

Objectives of Social Policies

Redistribution

Enhancing opportunity

Access to education

Access to finance

Partially reflections of market failure

Improving Outcomes

Even if market is efficient, it may not lead to socially acceptable distribution of incomeSlide3

Objectives

Social Protection

Market failures—absence of insurance to cover major risks

Huge loss of welfare

Lack of security cited as major problem

Problems in insurance risks: Unemployment, annuities, disability, insurance against inflation

Explained in part by theories of asymmetric information

But government has sometimes acted as a catalyst

Basic human needs

Education

Food

Social obligation (specific egalitarianism)Slide4

Full Employment

Most important social policy

Unemployment represents waste of resources

But also leads to adverse social consequences

Market economies do not automatically lead to full employment

And excessive focus on inflation can lead to higher unemployment than necessarySlide5

Trade-offs

Inflation vs. unemployment

Little evidence that moderate to low inflation has any effect on growth

Social programs can insure poor against inflation (indexing social security, etc.)

Continuing debate about broader distributive effects of inflation

With many studies claiming inflation “cruelest tax” flawed in identifying source of problem (oil price shock)

Well functioning markets have unskilled wages adjust fairly quicklySlide6

Trade-offs

Do unemployment benefits lead to higher unemployment, because of reduced incentives to search?

If there is a lack of jobs, more search does not produce more employment (search externality—just increases expenditures on search)

But in Efficiency Wage (Shirking—Shapiro/Stiglitz) models higher unemployment benefits can result in higher equilibrium unemployment

But increased job security has more ambiguous effects on unemployment

What is clear is that

markets by themselves

do not necessarily result in optimal levels of severance pay and unemployment insurance (private markets typically provide little) Slide7

Thinking about Redistribution

Neoclassical dichotomy—can separate “efficiency” concerns from “distributional concerns”

Today, we recognize that such separation is not possible (if there are imperfections or asymmetries of information, incomplete markets)

Social policies/concerns need to be integrated into all government programs

Assessing who benefits

Though often incidence is a complicated matterSlide8

Redistribution

Government needs to think of impact of policies on pre-tax distribution of income (not just adjustments to given after tax income distribution)

China today is in a markedly different position from many market economies

Who are worried about deficiencies in savings/investment

And hence have been pushing for low taxation of capital

In spite of adverse effects on distribution of income

In spite of limited evidence on the impact of such “incentives” on savings

Tax preferences may actually lower net national savingsSlide9

China today is trying to encourage consumption

So can employ progressive capital taxes

China is also in a different position from other developing countries

Traditional debates focused on need to extract “surplus” from rural sector

China needs to increase well-being of those in rural sector

But guard against problem in U.S.,EU, where agriculture subsidies mainly go to large, corporate farmers—huge distortion of resources and increase in inequitySlide10

Opportunities

Unequal access to opportunities

Education, finance

affected by parental wealth

Lowering social mobility

Horatio Alger mainly myth

But also discrimination—discriminatory market equilibrium

Gender, race

Becker was wrong

Impossible to undo fully

Affected by differences in quality of public schools

Location/geographic, network externalitiesSlide11

Opportunities

Huge societal costs of unequal opportunity

Efficiency—not drawing fully on most important factor—labor

Undermining Social Cohesion

Huge costs of exclusion

Manifested in anti-social behavior

But government can make a difference

Affirmative action programs

Directed expenditure programs

Promoting wider access to creditSlide12

Social Protection

Huge costs to insecurity

Widespread market failure

Especially associated with adverse selection

Market efforts directed at “cream skimming”

At enormous economic and societal costs

Helps explain huge transactions cost

Help explain problems in private health insurance marketSlide13

Public sector has to be worried about moral hazard (incentives)

But an integrated social insurance system (Singapore’s provident fund) can mitigate risk and minimize attenuation of incentive

Key question: how much inequality in, say, access to health/medicine should society accept?

Vexing question, especially in societies marked with high levels of inequality in other ways

Probably need to accept basic level of health care, publicly provided (financed)

With high income purchasing additional services

Good news—access to medicine only one of determinants of health

Government should work on other dimensions (nutrition, smoking, drinking) as wellSlide14

China’s Transition to a Market Economy

As China makes a transition to a market economy, it needs to be aware of the limitations of markets in providing basic levels of social protection

There is an important role of government

Which virtually every market economy has recognized

China should learn from the mistakes—the successes and failures of others in designing its social programs

But the strains imposed by China’s extremely rapid growth make it all the more important for its government to assume an important role Slide15

China’s Transition to a Market Economy

China’s decisions will affect not only the performance of the economy

Well designed social programs can even increase productivity

Making sure that all of the country’s talents are given the opportunity to reach their potential

Correcting, or mitigating, market failures

And with a well-designed safety net, individuals may be freer to take risks than they otherwise, encouraging innovation (the Scandinavian model)

But the nature of Chinese society itself