Efficiency, Fairness, and Public Policy: The Necessity of Expanding Public Expenditure

Author: Huang Youguang / Country:
Publisher:
Publishing Date: 2003-06-01
Features: Most of the arguments in this book are empirical (many normative propositions are also proposed in Chapters 3 to 5), but many specific opinions also contain valuable judgments, that is, they involve questions of what should be done. For example, the argument supporting the government's expansion of spending on research and environmental protection is clearly an indicative suggestion. However, if we accept the following convention (which is indeed the view adopted in this book and most of my other works), then there is no insurmountable gap between empirical analysis and normative recommendations. This convention is that when we make any indicative/normative statement, such as believing that public spending should be increased, we mean that if the recommended action is taken (e.g., expanding public spending under certain conditions), it will increase social welfare, which is a function of individual utility/well-being. In general, this convention is sufficient (especially based on the principle of "one is one," see Chapter 6. When it is necessary to specify the form of the social welfare function, I suggest using the unweighted aggregation of individual utilities, which is elaborated in detail in Chapter 5). Based on this convention, any formally indicative statement (should do X) is equivalent to another more empirical statement (X will increase social welfare or X will increase the sum of individual utilities). Of course, whether it is appropriate to increase social welfare defined in this way is still a normative issue (my answer to this question is affirmative, and the relevant arguments are found in Chapters 3 to 5). Regarding the cardinal measurability and interpersonal comparability of individual utility, please read Chapter 2. Under the above convention, if someone disagrees with my indicative/normative statement, there can only be 3 possibilities: either they disagree with my empirical analysis, or they disagree with the above definition of social welfare I made, or both. However, because of this convention, I have avoided the suspicion of confusing empirical analysis with normative judgments. Any indicative statement must be based on some normative judgments, which is a fundamental fact pointed out by Hume. Indeed, because it is very difficult to measure and compare individual utility (this difficulty has been greatly reduced by the principle of "one is one"), many indicative statements are not based solely on the above convention and some empirical analysis, but also include subjective judgments about certain facts. However, as I have pointed out (Ng, 1972), regarding facts closely related to their field of study, economists are more qualified than others to make subjective judgments, although not necessarily so for value judgments themselves. Therefore, if people can clarify the distinction between value judgments themselves and subjective judgments about facts, then economists can play a much greater role in policy recommendations. In my view, these underlying "rights" can be explained by the preferences of living people and the impact on future behavior. For example, living people may hope to express their respect for ordinary people or certain outstanding figures by giving them decent funerals and bestowing national funerals on martyrs. In addition, solemn national funerals can also encourage people to emulate heroes and face national adversity together. Of course, the difference between humans and stones is not limited to this; for example, stones and even animals cannot exercise rights such as voting. However, what I mean is the more fundamental right to be free from unnecessary harm (I believe this right should be enjoyed by all things with the capacity for pleasure and pain). Furthermore, if there is something in the world that can mechanically "exercise" some rights (e.g., voting rights) but does not have the capacity for pleasure and pain (perhaps some supermachine), I will not be any more lenient to it than to a stone. Although I adhere to the basic defense of utilitarianism in my book (Ng, 1981a), I am still willing to make the following three concessions to Sen. Although I believe that utilitarianism as a fundamental value judgment is entirely defensible, this does not mean that those who attack utilitarianism must be logically or scientifically wrong, because this issue involves fundamental value beliefs, and two completely rational and logically clear people may hold fundamentally different views. Conversely, this does not prove that such issues cannot be discussed logically or that discussing them is futile. You can logically argue that certain normative principles are derived from which axioms (including some normative axioms), or prove that certain normative principles imply certain favorable or unfavorable consequences. In this process, you may be able to persuade your opponent to abandon their original value judgments—they may believe these judgments are their fundamental value judgments, but after in-depth analysis, they find that this is not the case (for the usefulness of axiomatic value theory, see the appendix of my book Ng, 1981b). Secondly, I agree with Sen that the reason why economists generally support utilitarianism is "because they have not directly examined those circumstances in which conflicts are not only possible but also do occur" (Sen, 1981, p. 532). If economists could seriously consider the various issues raised by Sen, even if not the majority, at least a considerable proportion of economists would abandon their utilitarian stance, I say this with factual basis, moral philosophers have been researching these issues for a long time, but they are still divided in their views on utilitarianism and even general consequentialism (see Smart and Williams, 1973). In short, "Huang Youguang himself does not represent any real consensus on this issue" (Sen, 1981, p. 532), but I will try to persuade economists to utilitarianism stance and use more in-depth analysis to make any potential defectors reconsider. Those who hold the "pure representation" view believe that VNM utility is merely used to describe individual choice behavior in the presence of risk and is unrelated to the same individual's subjective cardinal utility. If individuals do not need to consider their subjective utility when making such choices, then this view can be (though it is quite puzzling what they base their rational choices on). In a sense, these economists who hold the "pure representation" view are right. First, the series of famous axioms adopted by the VNM hypothesis does not guarantee that individuals must consider their subjective utility when making choices involving risk and maximize their expected utility. However, this should be an intuitive requirement for rational choice. If you require strict reasoning, then it can be considered that the above axiom A guarantees this. Therefore, Harsanyi's conclusion is a complete utilitarian conclusion. Second, as Roemer (Roemer, 1996, p. 142) pointed out, even if we know everyone's VNM preferences or utilities, we cannot make meaningful interpersonal comparisons (and this is necessary for any social welfare function, including utilitarian social welfare functions). However, axioms A and the methods proposed by Edgeworth (Edgeworth, 1881) and myself (Ng, 1975a, 1996a) have made interpersonal comparisons of utility possible. My book (Ng, 1975a) points out that a natural way to obtain an interpersonal comparable cardinal utility index is to represent the utility differences of all individuals corresponding to the largest (non-strict) indifference quantities with the same number (e.g., 1), because the sensitivity of utility is limited (see Section 5.1 above). In my book (Ng, 1996a), I used this method to actually obtain an interpersonal comparable utility index and overcome the interpersonal incomparability problem of psychological surveys of happiness levels. In addition, there are other methods to obtain interpersonal comparable utility indices (Ng, 1975a, Section 9 introduces some of them). Therefore, even if you do not recognize Harsanyi's (1953) sufficient proof of utilitarianism, you must recognize that Harsanyi (1953) and Huang Youguang (Ng, 1975a, 1984a, 1996a) together achieved this. Sen believes that the value of Harsanyi's second (weighted) utilitarian conclusion (Harsanyi, 1955) is not great, saying that this conclusion is mainly a "representation theorem" and not utilitarianism. Sen has two criticisms: one is related to the choice of individual utility indices, which I have already rebutted above. The other is that this conclusion is limited to the single-profile framework, that is, given a set of individual preferences. I have two rebuttals: first, since this utilitarian conclusion applies to each single-profile, it is irrelevant that it is a conclusion within the single-profile framework. Second, Harsanyi's conclusion can be easily extended to the multi-profile framework, and this fact is already contained in Roberts' (1980) conclusion, who proved that corresponding conclusions exist in both frameworks, and Mongin (1994) directly proved this fact. Feldstein (Feldstein, 1997, p. 209) points out that the marginal cost of public spending is recognized as high for one reason: "the deadweight loss caused by raising taxes is not a small triangle but a much larger trapezoid, because there is already a tax distortion before the tax increase." This insight is natural within the orthodox theoretical framework, assuming that taxation serves only to finance public spending with no other valuable functions. Within this framework, the above insight is indeed quite important quantitatively, because the total tax revenue of many countries already accounts for more than 30% of GDP. However, the following consideration may have some countervailing effect. Most (if not all) production and consumption of goods and services have direct or indirect (through intermediate products) destructive effects on the environment. Taxing these production and consumption activities is far from enough. Therefore, although ordinary income tax and consumption tax are designed to raise government revenue, they can generally correct the environmental destruction effects of production and consumption. Although, from a theoretical point of view, the existing tax structure is far from ideal, this problem is not too serious when considering feasibility and administrative costs, of course, this does not deny that, in principle, economic activities that cause greater environmental harm should still be taxed more heavily (the marginal cost of raising public funds through different tax forms such as production tax, consumption tax, income tax, and Pigouvian tax is different, Ballard and Medema, 1993 estimated this). Without more reliable estimates, I believe that considering the severity of environmental problems (note the recent reports on global warming causing the melting of Antarctic icebergs) and the long-term consequences of environmental destruction, setting the corrective average tax rate at around 30% may not be unreasonable. I think that if you consider this, even if the distortion loss from tax increases is not negative, the so-called "trapezoid" effect will not be as large as imagined! 8.4 Diamond Goods and Taxation Without Burden It is well known that the excess burden of corrective taxes on activities with external costs such as pollution is negative, as mentioned in the previous section, but few people discuss this issue in relation to the optimal scale of public spending. Even within the economics community, the following fact is little known: there is a category of goods that, when taxed, not only does not incur excess burden but also does not impose any burden at all. If administrative costs are ignored, the proportion of negative excess burden of taxing such goods is 100%. Given the quality of a good, its utility (i.e., usefulness) to a consumer depends on the quantity consumed. This is true for most goods with consumable functions (e.g., nutrition, calories). However, for many goods, what people value is not the quantity but the value (i.e., price times quantity). A typical example is diamonds. Although diamonds are brilliant and dazzling, their utility to consumers mainly lies in their value. Artificial diamonds and top-grade diamonds are identical in appearance, but their prices are vastly different. Someone mixed artificial diamonds with top-grade diamonds and took them to a gem expert for identification. The expert said all of them were fake. Therefore, the reason people are willing to pay a high price for diamonds is not their inherent consumer utility, but their value. For convenience, I call goods that are valued purely for their value "purely diamond-like goods." There are many reasons why people pursue goods solely for their value. First, they can be used as conspicuous consumption goods to display the wealth of the owner. Second, they can be given as valuable gifts to others. Third, they can be portable and convenient means of storing value. People cannot take their shops and factories with them when they flee, but they can carry gold and silver. Some may argue that speculative factors should also be added, but today, speculation is mostly conducted through paper (or more accurately, electronic) transactions. When people give diamond rings or other valuable gifts, what both the giver and the recipient value is the price of the diamond ring, not the size of the diamond. The same applies to goods used as conspicuous consumption goods and means of storing value. If the price of gold doubles, then using half the amount of gold can achieve the same purpose. In fact, the higher the value density of gold, the easier it is to carry a larger amount of value. Small transactions can be facilitated by less valuable jewelry and precious metals such as silver to avoid the need for fine division of gold. Therefore, if we ignore transitional and distributional issues, taxing diamond-like goods and causing their prices to rise will not cause consumers to suffer utility losses. Therefore, from an efficiency perspective, purely diamond-like goods should be taxed at an infinitely high rate, which has been proven in my book (Ng, 1987a) (for impure diamond-like goods and upward-sloping compensatory demand curves, see). However, purely diamond-like goods are not very common, even diamonds have some practical uses. Nevertheless, many goods have varying degrees of diamond effects, so from an efficiency perspective, these goods should be taxed at higher rates. The currently popular ?book_contents= chapter Introduction 1.1 One is One: A Simple Answer to the Major Issue of How to Compromise Between Efficiency and Equality 1.2 The Old "New Welfare Economics" Returns 1.3 Overview of the Book 1.4 The Necessity of Expanding Public Spending 1.5 A Misleading Consensus 1.6 Three Basic Questions of Social Choice/Public Policy 1.7 Some Specific Opinions of This Book 1.8 A Methodological Issue 1.9 Topics on Which This Book Will Not Offer Any Advice Part I: Theoretical Foundations of Public Policy Chapter 2 The Necessity of Interpersonally Comparable Cardinal Utility 2.1 An Intuitive Explanation: Taking the Choice of Parents as an Example 2.2 Economists' Antipathy for Cardinal Utility 2.3 Ordinal Utility Alone Cannot Make Social Choice Chapter 3 Utilitarianism 3.1 A Review of the Sen-Huang Debate on Utilitarianism 3.2 Another Argument in Support of Utilitarianism 3.3 Rational Individualism Implies Utilitarianism Chapter 4 Utility, Informed Preferences, or Happiness 4.1 Non-Emotional Altruism: Pure Concern for the Welfare of Others 4.2 Irrational Preferences 4.3 Spontaneous Desires 4.4 Why Happiness Is Fundamental? Chapter 5 Utilitarianism 5.1 Arguments for Utilitarianism 5.2 Rational Individualistic Equality Implies Utilitarianism 5.3 Defending Harsanyi's Views Against Recent Criticisms 5.4 The Smallest Perceptible Increment Method 5.5 Utilitarianism and Procedural Fairness Chapter 6 One is One: A Solution to the Dilemma of Interpersonally Comparable Cardinal Utility 6.1 The Dilemma of Interpersonally Comparable Cardinal Utility 6.2 My Proposed Solution 6.2.1 Making Social Choices Using Unweighted Aggregates of Costs and Benefits: The Principle of One is One 6.2.2 Reasons for Supporting This Scheme 6.3 Economists Should Support Reverse Weighting! 6.4 Some Limiting Conditions for Applying the Principle of One is One 6.4.1 The Political Feasibility of Redistributing Through Taxes 6.4.2 Situations Where Income Tax/Transfer Payment Systems Fail 6.4.3 Transaction Costs 6.4.4 Ignorance of the Distributional Pattern of Benefits 6.4.5 The Redistribution Effects of Public Projects Themselves 6.4.6 Preferences for Work 6.4.7 Sudden Events 6.4.8 Non-Income Indicators Used for Discriminatory Treatment 6.5 Conclusion of This Chapter Chapter 7 The Separation of Politics and Economics Part II: What Is the Appropriate Scale of Government Spending Chapter 8 The Necessity of Expanding Public Spending Chapter 9 The Appropriate Benefit-Cost Ratio of Public Spending Projects Chapter 10 Concluding Remarks Appendix A Electrical Stimulation of the Brain: An Example of the Importance of Public Spending on Research Appendix B Pure Equalitarianism: A Critique Appendix C The Optimal Share of the Public Sector in GDP Rises with Economic Growth Appendix D Non-Emotional Altruism: Situations Where the Pareto Principle Does Not Apply Appendix E The Bergson-Samuelson Tradition Implies Individualism, Irrelevance, and Ordinalism Appendix F A Decline in the Efficiency of Public Goods Provision May Increase the Optimal Level of Public Spending Index of Names