Obama and Welfare Economics

Obama and Welfare Economics
[Analysis] The pursuit of equality
Alfredo Ascanio (askain)
Published 2009-04-25 13:14 (KST)

Welfare economics is a very important branch of economic theory; it serves as a foundation to many applied such as public finance, and the economics of government policy.

Welfare may diverge from utility (or preference). Distinguishing basic value judgments from subjective judgments of fact enhances the role of economist in policy recommendation.

But what is the principle underlying this segment of the economy? The Pareto Principle: This principle says that a change is desirable if it makes some individuals better off without making any other individuals worse off.

This principle is a reasonable sufficient-criterion for a social improvement. However, most policy changes make some individuals better off and some worse off. And that is the big problem that can be presented to President Obama and his team.

Can Obama still have a sufficient criterion for social improvement? Different welfare criterion in terms of compensation tests have been proposed to deal with cases where some individuals are made better off and some worse off.

The problem of social choice is to see whether we can derive our social preference based on the preferences of individuals, satisfying certain reasonable conditions. This seems simple enough and nothing more than the basic requirement of democracy. But a formidable difficulty is encountered in this problem of social choice.

A neo-dictator, he may say that, "the social welfare should just be my preference. Whatever I prefer or whatever I think is good for society should prevail"
The Majority Preference Criterion says that "x" should be preferred to "y" if no one prefers "y" to "x" and at least half of the population prefer "x" to "y."

What is the optimal distribution of income? The analysis concentrate on the choice of a tax schedule and then achieve an optimal balance between the need to provide incentives to work and the reduction of inequality due to differential earning skills.

Nevertheless, this is not the only relevant issue: the difference in skills is not the only cause of inequality; income taxation is not the only problem in economic justice. In fact, some people believe that equality of opportunity is more important than equality of income, because equality of opportunity will lead to equality of income, and equality of income is not an injustice if there is equality of opportunity.

The pursuit of equality by progressive income taxation is usually limited by the consideration of this incentive.

Wider problems related to social welfare are briefly considered and then we have the following question: does economic growth increase social welfare? Answers to such question can only be provided by a complete analysis of all institutional effects. Due to the increasing complexity of modern society, it is likely that more problems are going to involve significant institutional and subjective effects, making a complete multidisciplinary study more necessary.

Had Mr. Obama done a better job of selling his plan, and worked harder at making sure that Republicans were included in drafting it, they would have found it more difficult to oppose his plans.

But The Economist said: "There are some signs that Mr. Obama's administration is learning. This week the battered treasury secretary, Tim Geithner, has at last come up with a detailed plan to rescue the banks (see article and article). Its success is far from guaranteed, and the mood of Congress and the public has soured to the point where, should this plan fail, getting another one off the drawing board will be exceedingly hard. But the plan at least demonstrates the administration's acceptance that it must work with the bankers, instead of riding the wave of popular opinion against them, if it is to repair America's economy."

Alfredo Ascanio is a professor of economics at Simon Bolivar University in Caracas, Venezuela.
©2009 OhmyNews
Other articles by reporter Alfredo Ascanio