From preference to happiness: Towards a more complete welfare economics

Welfare economics is incomplete as it analyzes preference without going on to analyze welfare (or happiness) which is the ultimate objective. Preference and welfare may differ due to imperfect knowledge, imperfect rationality, and/or a concern for the welfare of others (non-affective altruism). Imperfection in knowledge and rationality has a biological basis and the resulting accumulation instinct amplifies with advertising-fostered consumerism to result in a systematic materialistic bias, as supported by recent evidence on happiness and quality of life. Such a bias, in combination with relative-income effects, environmental disruption effects, and over-estimation of the excess burden of taxation, results in the over-spending on private consumption and under-provision of public goods, and may make economic growth welfare-reducing. A cost-benefit analysis aiming even just at preference maximization should offset the excess burden of financing for public projects by the indirect effect through the relative-income effect and by the environmental disruption effect. A cost-benefit analysis aiming at welfare maximization should, in addition, adjust the marginal consumption benefits of public projects upward by a proportion determined by the proportionate excess of marginal utility over marginal welfare of consumption. The environmental disruption effects have also to be similarly adjusted upward. However, the productive contributions of public projects should not be so adjusted.  Welfare economics has achieved much, though still with long-standing weaknesses (e.g., the inability to make non-Pareto comparisons due to the unwillingness or difficulties in making interpersonal comparisons of cardinal utilities). It is not the intention of this paper either to survey the achievements or to remedy the weaknesses. Rather, it is argued that welfare economics is too narrow in focus and should be expanded in a number of aspects to make the analysis more complete and hence more useful. Some of the aspects discussed below have long been known but largely ignored in welfare economic analysis. Some are less well known and controversial points which are nevertheless important for welfare. Received: 22 January 2001/Accepted: 3 April 2002 This paper is revised from the keynote paper of the same title at the Conference on `Economics and the Pursuit of Happiness', Nuffield College, Oxford 2000, and combined with the paper `Towards a welfarist cost-benefit analysis' presented at American Economic Association Meeting, New Orleans, 2001. The paper was revised during my visit to the Division of Applied Economics, Nanyang University, Singapore. I am also grateful to Maurice Salles and two anonymous referees of this journal for helpful comments.     

Growth with Endogenous Risk of Biological Invasion

We model biological invasions as an unintended by-product of capital accumulation. We distinguish three spillover effects: (1) a negative production externality, (2) a negative or positive consumption externality and (3) an increase in the risk of future welfare loss. We also consider the implications when households self-protect by allocating income to reduce the potential damages from a biological invasion. An optimal output tax for production externalities is straightforward and can be augmented in the case of negative or positive spillover effects on consumer welfare. Policies to correct the effect of invasions on endogenous risk are more difficult to design.     

COSTLY INTERMEDIATION AND CONSUMPTION SMOOTHING

This paper studies quantitatively how intermediation costs affect household consumption loans and welfare. Agents face uninsurable idiosyncratic shocks to labor productivity in a production economy with costly financial intermediation and a borrowing limit. Reducing intermediation costs has two effects: (1) For a given decrease in the interest rate on borrowing, agents' ability to smooth consumption over time improves. (2) The demand for loans increases, which increases the interest rate. The net welfare gain of reducing intermediation costs from 3.927% (U.S. level) to 1% is about 1.14% of equivalent consumption in the baseline economy for an endogenous interest rate and 1.90% for an exogenous interest rate. The gains are distributed unevenly: households at the bottom wealth decile improve welfare by 3.96% and 5.86% of equivalent consumption, while those at the top decile have welfare gains of 0.35% and 0.2%, respectively. Sufficiently high intermediation costs eliminate borrowing and hence the welfare gain of reducing costs is not substantial. The welfare analysis includes transitional dynamics between steady states. (JEL D91, E60, G38)     

Capabilities and achievements: An empirical study

This paper contributes to the development of the capabilities approach by showing that capabilities can, counter prevailing wisdom, be measured. By operationalising the capabilities element of Sen's non-welfarist theory, the paper develops the data required by this novel approach to welfare economics and by exploring relations to life-satisfaction (happiness) it also examines new economic co-variates of experienced utility. A postal questionnaire is designed to examine elements of Sen's theory of capabilities and implemented on a random sample of English voters. Analysis of survey results includes ordinal logistic regression models of overall capabilities, rank correlations between own capabilities and views about the distribution of capabilities, rank correlations between capabilities and achievements and a set of ordered logit models explaining achievements as a function of corresponding capabilities. Furthermore, results show that it is possible to make statistically significant distinctions between different capabilities, that perceptions of others’ capabilities are sometimes related to own capabilities and that achievements appear, in general, to be related to corresponding capabilities. Finally, and in keeping with oft-found paradoxes in the happiness literature, an examination of co-variates suggests that satisfaction with capabilities might be negatively related to objective measures of opportunity.     

Children’s consent to child welfare services: Some explorative remarks

In this article, children consenting to a care order proposal is explored as a form of meaningful participation as seen by care-experienced young people. In contrast to health care and research ethics, almost no research exists on children's consent to child welfare measures. The findings suggest that instead of approaching children as individualistic rights-holders, a more relational understanding about consenting is required, both conceptually and in practice, to acknowledge the social, emotional and power relations in which children's consent (or objection) becomes topical in child welfare. Without that recognition, consenting may be far from meaningful participation.     

A MACROECONOMIC ANALYSIS OF ENERGY SUBSIDIES IN A SMALL OPEN ECONOMY

We construct a dynamic model of a small open economy to analyze the effects of large energy subsidies. The model includes domestic energy production and consumption, trade in energy at world market prices, as well as private and public sector production. The model is calibrated to Egypt and used to study reforms such as reductions in energy subsidies with corresponding reductions in various tax instruments or increases in infrastructure investment. We calculate the new steady states, transition paths to the new steady state, and the size of the associated welfare losses or gains. Our main results for a 15% cut in energy subsidies are: (1) Steady state gross domestic product drops in most of our experiments as less energy is used in production. (2) Steady state consumption rises in most of our experiments. (3) Welfare can rise by as much as 0.6% in consumption equivalent terms. (4) The largest gains in terms of output and of welfare can be obtained when savings from energy subsidy cuts are used to fund additional infrastructure investment. (JEL E21, E63, H55, J26, J45)     

Keeping up with the Joneses and the welfare effects of monetary policy

This paper examines the implications of “keeping up with the Joneses” preferences (jealousy) for the welfare effects of monetary policy. I develop a New Keynesian model, where households are jealous and the central bank follows the Taylor rule. I show that the welfare effects of monetary policy over time depend significantly on the relative strength of the consumption externality caused by jealousy and the monopolistic distortion. When a first-order approximation of the utility function is used, then the main result is the following: If jealousy (the monopolistic distortion) dominates, then a decrease in the interest rate reduces (increases) welfare in the short run, but increases (reduces) welfare in the medium run. However, the use of a second-order approximation changes the sign of the overall welfare effect of monetary policy if the initial level of employment is at the optimal level or just below it.     

Ecologically defining the mistreatment of adolescents

Ecologically defined, the problem of adolescent/family conflict for otherwise “normal” families is a reaction to crisis in the life cycle of the family. A family's success in weathering the crisis is indicated by their successful maturation to the next stage of the cycle; we can assume that in such cases the ratio of stress to coping ability was such that the family could integrate that stress. When conflict escalates to abuse and neglect, however, the indication is that stress has outstripped coping ability, and the implication is for stress-reducing intervention quite unlike the standard existing interventions in either the juvenile justice or child welfare systems, which negatively label family members, make them adversaries, fragment their coping capabilities, and even subject them at times to situations worse than those for which they needed help originally. The interventions called for are those that support beleaguered families; that are based on conceptualizations of people as adaptable and capable of solving their own problems if they are given adequate supports.     

Symposium introduction: Life satisfaction and welfare economics

The paper provides an overview of a symposium concerning life satisfaction and welfare economics. It provides a brief summary of the papers contained within the symposium and identifies four kinds of issues that arise from, and are addressed by, the burgeoning work on happiness and capabilities approaches to welfare economics.     

Developmental outcomes after five years for foster children returned home, remaining in care, or adopted

A substantial proportion of children who enter foster care in the US are infants or toddlers and will exit from foster care before they have been in care for long, either returning home or to adoption. These first years of involvement may predict a significant amount about children's longer term development so understanding developmental outcomes after five years is valuable to understanding if child welfare services (CWS) are serving the intention of promoting the well-being of children. A subsample of 353 infants (less than 13 months of age when investigated by CWS) and subsequently placed into foster care were selected from the National Survey of Child and Adolescent Well-Being. After 66 months, these infants had been reunified, adopted, or were still in foster care. Bivariate comparisons were completed. Statistical controls for maltreatment type and severity, demographic traits, and current caregiver education were implemented to help clarify the role of terminal child welfare placement, current caregiver behaviors, and household income, on eight linear regression models of developmental outcomes. Results support the longstanding tenet of child welfare services policy that remaining in foster care is less developmentally advantageous than having a more permanent arrangement of return home or adoption.     

THE CREDIT‐CHANNEL TRANSMISSION MECHANISM AND THE NONLINEAR GROWTH AND WELFARE EFFECTS OF INFLATION AND TAXES

With the credit‐channel effect driven by the central bank's open market operations, this paper's model easily gives rise to the nonlinear inflation‐growth nexus, which is evidenced by a number of cross‐country empirical studies. The threshold level of the inflation rate is found to be lower when tax rates are higher. The presence of the credit‐channel effect also provides the rationale for setting positive (and smaller than 1) tax rates on consumption, labor income, and capital income. The optimal tax rates rise as the inflation target declines. Under a fiscal policy rule where labor and capital income taxes move proportionally to each other, the optimal capital income tax rate could be higher than the optimal labor income tax rate. Under a sufficiently large central bank balance sheet, the credit‐channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing. This provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets. (JEL E58, E62, O42)     

THE OPTIMAL TAXATION OF ASSET INCOME WHEN GOVERNMENT CONSUMPTION IS ENDOGENOUS: THEORY,ESTIMATION AND WELFARE

This paper derives the Ramsey optimal fiscal policy for taxing asset income in a model where government expenditure is a function of net output or the inputs that produce it. Extending work by Kenneth L. Judd, I demonstrate that the canonical result that the optimal tax on capital income is zero in the medium to long term is a special case of a more general model. Employing a vector error correction model to estimate the relationship between government consumption and net output or the factor inputs that generate it for the United States between 1948Q1 and 2015Q4, I demonstrate that this special case is empirically implausible, and show how a cointegrating vector can be used to determine the optimal tax schedule. I simulate a version of the model using the empirical estimates to measure the welfare implications of changing the tax rate on asset income, and contrast these results with those generated in a version of the model where government consumption is purely exogenous. The shifting pattern of welfare measurements confirms the theoretical results. I calculate that the prevailing effective tax rate on net asset income in the United States between 1970 and 2014 averaged 0.449. Hence abolishing the tax completely does generate welfare improvements, though only by the equivalent of between 1.103% and 1.616% permanent increase in consumption—well under half the implied welfare benefit when the endogeneity of the government consumption is ignored. The maximum welfare improvement from shifting part of the burden of tax from capital to labor is the equivalent of a permanent increase in consumption of between only 1.491% and 1.858%, and is attained when the tax rate on asset income is lowered to between 0.148 and 0.186. Allowing the tax rate to vary over time raises the maximum welfare benefit to 1.865%. All the results are very robust to a wide range of elasticities of labor supply. (JEL E62, H21, H50)     

Third Sector Social Policy Research in Australia: New Actors,New Politics

Human service NGOs have become central actors in contemporary welfare states. The broadening of the role of NGOs in Australia as both providers of the human services that are an integral part of the welfare state and as lobbyists or advocates and agents of social change has been widely acknowledged; however, this paper focuses on a recent deepening of the role of human service NGOs in the Australian welfare state by exploring an additional dimension of their growth. Based on a recent study, it is evident that there has been increasing involvement by human service NGOs in the production of social policy knowledge through ‘policy research’ activities. The research mapped policy research activities, policy research infrastructure and policy research resources in human service NGOs, and also captured NGO policy researchers’ perceptions of the rationales and motivations driving NGOs in this direction. It was clear that this shift is based on strong beliefs that researchers located within human service agencies are best placed to produce the kind of knowledge that should form the basis of social policies responding to human need. Other drivers identified by policy researchers suggest, however, that the inclusion of third sector organizations in policy processes cannot simply be understood as the ‘opening up’ or ‘democratization’ of social policy processes to include Third Sector participants. The motivations for human service NGOs moving into social policy knowledge production in Australia are thus complex and diverse. Drawing on the findings of our study, Researching the Researchers, this paper reflects on the implications of this reconfiguration of welfare state politics. Who produces the knowledge that influences, moulds, and even determines the allocation of resources for the delivery of human services, and how this knowledge is produced have been ongoing concerns in social policy scholarship. We suggest, that in the case of human service NGOs in Australia, entry into the field of social policy research can be understood as a reconfiguring of the democratic system of policy determination. It may also be one in which the NGOs become ‘experts’ on citizens’ needs through research practices that are fundamentally less, rather than more inclusive, of the subjects of social policy. The implications of a possible shift in power to influence and in some cases determine who gets what in the welfare state is of deep concern in relation to future models of social protection and ultimately the redistributive and democratic processes of nation states. This paper seeks to question the often-unquestioned ascendancy of the third sector in welfare and asks whether this shift is in keeping with the democratic process and whether it is the best way to determine and satisfy human need.     

MAKING AND MANAGING ELECTRONIC CHILDREN: E-assessment in child welfare

'Every Child Matters' (ECM) is a government response to longstanding concerns about child welfare and protection. A key feature is the use of information and communication technologies (ICTs) to improve information sharing and inter-professional communication. One of the proposals requires the establishment of an index, ContactPoint, which is a database containing information on all children in their area, to be used by child welfare professionals to indicate their involvement with a child and, where there is 'cause for concern', to facilitate joint action. Whilst these proposals for harnessing ICTs within child welfare are a central part of the government's modernization strategy, plans for the Index have been heavily criticized for its panoptic potential to invade privacy and override professional discretion and judgement. This paper reports findings from an ethnographic study funded by the ESRC e-Society Programme. Drawing on data collected in one 'Trailblazer' local authority area during the pilot phase, it describes the introduction of a local child index and the ways in which professionals and the technologies are drawn together within the local child welfare network. For the Index to achieve its original purpose of improving information sharing and inter-professional communication it must be 'used' by child welfare practitioners. But establishing the Index as a friend to the child welfare professional is not a straightforward process. The research suggests this is dependent on a set of relations that are being constantly negotiated and accomplished in everyday practice. It is clear the deployment of ICTs in professional practice is highly contingent upon local policy implementation, the local arrangement of services and the everyday practices of busy and sceptical practitioners.     

EVALUATING CHANGES IN THE DISTRIBUTION OF CAPITAL WEALTH

A small-scale general equilibrium model in which the distribution of capital wealth is a key parameter is employed to examine the potential economic consequences of greater capital wealth equality. Every performance indicator examined – aggregate income, consumption equality, social welfare in the sum-of-utilities sense, and aggregate saving –is improved by greater capital wealth equality. However, the bottom-line social welfare gain, relative to the present high-inequality situation – even from the maximum achievable level of complete equality in capital wealth distribution – would be numerically rather modest.     

Familial and Social Dimensions of Welfare Receipt

Abstract

In this study we categorize welfare duration determinants into those associated with family traits and the social macro environment outside the family. Monthly AFDC-Basic data for Texas from mid-1989 through April 1993 are analyzed using an event history analysis to examine the length of time families receive AFDC benefits and to estimate the effects of the two latent traits that influence the pace of quitting welfare. Results suggest a need for reformulating welfare policies to address the disadvantages stemming from the social structural context of poverty such as urban residence and race membership.     

Empirical evidence on preference formation

To explain the empirical fact that different individuals have different individual welfare functions, a theory of preference formation has been developed by the first author. The theory essentially states that an individual's welfare function is identical to the distribution of consumption patterns the individual has observed over time. This includes both his own consumption and the consumption by others in his social reference group. The paper reviews the evidence collected with respect to directly measured individual welfare functions in Europe. Evidence obtained in related research by economists, psychologists, and sociologists is also discussed.     

MEASURING THE WELFARE GAIN FROM PERSONAL COMPUTERS

The welfare gain to consumers from the introduction of personal computers (PCs) is estimated. A simple model of consumer demand is formulated that uses a slightly modified version of standard preferences. The modification permits marginal utility, and hence total utility, to be finite when the consumption of computers is zero. This implies that the good will not be consumed at a high enough price. It also bounds the consumer surplus derived from the product. The model is calibrated/estimated using standard national income and product account data. The welfare gain from the introduction of PCs is 2%–3% of consumption expenditure. (JEL E01, E21, O33, O47)     

THE WELFARE EFFECT OF ACCESS TO CREDIT

I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit affects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption‐risk sharing more inefficient. I calibrate the model using U.S. data on credit‐card use and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare. (JEL E51, E41)     

Price reform and welfare: a transition model with queuing

We develop a general equilibrium model of an exchange economy with relative price distortions, where markets for consumption goods are cleared by resource-wasting queues. In general, greater distortions in relative prices lead to lower social welfare. We show, however, that in some cases a free market equilibrium may not exist if subsistence needs for commodities such as food are sufficiently high. In such an instance, removing price distortions will actually lower aggregate welfare.This paper is a revision of an essay from my dissertation at the University of Virginia. Primary thanks go to my advisors, Gerhard Glomm, Gertrude Schroeder, and Roger Sherman. Other helpful comments were made by Charles Engel, Gisela Meyer Escoe, and Chris Swann.