Public Finance and Public Policy

870 Pages·2012·34.359 MB·English

by  Jonathan Gruber

Public Finance and Public Policy
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Public Finance and Public Policy
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Public Finance and Public Policy
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Public Finance and Public Policy
fourth edition
Jonathan Gruber
Massachusetts Institute of Technology
Worth Publishers
A Macmillan Higher Education Company
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To Andrea, Sam, Jack, and Ava
Senior Vice President, Editorial and Production: Catherine Woods
Publisher: Charles Linsmeier
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Printing and Binding: Quad/Graphics
Cover Art: ©Tim McGuire/Corbis
Library of Congress Control Number: 2012951469
ISBN-13: 978-1-4292-7845-4
ISBN-10: 1-4292-7845-5
©2013, 2011, 2007, 2005 by Worth Publishers
All rights reserved.
Printed in the United States of America
First printing
Worth Publishers
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New York, NY 10010
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About the Author
Dr. Jonathan Gruber is a Professor of Economics at the Massachusetts Institute
of Technology (MIT), where he has taught since 1992. He is also the Director
of the Health Care Program at the National Bureau of Economic Research,
where he is a Research Associate. He is an Associate Editor of both the Journal
of Public Economics and the Journal of Health Economics. In 2009, he was elected
to the Executive Committee of the American Economic Association. He is
also a member of the Institute of Medicine, the American Academy of Arts
and Sciences, and the National Academy of Social Insurance.
Dr. Gruber received his B.S. in Economics from MIT, and his Ph.D.
in Economics from Harvard University. Dr. Gruber’s research focuses on the
areas of public finance and health economics. He has published more than 140
research articles, has edited six research volumes, and is the author of Health
Care Reform, a graphic novel. In 2006, he received the American Society of
Health Economists Inaugural Medal for the best health economist in the
nation aged 40 and under.
During the 1997–1998 academic year, Dr. Gruber was on leave as
Deputy Assistant Secretary for Economic Policy at the Treasury Department.
From 2003 to 2006, he was a key architect of the ambitious health reform
effort in Massachusetts, and in 2006 became an inaugural member of the
Health Connector Board, the main implementing body for that effort. During
the 2008 election, he was a consultant to the Clinton, Edwards, and Obama
Presidential campaigns. In 2009–2010, he served as a technical consultant to
the Obama Administration and worked with both the Administration and
Congress to help craft the Patient Protection and Affordable Care Act. In
2011, he was named “One of the Top 25 Most Innovative and Practical Think-
ers of Our Time” by the online magazine Slate. In both 2006 and 2012, he was
rated one of the top 100 most powerful people in health care in the United
States by Modern Healthcare magazine.
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Brief Contents
Contents .......................................................................................vii
Preface .....................................................................................xxvii
PART I Introduction and Background
1 Why Study Public Finance? ..............................................................................1
2 Theoretical Tools of Public Finance ..............................................................25
3 Empirical Tools of Public Finance .................................................................63
4 Budget Analysis and Deficit Financing ...........................................................91
PART II Externalities and Public Goods
5 Externalities: Problems and Solutions .........................................................121
6 Externalities in Action: Environmental and Health Externalities .......................149
7 Public Goods .............................................................................................183
8 Cost-Benefit Analysis ..................................................................................207
9 Political Economy ......................................................................................229
10 State and Local Government Expenditures ...................................................263
11 Education ..................................................................................................291
PART III Social Insurance and Redistribution
12 Social Insurance: The New Function of Government ....................................321
13 Social Security .........................................................................................355
14 Unemployment Insurance, Disability Insurance, and Workers’ Compensation .391
15 Health Insurance I: Health Economics and Private Health Insurance ..............419
16 Health Insurance II: Medicare, Medicaid, and Health Care Reform .................453
17 Income Distribution and Welfare Programs .................................................489
PART IV Taxation in Theory and Practice
18 Taxation in the United States and Around the World ......................................523
19 The Equity Implications of Taxation: Tax Incidence ........................................557
20 Tax Inefficiencies and Their Implications for Optimal Taxation ........................589
21 Taxes on Labor Supply ...............................................................................623
22 Taxes on Savings .......................................................................................647
23 Taxes on Risk Taking and Wealth .................................................................675
24 Corporate Taxation ....................................................................................703
25 Fundamental Tax Reform ............................................................................739
Glossary .....................................................................................G-1
References ...................................................................................R-1
Index ...........................................................................................I-1
vi
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Contents
Contents .......................................................................................vii
Preface ......................................................................................xxvii
PART I
Introduction and Background
CHAPTER 1 Why Study Public Finance? 1
...............................
1.1 The Four Questions of Public Finance 3
................................
When Should the Government Intervene in the Economy? 3
Application: The Measles Epidemic of 1989–1991 5
How Might the Government Intervene? 7
What Are the Effects of Alternative Interventions? 8
Application: The CBO: Government Scorekeepers 9
Why Do Governments Do What They Do? 9
1.2 Why Study Public Finance? Facts on Government
in the United States and Around the World 10
..............................
The Size and Growth of Government 10
Decentralization 12
Spending, Taxes, Deficits, and Debts 13
Distribution of Spending 16
Distribution of Revenue Sources 17
Regulatory Role of the Government 19
1.3 Why Study Public Finance Now? Policy Debates
over Social Security, Health Care, and Education 20
........................
Social Security 20
Health Care 21
Education 21
1.4 Conclusion 22
..............................................................
Highlights 22
....................................................................
Questions and Problems 23
....................................................
Advanced Questions 24
.........................................................
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CHAPTER 2 Theoretical Tools of Public Finance 25
....................
2.1 Constrained Utility Maximization 26
...................................
Preferences and Indifference Curves 27
Utility Mapping of Preferences 29
Budget Constraints 31
Putting It All Together: Constrained Choice 33
The Effects of Price Changes: Substitution and Income Effects 35
2.2 Putting the Tools to Work: TANF and Labor
Supply Among Single Mothers 37
.............................................
Identifying the Budget Constraint 38
The Effect of TANF on the Budget Constraint 39
2.3 Equilibrium and Social Welfare 43
......................................
Demand Curves 44
Supply Curves 46
Equilibrium 48
Social Efficiency 49
Competitive Equilibrium Maximizes Social Efficiency 50
From Social Efficiency to Social Welfare: The Role of Equity 52
Choosing an Equity Criterion 54
2.4 Welfare Implications of Benefit Reductions:
The TANF Example Continued 55
..............................................
2.5 Conclusion 57
..............................................................
Highlights 57
....................................................................
Questions and Problems 58
....................................................
Advanced Questions 59
.........................................................
APPendIx To ChAPTeR 2 The Mathematics of Utility Maximization ... 60
CHAPTER 3 Empirical Tools of Public Finance 63
......................
3.1 The Important Distinction Between Correlation and Causality 64
....
The Problem 65
3.2 Measuring Causation with Data We’d Like
to Have: Randomized Trials 66
................................................
Randomized Trials as a Solution 67
The Problem of Bias 67
Randomized Trials of ERT 69
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