Policy Strategy Economics Apr 3, 2013

All Gain from Guar­an­teed Access to Key Goods and Services

A guar­an­teed min­i­mum dis­tri­b­u­tion sys­tem is optimal

Based on the research of

Xavier Calsamiglia

Teresa Garcia-Milà

Therese McGuire

Listening: Interview with Therese McGuire on Guaranteed Access to Essentials

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Equal­i­ty is upheld as one of our country’s high­est ideals. In his sec­ond inau­gur­al address, Pres­i­dent Oba­ma said, a lit­tle girl born into the bleak­est pover­ty knows that she has the same chance to suc­ceed as any­body else because she is an Amer­i­can, she is free, and she is equal not just in the eyes of God but also in our own.” But in a coun­try where every­thing has a price, what mech­a­nisms ensure that those with­out mate­r­i­al means can secure equal oppor­tu­ni­ties to succeed?

The way some econ­o­mists con­ceive of it, cer­tain goods and ser­vices so piv­otal­ly affect an individual’s life for­tunes that access to them should trump the abil­i­ty to pay. And broad­ly speak­ing, Amer­i­cans tend to agree: our cit­i­zens should be able to enjoy basic nutri­tion, hous­ing, health care, and edu­ca­tion, regard­less of whether they are rich or poor. Thus, we have an egal­i­tar­i­an pref­er­ence” for the dis­tri­b­u­tion and con­sump­tion of these things.

Idea Mash-up: Oates Meets Tobin
The idea of a soci­etal pref­er­ence for equi­table access to essen­tial goods and ser­vices was first espoused in 1970 by James Tobin, a Nobel Prize – win­ning econ­o­mist. In 1972, in an unre­lat­ed vein of inquiry, econ­o­mist Wal­lace Oates pub­lished the book Fis­cal Fed­er­al­ism, which exam­ines how pub­lic-sec­tor respon­si­bil­i­ties and finances should be divvied up amongst mul­ti­ple nest­ed lay­ers of gov­ern­ment. From Oates’s per­spec­tive, the opti­mal sys­tem — that is, the least waste­ful sys­tem — is to put goods and ser­vices in the hands of local gov­ern­ments, who then decide the best ways to dis­trib­ute the goods and ser­vices. Empow­er­ing local gov­ern­ments has become a basic tenet of fis­cal federalism.

But in cas­es where there are egal­i­tar­i­an pref­er­ences for spe­cif­ic goods and ser­vices, is Oates’s favored frame­work tru­ly the best fed­er­al fis­cal mod­el? New research by Therese McGuire, a pro­fes­sor of man­age­ment and strat­e­gy at the Kel­logg School of Man­age­ment, uses Oates’s frame­work to inves­ti­gate how to equi­tably dis­trib­ute the goods and ser­vices that Tobin iden­ti­fied as cru­cial for deter­min­ing an individual’s life chances.

McGuire, who worked with two coau­thors from the Uni­ver­si­tat Pom­peu Fab­ra and the Barcelona Grad­u­ate School of Eco­nom­ics, points out that Tobin’s view con­flicts with a cen­tral belief of most econ­o­mists. Effi­cien­cy in eco­nom­ics is about get­ting the most social wel­fare, the most util­i­ty, and the most hap­pi­ness pos­si­ble,” McGuire says. Which is why econ­o­mists say to redis­trib­ute income, not goods and ser­vices, because that’s how peo­ple will be hap­pi­er and you get high­er social wel­fare.” But when soci­ety prefers to see cer­tain essen­tials equi­tably dis­trib­uted, which the authors refer to as sol­i­dar­i­ty,” McGuire and her coau­thors take the posi­tion that it is more effi­cient to focus on equi­table pro­vi­sion­ing of the spe­cif­ic goods and services.

The researchers then ask, should the pub­lic admin­is­tra­tion of such ser­vices be cen­tral­ized or decen­tral­ized? What is the best fis­cal fed­er­al struc­ture for these pub­licly pro­vid­ed services?

To answer these ques­tions, McGuire and her coau­thors designed a series of mod­els rep­re­sent­ing a hypo­thet­i­cal soci­ety with mul­ti­ple nest­ed lev­els of gov­ern­ment. (Regions could be states in the U.S. or coun­tries in the Euro­pean Union.) Peo­ple were grouped into two cat­e­gories: rich and poor. The poor con­trolled 20 per­cent of the assets, and the rich con­trolled the remain­der. The authors assumed that the pub­lic opposed fluc­tu­at­ing lev­els of key ser­vices across jurisdictions.

The researchers then mod­eled five dif­fer­ent types of fed­er­al fis­cal struc­tures: cen­tral­ized, decen­tral­ized, vol­un­tary trans­fers (where mon­ey is trans­ferred between regions), match­ing grants (where local gov­ern­ments match grants made by the cen­tral gov­ern­ment), and guar­an­teed min­i­mums (where a min­i­mum grant amount is guar­an­teed by the cen­tral gov­ern­ment to local gov­ern­ments). With­in each mod­el, they allowed for a con­tin­u­um of the public’s pref­er­ence for sol­i­dar­i­ty. They also assumed that this pref­er­ence was organ­ic, or reflec­tive of a region’s val­ues, rather than imposed from else­where. With all the para­me­ters in place, the researchers then ran sim­u­la­tions to find the most effi­cient fis­cal system.

A Sur­prise Find­ing
While Oates argued for the supe­ri­or­i­ty of a sys­tem where sub­cen­tral (or local) lev­els of gov­ern­ment were fis­cal­ly empow­ered, the authors spec­u­lat­ed that, once sol­i­dar­i­ty was tak­en into account, a decen­tral­ized sys­tem might not be the most effi­cient sys­tem. Indeed, the mod­els showed that the strength of the sol­i­dar­i­ty pref­er­ences deter­mined how well dif­fer­ent sys­tems performed.

If the goods in ques­tion are pri­vate­ly con­sumed and there is no taste for sol­i­dar­i­ty,” McGuire explains, then a decen­tral­ized sys­tem is the most effi­cient one. But when a taste for sol­i­dar­i­ty is present, the most effi­cient sys­tem turned out to be the guar­an­teed min­i­mum system.”

Fig­ure 1: Effi­cien­cy loss asso­ci­at­ed with vary­ing tastes for solidarity

In fact, the guar­an­teed min­i­mum sys­tem yield­ed the least inef­fi­cien­cy in every case con­sid­ered, from when sol­i­dar­i­ty pref­er­ences were extreme­ly weak to when sol­i­dar­i­ty pref­er­ences were extreme­ly strong.

McGuire said it was sur­pris­ing and notable that the guar­an­teed min­i­mum sys­tem out­per­formed all the oth­ers. We looked at many rea­son­able changes to the assump­tions,” McGuire said. We allowed all kinds of vari­ance in the mod­els — how strong­ly you feel about sol­i­dar­i­ty, how we char­ac­ter­ized the util­i­ty func­tion of the var­i­ous indi­vid­u­als — and no mat­ter what we did, the guar­an­teed min­i­mum came out as the most efficient.”

Find­ings, In Con­text
Why is a guar­an­teed min­i­mum so ide­al? Essen­tial­ly, it ensures that every­one has ade­quate goods and ser­vices while still rec­og­niz­ing region­al dif­fer­ences by allow­ing regions that wish to pro­vide more to do so. McGuire says the study rep­re­sents the first time that Tobin’s ideas of spe­cif­ic egal­i­tar­i­an­ism” (or sol­i­dar­i­ty) have been crossed with Oates’s frame­work of fis­cal fed­er­al­ism. We pro­vide a new ratio­nale for a fis­cal fed­er­al sys­tem with a guar­an­teed min­i­mum lev­el of pro­vi­sion of key goods con­sid­ered to be vital to eco­nom­ic and soci­etal suc­cess,” McGuire said.

There are plen­ty of real-world appli­ca­tions. The mod­el indi­cates that the best way to offer health­care is to enact a guar­an­teed min­i­mum sys­tem. If we all believe that a cer­tain min­i­mum lev­el of health care should be pro­vid­ed for every­one to be on equal foot­ing and suc­ceed in our soci­ety, then the pre­ferred sys­tem is either cen­tral pro­vi­sion or a cen­tral man­date that is com­mon across the coun­try,” McGuire says.

Already, most pub­lic schools are fund­ed with a guar­an­teed min­i­mum form of state grant. How­ev­er, the min­i­mum spend­ing lev­el guar­an­teed by the states dif­fers from one state to the next, which cre­ates disparities.

Accord­ing to McGuire, the find­ings are also rel­e­vant to Spain, one of sev­er­al coun­tries in the EU whose debt to GDP ratio is wor­ry­ing­ly high. Part of the country’s debt bur­den comes from bor­row­ing by region­al gov­ern­ments, who have impor­tant spend­ing respon­si­bil­i­ties, includ­ing health care and edu­ca­tion, but whose rev­enues are in large part con­trolled by Spain’s cen­tral gov­ern­ment. This sep­a­ra­tion of rev­enue-rais­ing author­i­ty from spend­ing respon­si­bil­i­ty is an inef­fi­cien­cy of a high­ly cen­tral­ized sys­tem that you would not nec­es­sar­i­ly have with a guar­an­teed min­i­mum sys­tem,” McGuire says. In a guar­an­teed min­i­mum sys­tem, the region­al gov­ern­ments would be respon­si­ble for rais­ing any addi­tion­al funds beyond their cen­tral­ly financed min­i­mal allotment.

Here at home, the fed­er­al government’s reach is hot­ly con­test­ed, as the recent debates over Oba­macare” demon­strate. But this recent study by McGuire and her coau­thors demon­strates that some issues are best solved by nei­ther com­plete­ly cen­tral­ized nor decen­tral­ized sys­tems. This is espe­cial­ly true when it comes to the crit­i­cal goods and ser­vices to which soci­ety deems every­one should have access — even those in soci­ety who are, as Pres­i­dent Oba­ma put it, born into the bleak­est poverty.”

Featured Faculty

Therese McGuire

ConAgra Foods Research Professorship in Strategic Management, Senior Associate Dean for Curriculum & Teaching

About the Writer

T. DeLene Beeland is a science writer based in Asheville, NC.

About the Research

Calsamiglia, Xavier, Teresa Garcia-Milà, and Therese J. McGuire. 2012. “Tobin Meets Oates: Solidarity and the Optimal Fiscal Federal Structure.” International Tax and Public Finance, pp 1-24.

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