Five books on public economics/finance

Jonathan Gruber of MIT picks his five books to read on public finance.  Gruber advised the Romney administration on the Massachusetts healthcare reform of 2005 and the Obama administration on the Affordable Care Act of 2010.

What does one mean by public economics?

Let’s start by defining the term that we’re discussing. What is public finance, otherwise known as public economics?

Public finance is the study of the role of government in the economy. It is defined around four questions: When should governments intervene? How should governments intervene? What is the impact of government intervention on the economy? And why do governments intervene in the way that they do?

A common knock on economists is that you all disagree and so present everything as “on the one hand, and on the other hand”. What do all public finance economists agree on?

I would say that there is almost nothing that we all agree on, but there are areas of broad agreement. There is broad agreement that the best tax system is one that is broad and comprehensive and has relatively low tax rates. There’s broad agreement that government intervention should be proportionate to how big the market failures are – that markets which function well on their own should be left alone and there should be some intervention where there’s market failures like imperfect information or externalities but there’s lots of disagreement on the degree of that. It’s really a field where there is a lot of disagreement.

Can economics really help decide government’s optimal role in society? I thought that was the province of political philosophy or just plain partisan reflex.

I think of economics as being very good at answering relatively narrow questions precisely and less good at answering very broad questions. So a question like what’s the optimal role of the government in economy – that’s just too broad. But something like how big should the benefit for unemployment insurance be, or, should we repeal the Bush tax cuts? Those are topics that aren’t in the province of political philosophers. Those are topics on which we have a lot to offer.

He points to this important shift in US public economics. Earlier public finance was about trataxes and transfers. Now much of it is about healthcare. This remains the most important issue in public finance:

What are the two or three most important questions that public finance economists have not answered but need to? And how optimistic are you that they will be answered?

The single most important question that we need to answer is how government behaviour, not merely taxation, affects capital formation. I think we still don’t really have a good handle on what government can do to best promote capital formation and what it does that most dissuades capital formation. The biggest issue in dollar terms is just how to control healthcare costs. The Affordable Care Act makes a start but more must be done.

I like to say there are only two problems we have to worry about in America – healthcare spending and global warming because either one puts us underwater. How we control healthcare costs is probably the number one problem public finance economists and everyone in the world has to grapple with, because if we don’t control healthcare costs we’ll be bankrupt. Capital formation would be number two, and then if I had to pick a third – well, those two are difficult enough. I’ll just stick with two.

He also discusses the differences in healthcare plans of Obama and Romney:

You were an architect of Mitt Romney’s Massachusetts health programme and an instrumental adviser in the design of the Obama administration’s health reforms. So please settle the question of the year: How similar are they?

They are very, very similar. You can think of the Affordable Care Act as a more ambitious version of the Massachusetts reform. Both reforms have the same core principles: Non-discrimination in insurance markets, health insurance mandates and subsidies so insurance is affordable. In Massachusetts, we stopped there.

The national bill – the Affordable Care Act – has two additional features. One is it’s paid for and two, it takes on cost controls. Romney’s reform was paid for with funding from the federal treasury. The Affordable Care Act is paid for through offsets in the federal budget. And the Affordable Care Act tackles the increase in costs in a serious way, which the Massachusetts bill didn’t do. So you can think of the Affordable Care Act as the Massachusetts bill-plus.

Where did the idea for a mandate come from?

I associate it with Stuart Butler from the Heritage Foundation and Mark Pauly, an academic at Wharton. I first heard about it as the conservative alternative to the Clinton healthcare reform of the early 1990s. At the time, most economists thought an individual mandate made more sense than the employer mandate proposed by the Clinton administration. Over time the idea became more popular and then Massachusetts adopted it as the right way to go.

Going by how the crisis has shaped up, public economics is clearly one of the hot subjects to study…


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