An Innovative Approach to Policy Development Executive Briefing Note: President-Elect Strategy to Solve Inequality Lise Hebabi, PhD Director & Senior Consultant Generativ.ca consultants inc.: David Barrows Aurora Philosophy Institute

ABSTRACT

 

In this teaching case, a senior executive from Silicon Valley, newly appointed to the cabinet post of Secretary of Health and Human Services, has been given the task of evaluating and “solving” the problem of inequality. Based upon her, his private sector experience the newly appointed Secretary is expected to propose innovative solutions. The case describes a multi-faceted issue with philosophical, social, psychological, and economic dimensions. The proposed solution must be presented in a one-page brief to the president-elect.

Keywords: innovation; strategy; inequality; policy

Background

            It has been quite an adventure so far. I have a classic middle-class background with an undergraduate degree at Harvard and a PhD at MIT. The PhD was not required for what I wanted to do but it made my parents happy, and I could also teach in the Boston area. I am 43 years old, married with two children, and an almost billionaire in Silicon Valley. Now is the time to make some serious money. 

Harvey called. We have remained friends since our undergraduate days at Harvard. Harvey wants to save the world and has chosen politics as the way to accomplish his mission. Harvey is now a senior member of the President-Elect’s team. After my meeting with the President-Elect I was offered the position of Secretary of Health and Human Services (a Cabinet level position). The pay is Level I, $219,200 per annum. It is so trivial that I have donated my stipend to charity. This will be an expensive move: find accommodation in Washington, private school for the children and there is the opportunity cost of not continuing my career in the Valley. 

The President-Elect was clear. My job is to evaluate and “solve” the problem of inequality utilizing innovative policies and program innovation strategies. Inequality encompasses many areas: inequality of opportunity, inequality of income, inequality of wealth, etc.  Of course, all these aspects of inequality are interrelated. No null sets here. 

It is amazing to me. Senior people in Washington do not understand the difference between a problem and an issue. Problems can be solved but issues must be managed. Issues never really go away; they change form and structure. Issues are always there and require sophisticated and ongoing management. Unfortunately, these capabilities are in short supply in Washington. For them everything is a problem which requires a solution. I suppose it is a function of their interaction with the media and the election cycle. All media discussions are 3 to 5 minutes. There is no opportunity for nuance. 

To complicate matters, my undergraduate degree was in mathematics and my PhD in computer science. I have no academic training in the social sciences. I am on the board of directors of my local hospital. The hospital provides service to affluent Californians. I have no background in this field. 

So, what to do? Harvey suggested extensive briefings with the civil servants, academics, community organizers, etc. I refused to be briefed by stakeholders with their own agendas, so I did my own research, as I have always done. 

The Issue

             Here is what I found, in no particular order of importance:

1. Medical Solutions

             Euthanasia is a terrific idea. It has been employed since the dawn of humankind to forcibly remove unwanted people. It is still utilized to this day. However, the international community has concluded that genocide is no longer an acceptable public policy. 

Well, if you cannot kill them, why not institute enforced sterilization? That should reduce the number of individuals that have the potential to be disadvantaged. Compulsory sterilization in Sweden was administered without a valid consent of the subject, during the years 1906–1975 on eugenic, medical, and social grounds. As recently as 2012, sterilization was also a condition for gender reassignment surgery (Wikipedia contributors, 2020b). In most of the world enforced sterilization is now viewed as inappropriate public policy.

2. Why Are We Here?

            Why are we here? What constitutes inequality and why is inequality undesirable? 

The World Bank defines absolute poverty as a set standard which is consistent over time and between countries. First introduced in 1990, the dollar a day poverty line measures absolute poverty by the standards of the world's poorest countries. As of 2015 the World Bank international poverty line is $1.90 a day (The World Bank, 2020). This is a serious global issue but, largely, irrelevant in America.

Jesus said “The poor you will always have with you, but you will not always have ME" (John 12:8). If we define the poor as the lowest quartile then Jesus was right. The poor will always be with us by definition! John Diefenbaker was campaigning to be elected Prime Minister of Canada. During one of his speeches he reportedly said, “If I am elected Prime Minister no Canadian will have an income below the national average”. And he was elected!

The Stoic philosopher Marcus Aurelius argued:

  • We’re not put on earth to feel pleasure. You don’t exist to eat delicious foods, to see exotic places, or to ‘feel good.’ You exist for your fellow man and woman.
  • What brings us true happiness in life? It is helping others and doing what we were made for. (Kamtekar, 2018)

Unfortunately, Stoic philosophy is a “tough sell basis for a major policy initiative to “solve” the problem of inequality.

3. A Look at the Numbers

Perhaps some data will help.

  • In 2019, 81% of the US population owned a smartphone (Pew Research Center, 2019).
  • As of 2019, 90% of adults in America use the internet, either irregularly or frequently. The United States ranks #1 in the world with 7,000 Internet Service Providers (ISPs). (Wikipedia contributors, 2020d)
  • In 2018, 91.3% of US households had access to a vehicle. (U.S. Census Bureau, 2018)
  • According to the USDA's latest Household Food Security Report, more than 35 million people in the United States struggled with hunger in 2019. In 2019, 13.7 million American households were food insecure with limited or uncertain access to enough food (Coleman-Jensen, Rabbitt, Gregory, & Singh, 2020). The United States 2020 population is estimated at 328,239,523 people at midyear (U.S. Census Bureau, 2019). Almost 11% of US citizens struggle with hunger. Seems unacceptable to me.
  • US Census Bureau statistics for 2019 indicate that 12.3 % of the US population lives below the poverty line. The figure is lower for White people and Asians (10.3% and 9.6 % respectively), and significantly higher for American Indian and Alaska Natives (23%), African Americans (21.2%), people of Hispanic or Latino origin (17.2%), and native Hawaiian and other Pacific Islanders (16.5%) (US Census Bureau, 2019). Although maybe living in Hawaii compensates for lower income…
  • The 2019 Census tells us that education matters too. Only 4.1% of Americans with University degrees are poor, compared to 23.4% of those who don’t have a high school diploma (US Census Bureau, 2019). 
  • What does the Congressional Budget Office say?

“The CBO builds on its past analyses of the distribution of household income in the United States by projecting what that distribution would look like in 2021 under current law and comparing those projections with the actual distribution in 2016. In particular, this analysis focuses on how two factors—means-tested transfers and federal taxes—affect the distribution of income. Means-tested transfers are cash payments and in-kind benefits from federal, state, and local governments that are designed to provide assistance to individuals and families with low income and few assets. Such transfers include benefits provided through programs such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP) but not social insurance benefits, such as Social Security and Medicare. Federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes.
Average inflation-adjusted household income is projected to grow for all groups. Growth in average income—both before and after means-tested transfers and federal taxes are accounted for—is projected to be fastest for households in the highest quintile (or fifth) of the income distribution. Growth in income after transfers and taxes is more skewed toward higher-income households than is growth in income before transfers and taxes. (Congressional Budget Office, 2019)”.

Thanks to the Federal government the rich get richer!

  • The Organization for Economic Co-operation and Development ("OECD") ranks social welfare spending by country as a percentage of GDP. In 2019 the United States ranked 20th in the world (OECD, 2019). Nothing to be terribly proud of.

4. A Just Society

Two Harvard philosophers debated the configuration of a just society in the context of inequality (Yezzi, 1986). 

John Rawls was a proponent of contemporary liberalism. Citizens do not deserve to be born into a rich or poor family or to be born more or less gifted than others. The initial distribution of natural assets is undeserved. Wealth creation is a cooperative enterprise, and all social goods are to be distributed equally. Wealth and power would be distributed equally except where inequalities work to the advantage of all. Rawls’ theory of justice is within the social contract tradition of Locke, Rousseau and Kant.

 

Robert Nozick believed in the minimal state. In this philosophical approach legitimate use of power by the state is limited to preventing fraud or the use of force. It does not include the power to tax or to confiscate property. Taxation by the state to finance projects other than protection violates individual rights to decide how one's property is disposed of. Taxation without consent is equivalent to forced labour. Socialism and liberalism redistribute wealth to achieve social justice. This imposes the redistribution of goods which ignores the history of how goods have come to be produced and distributed through trade, labour, purchases, gifts, etc. To take those goods away from people would be unjust, as long as the initial acquisition of the goods was just (e.g., one's own labour, inheritance). The state has the obligation to protect property and to punish those who violate property rights. 

5. Income Disparities

Examples of huge income disparities abound.

Cristiano Ronaldo is a Portuguese professional soccer player with a net worth of $500 million. Ronaldo earns a base salary of $70 million. Off the field he earns an additional $50 million from endorsements. He is 35 years of age ("Cristiano Ronaldo Net Worth," 2020). He kicks a ball. Is that fair? How much should he be paid for kicking a ball? How will this value be determined? Jeff Bezos established Amazon on July 5, 1994. Amazon has created market value of over $ 1 Trillion for shareholders. Amazon has created jobs for 750,000 employees. Bezos is worth $187 billion ("Jeff Bezos Net Worth," 2020). Is that fair? What is a better number and why? In Economics 101 we learn that the marginal value of labour is the marginal product of labour multiplied by the value of the items produced. Why is that not applicable here?

The argument is that free markets can fail. The extreme case of market failure is slavery. Research from the Walk Free Foundation, based on its Glob al Slavery Index of 2018, estimated

there were about 40.3 million slaves around the world. The population of Sweden is about 10 million; the number of slaves in the world is equal to, about, four Sweden’s. The Walk Free Foundation reported in 2018 that slavery in advanced democratic nations is much more common than previously known, in particular the United States and Great Britain, which have 403,000 and 136,000 slaves respectively (The Global Slavery Index 2018, 2018). Obviously, we must make this a priority for resolution.

Labour markets can fail due monopsony. The power of labour unions rests in their two main tools of influence: restricting labour supply and increasing labour demand. Through collective bargaining, unions negotiate the wages that employers will pay. Do we want to enhance the power of unions? Is that good public policy? Are there alternative approaches to address labour market failures?

Empirically the elimination of inequality is impossible. In 1573, Tusser observed: “A foole and his monie be soone at debate, which after with sorrow repents him too late” ("Tusser, Thomas," 1911). This is the earliest known version of the proverb: A fool and his money are soon parted. Two great American philosophers noted (BrainyQuote, 2020):

  • Never Give a Sucker an Even Break (W. C. Fields) 
  • There's a sucker born every minute (P.T. Barnum) 

The numbers do not work. The Pareto distribution is a power-law probability distribution that is used to describe a number of social, scientific, geophysical and actuarial observations. With respect to the distribution of wealth in a society, the fitted trend indicates that a large portion of wealth is held by a small fraction of the population. This Pareto distribution has become known as the Pareto Principle, or 80-20 rule. This rule states that 80% of the wealth of a society is, generally, held by 20% of its population.

6. What About Genetics? 

              A recent study found that “individuals’ geneti participation, at least in part, through genetic influences on the willingness to take risk, and on perceptions of the distribution of equity returns” (Sias, Starks, & Turtle, 2020). And there is clearly an inherent biological bias with respect to us versus them. This is reinforced by conditioning at the earliest stage of human development, hence the expression “looking for a friendly face”. This has led to an over-representation of white males in positions of power in our society. So, genetics matter. Therefore, all that is required is a bit of enforced genetic re-engineering. We simply re-edit genetics so we’re all identical. Three problems with that: 1. The technology is not available.  2. Many Americans will not take proven inoculations for measles. It is hard to imagine much public support for enforced genetic reengineering. 3. Even if we could proceed, the effects would not appear in the adult population until well after the next election. This is probably a non-starter.  Nonetheless, research indicates that considerable progress can be made in social re-engineering using established psychological and sociological interventions. This must be explored on a serious basis to determine which approaches will be the most valuable, sustainable, and politically acceptable. There is also the opportunity for selective utilization of government regulations and incentives.

Financing the Solution

            Whatever we decide to do will cost a fortune. In the private sector we reallocate resources on a continuous basis. Companies that do not respond to changing market conditions die: JC Penny, Kodak, Lehman Brothers, etc. Not so easy in government. At one time, in Italy, the government had a department to serve widows of World War 1 veterans. There were more civil servants than widows!

Modern Monetary Theory (MMT) argues that a county’s currency is a public monopoly for the government and that unemployment is evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy desired savings (Barrows, Forthcoming).  

Functional finance is often referred to as old Keynesian. Functional finance is based on effective demand principles. Government should finance itself to meet explicit goals such as achieving full employment, ensuring growth, and low inflation. As a result, governments should:

  • Intervene because economies are not self-regulating.
  • Ensure a prosperous economy.
  • Manage the money supply
  • Direct fiscal policy to ensure a prosperous economy, balancing revenue and spending is of secondary importance; prosperity is the primary goal.
  • Tax based upon economic impact, rather than to raise revenue.

If one accepts the notion of endogenous money (or MMT) then it cannot be assumed that successful fiscal adjustment (lower deficits) will lead to lower interest rates, since those rates are managed by monetary authorities. The Central Bank manages the short-term rates, and can directly intervene on long rates, as it did during the Great Depression, World War II, and with Quantitative Easing.

Consistent with MMT, Blanchard notes that when the interest rate on the public debt is lower than the GDP growth rate the debt follows a stable process. The debt-to-GDP ratio tends to decline because borrowing ‘pays for itself’. Historically, in the US, the interest rate has often been lower than the growth rate. Governments could, therefore, use the budget to stabilize the economy when it is slowing down and to undertake productive public investments (Robb, 2019).

Modern monetary Theory (MMT) suggests that national debt which resides in the central banking system is irrelevant. The central bank can “forgive" the debt of the national government by simply pressing a button. Alternatively, the national government can repay the debt. The central bank can collect these payments and return the proceeds to the national government. MMT must be used with caution due to: 

  1. The threat of inflation. Inflation is less likely in a global economy with numerous supply opportunities, such as China, India, etc., which did not exist during the 1970s Stagflation. The potential for supply constrained inflation is contingent upon the world production possibility frontier.  
  2. A greater concern is for asset-price acceleration. This is especially relevant in the international housing market. Such real estate price inflation is pure economic rent. A Ricardo-George tax solves the problem; admittedly a Ricardo-George tax is politically difficult to implement. 
  3. The law of unintended consequences with the potential for Black Swan events. 

Proof of MMT is the national debt of Japan. This is held, primarily, internally and has had no impact on domestic inflation. In fact, the major concern for Japan has been deflation.

Of course, MMT policy is the responsibility of the Treasury and the Federal Reserve. They will go nuts and resent my intrusion onto their turf (Obama’s stay in your own lane theory of management). I will persist. How else can this be financed?

Conclusion

            The President-Elect is from the Reagan school of management: a one-page briefing note. If you can’t explain yourself on one page you do not know what you are talking about. One excellent page is infinitely superior to 100 PPT slides. Well, time to write.

Executive Briefing Note to the President-Elect: Strategy to Solve Inequality

Inequality is multidimensional ………………………….

Teaching Note

            This case presents a hypothetical situation where a successful Silicon Valley executive has been recruited to serve as Secretary of Health and Human Services in the cabinet of the newly elected president of the United States, with no previous experience in government or as a volunteer in the social services sector. An innovative, integrated, strategy is required.

 

The case can be used for in class discussions and for written assignments. The questions raised by the case help to stimulate critical thinking. The scenario illustrates and simulates high-stake and controversial decision making under time constraints. These decisions can have lasting and widespread repercussions.

The case has been used successfully in undergraduate, post graduate and executive education. It is targeted to students and executives responsible for public policy development and implementation in developed and transition nations. The case has also been used successfully in graduate and undergraduate degree courses in public and business administration (with a particular emphasis upon business-government relations). As well, the case is of interest to executives enrolled in executive education programs.

There are a number of interesting pedagogical opportunities. One approach is to focus on the models of public policy development and how they may be utilized is this case; rational, incremental, public choice and class analysis (e.g. Marx). Questions for discussion could include:

  • When and under what circumstances should the nominee meet with stakeholders? 
  • Should the stakeholder discussions have taken place prior to the preparation of the executive memo, during the preparation of the executive memo or at the completion prior to submission to the president elect? 
  • To what extent should the memo focus on processes, initiatives or the expected results?
  • What process could the students recommend in this case?

There could be an interesting discussion on the pros and cons of appointing a senior private sector executive for a social services portfolio. This is especially true as the executive has no educational, work or volunteer experience in the social services sector. Will this background bias the nominee to search for market-based solutions and an enhanced roll for private sector evolvement? If so, what private sector skills, expertise or interventions might be appropriate?

The case has been utilized effectively in group simulations. Groups are allocated 1/2 hour to develop their briefing note. Briefing notes are then presented and evaluated by the entire class.

We have asked the entire class to evaluate each presentation and to assign a grade, with comments. This is anonymous and provides an excellent opportunity for student commentary and evaluations.

The case proposes and discusses alternative policy options with respect to the issue of inequality. What is the utility of discussing euthanasia? Euthanasia is an option available in a number of countries in the developed world, in addition to being fairly widespread in the developing world. Discussion of international practices can be important from a pedagogical perspective and is particularly useful in executive education programs in developing nations.

 

References

Barrows, D. (Forthcoming). National Debt. In S. Pressman & J. Smithin (Eds.), Some Unsettled Question in Monetary Macroeconomics: Palgrave Macmillan.

BrainyQuote. (2020). Retrieved from https://www.brainyquote.com/

Coleman-Jensen, A., Rabbitt, M. P., Gregory, C. A., & Singh, A. (2020). Household Food Security in the United States in 2019. (ERR-275). U.S. Department of Agriculture, Economic Research Service

Congressional Budget Office. (2019, December 19, 2019). Projected Changes in the Distribution of Household Income, 2016 to 2021. Retrieved from https://www.cbo.gov/publication/55941

Cristiano Ronaldo Net Worth. (2020). Retrieved from https://www.celebritynetworth.com/richest-athletes/richest-soccer/ronaldo-net-worth/

The Global Slavery Index 2018. (2018). Retrieved from GLOBALSLAVERYINDEX.ORG: 

Jeff Bezos Net Worth. (2020). Retrieved from https://www.celebritynetworth.com/richest-businessmen/ceos/jeff-bezos-net-worth/

Kamtekar, R. (2018). Marcus Aurelius. In E. N. Zalta (Ed.), The Stanford Encyclopedia of Philosophy (Spring 2018 Edition ed.).

OECD. (2019). Social spending (indicator). Retrieved from https://data.oecd.org/socialexp/social-spending.htm

Pew Research Center. (2019). Mobile Fact Sheet. Retrieved from https://www.pewresearch.org/internet/fact-sheet/mobile/

Robb, G. (2019). What Modern Monetary Theory gets 'plain wrong', according to former IMF chief economist. MarketWatch

Sias, R., Starks, L., & Turtle, H. J. (2020). Molecular Genetics, Risk Aversion, Return Perceptions, and Stock Market Participation. NBER Working Paper No. 27638 (August 2020). 

The World Bank. (2020). Understanding Poverty. Retrieved from https://www.worldbank.org/en/understanding-poverty

Tusser, Thomas. (1911). In H. Chisholm (Ed.), Encyclopaedia Britannica (11th Edition ed., Vol. 27, pp. 488): Cambridge University Press.

U.S. Census Bureau. (2018). Selected Housing Characteristics. Retrieved from https://data.census.gov/cedsci/table?y=2018&d=ACS%205-Year%20Estimates%20Data%20Profiles&tid=ACSDP5Y2018.DP04&hidePreview=true.  Retrieved 2 December 2020, from United States Census Bureau https://data.census.gov/cedsci/table?y=2018&d=ACS%205-Year%20Estimates%20Data%20Profiles&tid=ACSDP5Y2018.DP04&hidePreview=true

U.S. Census Bureau. (2019). QuickFacts United States. Retrieved fromhttps://www.census.gov/quickfacts/fact/table/US/PST045219.  Retrieved 10 December 2020, from United States Census Bureau https://www.census.gov/quickfacts/fact/table/US/PST045219

US Census Bureau. (2019). Selected Characteristics of People at Specified Levels of Poverty in the Past 12 Months. Retrieved from https://data.census.gov/cedsci/table?q=poverty&tid=ACSST1Y2019.S1703&hidePreview=false. American Community Survey, at data.census.gov Retrieved 10 December 2020, from United States Census Bureau https://data.census.gov/cedsci/table?q=poverty&tid=ACSST1Y2019.S1703&hidePreview=false

Wikipedia contributors. (2020a, 21 November 2020). Assisted suicide. Retrieved from https://en.wikipedia.org/wiki/Assisted_suicide

Wikipedia contributors. (2020b). Compulsory sterilization. Retrieved from https://en.wikipedia.org/w/index.php?title=Compulsory_sterilization&oldid=991147259

Wikipedia contributors. (2020c, 26 November 2020). Euthanasia. Retrieved from https://en.wikipedia.org/w/index.php?title=Euthanasia&oldid=990811693

Wikipedia contributors. (2020d, 19 September 2020). Internet in the United States. Retrieved from https://en.wikipedia.org/w/index.php?title=Internet_in_the_United_States&oldid=979144297

Yezzi, R. (1986). Directing Human Actions: Perspectives on Basic Ethical Issues. Lanham: University Press of America.