YOU DECIDE: How should the government help people?

Date posted: April 29, 2011

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

My first economics professor in 1969 told me there were two ways to help people — with money or with programs. More than 40 years later, these alternative approaches are at the center of the current debate over how to deal with the national debt.

How so? Well, first let me give you some background on what my economics professor meant with his money versus programs comment.

Let’s say the targeted group to help is limited-resource (low-income) folks. One attitude says, if income is the problem, then income is the solution! That is, if some households don’t have enough income to achieve an acceptable standard of living, then giving these households more income will allow them to purchase the necessary products and services to increase their living conditions.

The earned income tax credit (EITC) is a good example of this money approach. Working households earning below a certain level of income are provided additional cash by the government. Food stamps are also a variation on the money theme. Although not cash, the stamps are resources (vouchers) the recipients use to purchase food products.

Supporters of the money approach like its simplicity and flexibility. Only a few rules are needed to determine which households qualify, so bureaucratic costs are relatively low. Indeed, the Internal Revenue Service runs the EITC program. Recipient households also have maximum flexibility in determining how the cash (or semi-cash in the case of food stamps) is used.

But some find these characteristics of the money approach to be a problem. They say many decisions — particularly in areas like health care — may be too complicated for households to confront, even with more cash. They also believe that without government intervention private providers may not always act in the best interests of consumers. Therefore, the government must have a more involved role in assisting households via the program approach.

Here, the government develops programs that monitor and influence the provision of services to eligible households. The programs can be complex, with rules about what services eligible households can use, how these services are to be provided and how much the providers are to be paid. In most cases the government directly pays the provider, although households may be required to contribute some funds.

Medicare (assisting elderly households receiving health care) and Medicaid (assisting low-income households receiving health care) are two examples of the program approach.

So how does the money versus program debate fit into the current discussion about reducing the national debt? The fit is perfect because the philosophies behind the money and program approaches are also behind alternative plans to address the national debt.

Currently much attention is focused on how to contain expenses in the federal government’s two big health care plans, Medicare and Medicaid, and thereby reduce growth in the national debt. Several debt reduction plans, including those from the President and debt commissions, would maintain the program approach of Medicare and Medicaid but would achieve savings by changing their rules and payment schedules to providers.

The money approach is illustrated by the budget plan recently passed by the U.S. House of Representatives. For future retirees who are now under age 55, Medicare would be converted to the money approach. Future retirees would be given a certain amount of money to help them purchase private market insurance to cover their health care costs. The federal government’s role would be limited to managing and funding the health care vouchers.

The money approach, but in a slightly different way, would also be used for Medicaid. Federal Medicaid funds would be directly provided to the states, thereby giving states more resources to help eligible Medicaid households. States would then decide how best to use that money.

To use an analogy of getting better performance from your vehicle’s engine, the program approach says to keep the engine but tweak the components and additives to achieve better efficiency and output. In contrast, the money approach says a whole new engine is needed, and no amount of tinkering will help because the old engine just isn’t working!

At the core of many public policy debates is a difference in philosophical approaches, and today’s debate over containing the national debt is a good example. Before choosing a policy, you first have to decide on a philosophy backing the policy. Good luck!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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