Why Government Fails So Often: And How It Can Do Better (57 page)

Notwithstanding these immense gains for consumers from deregulation, problems remain. Airport delays and congestion have increased, carrier consolidations have raised concentration in some markets, volatility in fuel prices and thus fares has continued, and air traffic control technology has not kept pace. Some of these conditions reflect the failure to institute congestion pricing, which also reflects monopolistic practices by airport authorities governed by local law and politics, not federal policy.
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THE WELFARE REFORM ACT OF 1996

The politics and policy of cash assistance to America’s poor—which is what most commentators mean by the term
welfare program
—have always been extraordinarily vexed, far more so than in European liberal democracies. Brookings Institution researchers Gary Burtless and Ron Haskins note,

While almost two-thirds of Americans agree with the statement that “income differences in the United States are too large,” policies aimed at reducing income differences command relatively little popular support. On the whole, Americans are not particulary concerned about the income distribution and are less persuaded than citizens in other rich countries of the need for public policies to temper inequality…. A large majority of Americans believes that individuals should bear primary responsibility for supporting themselves, whereas voters in other rich countries are more inclined to believe that governments have an obligation to assure that everyone is provided for. Large majorities of Americans also believe their society offers an equal opportunity for people to get ahead and think that hard work will ordinarily translate into a better life…. Residents of other rich countries are less likely to think their societies provide equal opportunity and are more inclined to believe that differences in individual success are due to luck or personal connections rather than individual effort.
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Since the defeat of President Nixon’s guaranteed family income plan in 1971, no European-style family allowance or other such universal welfare program has come close to passing either house of Congress. Instead, Congress has preferred to expand two large programs: the Earned Income Tax Credit, and the Supplemental Nutrition Assistance Program, both discussed above. The United States spends a much smaller fraction of its budget on poor families than do other countries in the Organisation for Economic Co-operation and Development.
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The budgetary going to the elderly rather than to children is vastly disproportionate, in my view.

Burtless and Haskins continue,

When major reform in social assistance finally came in 1996 … the main focus … was AFDC [Aid to Families with Dependent Children], the principal cash assistance program providing aid to working-age parents and their children. The reform passed in 1996 was designed to reduce dependency on cash assistance by ending the automatic entitlement to benefits. AFDC was abolished and replaced with Temporary Assistance for Needy Families (TANF). The new law placed pressure on all states to adopt aggressive policies to restrict or eliminate cash benefits to poor parents who were capable of working but now did not work. Work requirements were stringent, and the new law imposed financial penalties on states that failed to require parents to meet them but also gave states flexibility to create their own sanctions within the federal law framework. The law also imposed time limits on the assistance payments families could receive. Most families could receive federally financed benefits for no longer than five years. The law permitted states to impose even shorter time limits, and more than half of them did so.
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Many liberals bitterly opposed TANF—some prominent ones even resigned from the Clinton administration in protest—but it passed with overwhelming bipartisan support. Going into effect at a time when the economy was growing strongly and the unemployment rate was low, the results were far more dramatic than even the optimists
predicted: the welfare rolls experienced a large and sustained decline, the first in more than six decades of the welfare program, and the employment rate of low-income single mothers reached its highest level ever, leaving them with a real net income gain of 25 percent. The child poverty rate saw its first sustained decline since the 1960s, and for black children and children in single-parent families reached its lowest levels ever. Almost every index of child well-being except obesity improved. Since then, two recessions—a mild one in 2001, and a very deep one since 2008—have eroded some of these gains: the employment rate of never-married mothers, the group that is hardest to find jobs for, is down, and the poverty rate is up. Nevertheless, more are employed, and they are less poor than they were before the 1996 law (even without counting benefits not included in the poverty measure).
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The gains from the 1996 welfare reform and other work-related subsidies are certainly no cause for smugness. Seventeen years later, the law’s incentives have not yet lifted all mothers and their children out of poverty—not by a long shot. Many who have benefited from the program are stuck in low-wage jobs, and others still do not work full-time or at all. Some of these women are so dysfunctional that no program or personal desire to work will enable them to hold any jobs, much less decently paying ones. As a group, however, never-married mothers, and single mothers more generally, have clearly improved their and their children’s living standards and prospects. Interview studies show that they express pride in these gains and in their status as workers. Over time, they may be able to progress further as they accumulate job skills, experience, and work habits, and as the economy improves.
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None of this progress is preordained, of course, but there is now more reason for hope than there was before the reform.

The decline in welfare dependency after 1996 reflected a number of interacting factors: welfare reform, a robust economy, expanded EITC and child care benefits, and others.
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The reasons for the 1996 law’s contribution are fairly clear. It created strong incentives, both
positive and negative, for the most uneducated, untrained, and unpromising welfare recipients to join the workforce. As shown by their high employment rates, poor mothers responded to these incentives even more resourcefully than most policy makers had expected despite their often chaotic domestic circumstances. The federal law meshed well with many experimental state and local welfare-to-work programs, helping states pay for job search and readiness, health insurance, child care, and other vital work support services. Most politicians did not cave in to the intentionally inflammatory “dying in the streets” rhetoric; instead, they figured that the program could hardly be worse than the status quo of welfare dependency and that many of the poorest of the poor would end up better off. Both Congress and the states resisted the temptation to cut and run once the recipients’ situations improved; the governments largely maintained their efforts over time, mindful of how fragile these gains could be. Knowing the mixed record of earlier welfare-to-work programs on reducing welfare dependency, government tried something new and stuck with it. Even today, virtually every state still runs a strong welfare-to-work program, in part because the programs are relatively inexpensive. (Even so, critics argue that some of the state programs have manipulated the federal requirements and use the flexible TANF block grant funds for purposes other than paying cash welfare or moving mothers to work.
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) This approach has also found favor in Europe, where governments have also adopted strong work requirements in many of their welfare programs, unemployment insurance, and even disability programs.
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THE NATIONAL INSTITUTES OF HEALTH

One domain in which even small-government advocates generally concede an important role to the federal government is basic research—the creation of knowledge—in areas where private actors lack strong incentives to invest. This may be because the research involves enormous uncertainty, private investors cannot gain intellectual
property rights enabling them to extract full economic value from an investment in it,
*
or other strategic considerations discourage private investment. The federal government has played an important, perhaps essential, role in seeding some of our most transformative technological advances, including many components of the digital revolution.
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The National Institutes of Health (NIH) consist of a variety of domain-specific organizations funded by the federal government. The NIH’s 2012 budget was $30.9 billion, which works out to just under $100 per capita in the population, and it constitutes only 0.8 percent of the federal budget and only 3.5 percent of the Department of Health and Human Services budget.
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The social value generated by NIH research is difficult to determine because its downstream effects are affected by a number of factors (including investments by private companies); a long lag time exists between basic research and social impact; and objective data is hard to gather and analyze. Nevertheless, those analyses that have been conducted, mostly on pharmaceutical innovation, suggest that this research has been highly cost-effective.
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A 2011 article in the
New England Journal of Medicine
usefully summarizes the published studies on the relationship between pure biomedical research financed and conducted by public-sector research institutions (PSRIs), and applied research done by the private pharmaceutical industry. (The authors broadly define PSRIs to include all universities, research hospitals, nonprofit research institutes, and federal laboratories in the United States.) I can do no better than quote at length from this summary:

Historically, there has been a clear distinction between the roles of public-sector research and corporate research in the discovery of new drugs and vaccines to solve unmet medical needs. PSRIs have performed the upstream, basic research to elucidate the underlying mechanisms and pathways of disease and identify promising points of intervention, whereas corporate researchers have performed the downstream, applied research to discover drugs that can be used to treat diseases and have then carried out the development activities to bring the drugs to market. The intellectual property that protects the investment in developing these drugs is created in the applied-research phase. An excellent example of this traditional approach was Julius Axelrod’s research at the National Institutes of Health (NIH) regarding the basic mechanisms of neurotransmitters, for which he received the Nobel Prize in 1970. This research provided the foundation for the pharmaceutical industry’s discovery of an entirely new class of drugs, the selective serotonin-reuptake inhibitors (SSRIs), which have been important in the treatment of depression. All the major SSRIs were discovered by pharmaceutical companies with the use of Axelrod’s basic discoveries and are therefore not included in our study (e.g., Eli Lilly’s discovery of fluoxetine [Prozac], which received approval from the Food and Drug Administration [FDA] in 1987). However, Richard and Judith Wurtman at MIT discovered the role of these drugs in the treatment of premenstrual dysphoric disorder and obtained a method-of-treatment patent for this new use. MIT licensed their work to Interneuron Pharmaceuticals, which later licensed it to Eli Lilly. Eli Lilly then received FDA approval for a new use of fluoxetine and created a separate product, Sarafem, for this new use. Thus, we have included Sarafem in our study.

There is little dispute about the importance to drug discovery of basic research at PSRIs under the traditional approach. Studies by Cockburn and Henderson showed the complex relationships between public and private research in the pharmaceutical industry. Zycher
et al.
found that at least 80 percent of 35 major drugs that they studied were based on scientific discoveries made by PSRIs, whereas Toole found a quantifiable correlation between investment in publicly funded basic research and corporately funded applied research: an increase of 1 percent in the funding of public basic research led to an increase of 1.8 percent in the number of successful applications for new molecular entities (compounds that have not been approved for marketing in the United States) after a lag of about 17 years. He found that a $1 investment in public-sector basic research yielded $0.43 in annual benefits in the development of new molecular entities in perpetuity.

Historically, PSRIs did not play a major role in the downstream, applied phase of drug discovery, in which the actual products are discovered and patented. However, in the mid-1970s, the newly emerging tools of biotechnology—recombinant DNA and monoclonal antibodies—allowed PSRIs to create and patent biologic drug candidates and discover and patent small-molecule drugs. At that time, all products created in academic institutions were owned by the government, which granted only nonexclusive licenses. This system resulted in the ineffective transfer of academic technologies. For instance, by 1978, the government had licensed less than 5 percent of the 25,000 to 30,000 patents it owned.

In 1980, Congress passed two pieces of legislation that transformed the ownership, management, and transfer of intellectual property that is created by PSRIs. First, the Bayh–Dole Act (Public Law 96–517) allowed universities, nonprofit research institutes, and teaching hospitals to own the intellectual property resulting from federally funded research and to license it according to terms of their choosing. Second, the Stevenson-Wydler Technology Innovation Act (Public Law 96–480), as amended by the Federal Technology Transfer Act of 1986 (Public Law 99–502), provided a corresponding authority to federal laboratories. Under this new approach, inventions that arose from PSRIs, in addition to being freely published in the scientific literature, could also be converted into intellectual property and transferred through license agreements to the private sector for commercialization and public use. The new approach is thought to be considerably more effective than government ownership of academic inventions and was introduced just as the fruits of the biotechnology revolution started to emerge.
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