Public Policy Institute of California

¶ … Public Policy Institute of California is trying to devise policies that encourage individuals to obtain the socially optimal level of education. The two main approaches are through the cost & benefit sides.

When the issue of education arises, it tends to be discussed in terms of benefits. Individuals are encouraged to continue their education as far as possible so that they can get the best job, one that gives them stability along with high degrees of autonomy and the ability to feel fulfilled. Education is generally considered to bring other benefits as well -- including the ability to participate knowledgeably in the democratic process. Both the ability to be a competent worker and a competent citizen are seen as benefiting both the individual and the community at large.

However, while all of the above is true, there are also significant costs to education. These are explicit short-term costs: Books, tuition, student fees. There are also more tacit short-term costs: Time spent studying and in class cannot be spent working or on gaining specific skills that might be more readily used to get a job than the general knowledge that might be acquired in a college. There are also ongoing costs of education, primarily in terms of paying back student loans and the interest that accrues on them.

There is no single optimum amount of education, although each person must assess the kinds of costs and benefits listed above. The "right" answer will depend on the kind of job the person wants, the kind of expectations that person has grown up with in terms of education, and the kinds of things that the individual finds to be rewarding outside of work.

2. Mandatory medical insurance coverage was considered an essential component of the recently passed federal healthcare reform. What problem is this mandate aimed at mitigating. How would reforms banning the denial of coverage for those with preexisting conditions make this mandate essential?

Insurance companies argued that they would face huge new costs if they were required to cover individuals with any pre-existing conditions if they were not compensated for this new mandate with increased revenues from some other source. The new law mandating healthcare reform responded to this demand on the part of the insurance industry by requiring that all individuals buy health insurance.

A Gallop poll in 2007 demonstrated that Americans were (and they remain) deeply unhappy with the fact that so many of us are uninsured.

(http://www.gallup.com/poll/102931/increase-public-pressure-healthcare-reform.aspx)

The healthcare reform law requirement that all Americans obtain health insurance is a blunt-force way in which to remedy this problem: It requires that insurance companies make their products reasonably priced enough that all Americans can afford them (although some will need help to do so; the law makes provisions for this) in part by limiting the companies' probably profits.

3. The over issuance of home loans to those who weren't creditworthy has been cited as a major factor that precipitated the financial crisis. Discuss the asymmetric informational problem that arises in the case of hourly loan officers issuing loans. Propose at least two proposals to minimize these concerns.

One of the primary reasons that so many home loans were issued in recent years to individuals who were not sufficiently creditworthy to be able to make timely payments on those loans is that there was an ongoing condition of asymmetric information. The individuals seeking the loans had much more information than the loan officers; in many cases they knew that they could not reasonably meet the conditions of the loan.

The hourly loan officers in many cases could probably have been able to determine that the individual was unlikely to be able to service the loan. However, these hourly loan officers were being rewarded for making loans and they had no real personal investment in whether or not the loan conditions were honored. They were only the agents of those who were assuming any real risk.

One possible solution for this problem is to make the loan officers' pay directly contingent on whether the mortgage holder continued to make payments for a specific period of time. Another, slightly less drastic tactic, would be to pay loan officers a flat salary so that they would be fairly compensated for their expertise regardless of how many loans they made. This would be the difference between a salesperson in a store selling on commission or being paid a salary: In both cases the person who is paid a flat rate can be assumed to be less affected by short-term gain and could take a longer, more rational view of the process.

4. There has been much discussion about grade inflation at schools and universities. Discuss and display graphically the impact of grade inflation and the loosening of educational standards. Make sure to discuss how this will affect the ability of education to be used as a signal of worker quality.