Step 4: --Using Market Mechanisms To Solve Problems

Government cannot create a program for every problem facing the nation. It cannot simply raise taxes and spend more money. We need more than government programs to solve our problems. We need governance.

Governance means setting priorities, then using the federal government's immense power to steer what happens in the private sector. Governance can take many forms: setting regulations, providing financial incentives, or ensuring that consumers have the information they need to drive the market.

When the Roosevelt administration made home ownership a national priority, the government didn't build millions of homes or distribute money so families could buy them. Instead, the Federal Housing Administration helped to create a new kind of mortgage loan. Rather than put down 50 percent, buyers could put down just 20 percent; rather than repay mortgages in 5 years, borrowers could stretch the payments over 30 years. The government also helped to create a secondary market for mortgages, helping even more Americans buy homes.

As we reinvent the federal government, we, too, must rely more on market incentives and less on new programs.

Worker Safety and Health

Today, 2,400 inspectors from the Occupational Safety and Health Administration (OSHA) and approved state programs try to ensure the safety and health of 93 million workers at 6.2 million worksites. The system doesn't work well enough. There are only enough inspectors to visit even the most hazardous workplace once every several years. And OSHA has the personnel to follow up on only 3 percent of its inspections.

Action: The Secretary of Labor will issue new regulations for worksite safety and health, relying on private inspection companies or non-management employees.

See Note 37

Government should assume a more appropriate and effective role: setting standards and imposing penalties on workplaces that don't comply. In this way, OSHA could ensure that all workplaces are regularly inspected, without hiring thousands of new employees. It would use the same basic technique the federal government uses to force companies to keep honest financial books: setting standards and requiring periodic certification of the books by expert financial auditors. No army of federal auditors descends upon American businesses to audit their books; the government forces them to have the job done themselves. In the same way, no army of OSHA inspectors need descend upon corporate America. The health and safety of American workers could be vastly improved--without bankrupting the federal treasury.

The Labor Secretary already is authorized to require employers to conduct certified self-inspections. OSHA should give employers two options with which to do so: They could hire third parties, such as private inspection companies; or they could authorize non-management employees, after training and certification, to conduct inspections. In either case, OSHA would set inspection and reporting standards and conduct random reviews, audits, and inspections to ensure quality.

Within a year or two of issuing the new regulations, OSHA should establish a sliding scale of incentives designed to encourage workplaces to comply. Worksites with good health, safety, and compliance records would be allowed to report less frequently to the Labor Department, to undergo fewer audits, and to submit less paperwork. OSHA could also impose higher fines for employers whose health and safety records worsened or did not improve.

Environmental Protection

As governments across the globe have begun to explore better ways to protect the environment, they have discovered that market mechanisms--fees on pollution, pollution trading systems, and deposit-rebate systems--can be effective alternatives to regulation. But while the idea of "making the polluter pay" is widely accepted in this country, our governments have not widely applied it. Many federal, state, and local regulations rely on an earlier approach to environmental control: stipulating treatment, not outcomes. Their wholesale shift to a new approach will take time.

Action: Encourage market-based approaches to reduce pollution.

See Note 38

Many federal agencies, lawmakers, and environmental groups endorse using market-based incentives to meet environmental goals. We propose that both EPA and Congress use administrative and legislative measures, for example, the Clean Water Act, to promote market mechanisms to stop polution.

One route is allowing polluters to "trade: pollution rights. This would reward companies that not only meet legal requirements-- but for the extra mile to reduce pollution by more than the law requires.

Rather than dictating exactly which technologies industry should use to reduce pollution, the government would set standards and let the market handle the details. The government could also assess fees based on the amount and nature of pollution emissions or discharges. Fees could reflect the quality, toxicity, and other adverse characteristics of pollutants.

The federal government has used this approach before. In the 1970s, the Environmental Protection Agency (EPA) distributed credits to companies that cut air pollution and let them trade credits between different sources of their own pollution or sell them to other companies located nearby. In the 1980s, the EPA used a similar approach as it forced industry to remove lead from gasoline. Both efforts were successful: industry met its targets, while spending billions of dollars less than otherwise would have been required. Then, as part of the 1990 Clean Air Act, the President and Congress agreed to give credits to coal-burning electric power plants for their allowable emissions of sulfur dioxide, to cut down on acid rain. Power plants that cut their emissions below a certain level can sell unused credits to other plants. Experts estimate that this will cut the cost of reducing sulfur dioxide emissions by several billion dollars a year. See Note 39

Public Housing

Public housing is a classic story of good intentions gone awry. When the program began in the 1930s, it was hailed as an enlightened response to European immigrants' squalid living conditions in cities across the nation. Through an enormous bureaucracy stretching from Washington into virtually every city in America, the public housing program brought clean, safe, inexpensive living quarters to people who could not otherwise afford them.

For two decades, public housing was a success. But by the 1970s, it had come to symbolize everything wrong with the "liberal" approach to social problems. Inflexible federal standards, an overly centralized administrative structure, and local political pressures combined to produce cookie-cutter high-rise projects in our worst urban areas. Over time, many projects degenerated into hopeless concentrations of welfare families beset by violence and crime.

We spend $13 billion a year on public housing, but we create few incentives for better management. In local housing agencies, managers are hamstrung by endless federal regulations that offer little flexibility. Any savings they generate are simply returned to the government.

Tenants enjoy even less flexibility. With housing subsidies attached to buildings, not people, the program's clients have no choice about where to live. They, therefore, have absolutely no leverage--as customers--over the managers.

Action: Authorize the Department of Housing and Urban Development to create demonstration projects that free managers from regulations and give tenants new market powers, such as freedom of choice to move out of old public housing buildings.

See Note 40

We want to let public housing authorities, through not-for-profit subsidiaries, compete for new construction and modernization funds that they would use to create market-rate housing. The managers would manage this new housing free of most regulations, provided they met performance standards set by HUD. They would rent to a mix of publicly subsidized and market-rate tenants. The rents of unsubsidized tenants would help to finance the subsidies of assisted tenants.

With portable subsidies, publicly assisted tenants could look for housing wherever they could find it. Rather than dependent beneficiaries, forced to live where the govern- -----ment says, they would become "paying customers," able to choose where to live. Thus, public housing managers would no longer have guaranteed tenants in their buildings; they would have to compete for them.