Instructions:

1. The exam consists of 6 pages, including this cover sheet. Please check now to ensure your copy is complete.
   
2. The exam is entirely open book; however, additional research is discouraged. Full credit is obtainable using concepts discussed in class or contained in the assigned course materials. To the extent you rely on the course materials, formal references are not necessary.
   
3. You may not communicate with any person about the contents of the exam while it is being administered, even if you have turned in or not yet picked up your own copy. If during the exam you have any questions regarding its administration, you should contact the office of Academic Services and they will contact me if necessary.
   
4. Your exam is due 24 hours after you pick it up, or at 4 pm on Wednesday, May 15, whichever is earlier. You must return your exam in person, and also must return your copy of the exam questions at the same time.
   
5. There are three questions on the exam, each with a separate word limit. You may not use any leftover space from one question in answering another; and any attempt to use shorthand or nonstandard abbreviations will be counted as if full words were used.
   
   To ensure compliance with the word limit, you must provide a word count for each question. Answers exceeding the word limit will be penalized by reducing their score in proportion to the excess.
   
6. Follow the instructions for each question carefully, concentrating on the role you are asked to assume and the audience for your response. If you feel that any of your answers depend on facts not provided in the question, you should say so, and state clearly any additional assumptions you are making.
   
7. To ensure that you receive full credit for your answer, please: (a) write or print your exam ticket number on all pages of your exam; (b) begin your answer to each question on a new sheet of paper; (c) use double spacing and 1-inch margins, so that I have enough room to make notations on your exam; (d) if you write your exam by hand, write legibly.
   
8. I will post grades on the class website as soon as they are ready, and will post a feedback memo as soon as possible after that. Good luck on the exam; and have a good summer.

QUESTION 1:  a of exam, 1000 word limit

In late April of this year, by a vote of 88 to 11, the U.S. Senate passed an energy bill that contains a variety of new federal regulations and tax incentives. Proponents of the bill claim that it will promote more efficient use of energy and encourage the development of additional domestic energy sources; critics of the bill contend that it will accomplish little. As the New York Times reported in its April 27, 2002 article on the bill's passage:

When the Senate began debating energy legislation in early March, senators from both parties said the world situation made it more imperative than ever that the United States reduce its reliance on imported oil, especially from the Middle East. But the Senate quickly became paralyzed by partisan and regional differences, and by the refusal of the many commercial and environmental interests with a stake in the matter to consider compromise.

Most Republicans and energy interests favored more energy production, particularly oil and gas exploration in the Arctic National Wildlife Refuge. But this step, advocated by President Bush and approved by the House, was unacceptable to most Democrats and to environmental groups. Those Democrats and the environmentalists sought more conservation, particularly stiff new automotive fuel-efficiency standards. But this proposal was unacceptable to most Republicans and to the automobile manufacturers and unions. With both sides intransigent, the two ambitious proposals, drilling in Alaska and mandating more fuel-efficient vehicles, were rejected by lopsided margins. . . .

Like many other legislative goals, more energy independence became unattainable this year because the House and Senate are so closely divided, because neither party is in the mood to compromise in an election year and because under the rules, controversy cannot be resolved in the Senate unless one side or the other has 60 votes. . . . With the most important elements of energy policy set aside, the bill that was approved today contained only modest measures to encourage the conservation and development of alternative forms of energy, none of which are likely to affect people's day-to-day lives.

The bill now goes before a conference committee that will attempt to reconcile its provisions with those of a bill passed by the House last year with the backing of the Bush administration. Among the main differences between the House and Senate bills are the following:

• The House bill permits oil and gas exploration, limited to a surface area of 2000 acres, in the Arctic National Wildlife Refuge (ANWR); the Senate bill would maintain the current ban on such exploration. Government geologists have estimated that 6 billion to 12 billion barrels of oil could be produced from drilling in ANWR, but environmental groups have argued that drilling would disrupt a thriving and unique ecosystem. All sides agree that the issue has taken on very substantial symbolic importance to both sides, quite possibly beyond its actual policy importance.
  
• The House bill requires the Department of Transportation (DOT) to develop fuel efficiency regulations that would reduce by five billion gallons the amount of gasoline used by pickup trucks, sport utility vehicles and vans sold in the United States between 2004 and 2010 (an average 1 mpg increase). The Senate bill merely directs DOT to study the problem and to propose new rules by 2004, which Congress could then veto.
  
• The Senate bill requires utility companies to gradually increase the percentage of electricity they derive from renewable sources such as wind and solar power until the proportion reaches 10 percent in 2020; the House bill has no such provision.
  
• The Senate bill requires petroleum refiners to triple over the next 10 years the amount of ethanol (a grain-alcohol-based fuel) that they blend into their gasoline — a requirement that was vigorously opposed by senators from high-gasoline-consumption states like California and New York, but vigorously supported by farm-state senators and by Senate majority leader Daschle along with President Bush. The House bill has no such provision.

You are chief legislative aide to a centrist senator who holds a key position on the upcoming conference committee. Your boss is not up for re-election until 2006 and holds what is generally regarded as a "safe seat"; accordingly, she has more freedom than many of her colleagues to advocate what she regards as an enlightened policy position as opposed to the narrow interests of her constituents. As a centrist, she tends to accord value to a variety of normative perspectives; as an experienced politician, she recognizes that it is sometimes necessary to compromise between principles and pragmatic concerns in order to develop legislation that can attract majority support. Her pragmatism has its limits, however, and she is willing to let the energy bill fail if the alternative is to support legislation that she regards on balance as bad for the country and for her constituents.

The Senator has asked you to draft a memo to her outlining what you believe to be the best compromise proposal to offer to the conference committee, along with a fallback alternative if your primary proposal proves to be politically infeasible. In your memo, you should indicate why you think these proposals are desirable, and whether, in the end, your boss should support them. You may cast your memo in whatever format you wish, but you should in no event exceed 1000 words.

QUESTION 2:  a of exam, 1000 word limit


The recent collapse of the Enron corporation, in which thousands of the firm's middle- and lower-level employees lost their jobs and retirement funds while more senior managers managed to cut their losses by selling private holdings of company securities before news of the firm's precarious financial condition became widely known, has prompted widespread calls for reform of Federal regulations governing pension funds and the use of stock options to compensate corporate employees. In the specific case of Enron, some longtime Enron employees lost hundreds of thousands of dollars as the value of stock they had accumulated in prior boom times fell sharply at a time when, under their contracts with the company, they were not allowed to sell it.

More generally, most financial planning experts advise against holding much stock in the company that pays one's salary, but many companies offering employee stock ownership plans offer incentives to do just the opposite. Enron, for example, matched workers' contributions to their 401(k) retirement plans only with Enron stock, and it encouraged employees to put their own contributions into company stock as well. As a result, at the time of the its collapse, 60 percent of Enron's 401(k) assets were reportedly held in its own shares. The situation of Enron's employees may not be atypical, as the New York Times reported in its article of January 20, 2002:

"It sounds so reasonable to diversify," said Elizabeth W. Jetton, who is president of Financial Vision Advisors in Atlanta and serves on the board of the Financial Planning Association. But many middle-class American investors "tend to be extremists," either overlooking risk or investing too conservatively.

Most experts agree that telling investors about the benefits of diversification will help to protect them from big losses. "Definitely the most important thing is to try to educate the participants as much as possible," said Louis Berney [the editor of DC Plan Investing, an industry newsletter distributed by the Institute of Management and Administration]. But Paul Yakoboski, director of policy research at the American Council of Life Insurers, worried that investors were "not following the education that they're getting." He said that making it easier for independent financial advisers to enter the workplace. . . would make more of a difference.

A quarter-century ago, private pensions were managed virtually exclusively by employers and their appointed trustees. The rise of 401(k) plans has changed that picture dramatically. "It is quite fair to say that when it comes to saving for retirement, 401(k) is the main way that it's done nowadays," Mr. Yakoboski said. "If you were to compare it to other vehicles, like I.R.A.'s, it's not even close."

Many Americans are "relying so much on their 401(k) that they don't have savings anywhere else," Ms. Jetton said. "It's sort of, `I gave at the office.' " . . .

[Private investors] who take too many risks are more the exception than the rule, though, according to Mr. Yakoboski. "401(k) participants are often very unsophisticated investors," he said. "They're passive investors." Mr. Berney warned that naïve investors could end up trying to follow overly conservative strategies. "People underestimate how much they're going to need" for retirement, he said.

You are a policy analyst for a bipartisan commission set up by the Securities and Exchange commission to advise the President and Congress on possible reforms of the private pension system. You have been assigned to draft a memo discussing three possible regulatory approaches to the problem (one of which, if you wish, could be just to leave the allocation of retirement funds to the decentralized decisions of employers and employees). Your memo, however, should indicate the main advantages and disadvantages of these three approaches, and should also indicate which approach you view on balance as the most desirable policy.

QUESTION 3:  a of exam, 1000 word limit

The issue of insurance coverage for prescription drugs promises to be a major focus of this fall's midterm Congressional elections, which could determine which party controls the House and the Senate. According to figures produced by the Congressional Budget Office, outpatient drug spending for Medicare beneficiaries will exceed $86 billion this year and averages $2,150 a person; and while private insurance pays some of these costs, nearly one-third of the 40 million beneficiaries have no insurance for drug expenses at all.

Recently, Congressional leaders of the Democratic and Republican parties have offered competing legislative proposals to amend the Medicare insurance program to address the prescription drug problem. The Republican plan, as presented by Speaker of the House J. Dennis Hastert,, would offer Medicare beneficiaries the opportunity to pay premiums of $35 to $40 a month in exchange for insurance coverage that would be limited by a $250 deductible. After a beneficiary has met the $250 deductible, Medicare would pay about 75 percent of drug costs from $251 to $1,000 and about 50 percent of drug costs from $1,001 to $2,000. At this point, federal payments would stop, and would not resume until the patient had spent $5,000 on medicine, but all expenditures over $5000/year would be covered in full. The GOP estimates that its plan, which would continue indefinitely, to cost up to $350 billion over the next 10 years. This estimate assumes that under the plan, group purchasing by Medicare would result in substantial discounts in the price the program pays for drugs.

The Democratic plan, as offered by Senators Bob Graham of Florida and Zell Miller of Georgia, would both be more generous to beneficiaries and more costly to the government. It would charge beneficiaries only $25 a month, in exchange for prescription drug coverage with no deductible and cost sharing up to $4000, beyond which all expenditures would be covered in full by the government. The Democrats estimate that their plan would cost $400 billion to $500 billion, but under their proposal the plan would not continue beyond 2010 unless Congress reauthorized it.

You are a political consultant who specializes in the design and production of political advertising campaigns. Several years ago, in fact, your influential television campaign featuring a fictional middle-class couple, "Larry and Heloise," was widely regarded as instrumental in the defeat of proposed legislation for health care reform. (The typical 30-second advertising spot in this campaign portrayed the couple discussing a newspaper article on the reform proposal over a morning cup of coffee, and remarking on how the proposal was poorly conceived as a policy matter and how it would adversely affect their individual interests.) You have now been approached by representatives of both Congressional parties, who have asked you to revive the Larry and Heloise characters and to build an advertising campaign around them, focusing on the issue of prescription drugs, that could be used in the upcoming national electoral campaign.

Your assignment is to choose either the Congressional Democrats or Republicans as your client, and then to produce a 1000-word memorandum in which you propose a series of three to four television ads on the prescription drug issue. You should not attempt to produce actual scripts for the ads, as you do not have enough space and the memo is intended only as a proposal in any event. Instead, for each ad you contemplate, you should identify its main substantive message, your reasons for focusing on this message, and the way in which you would convey this message to an audience of potential voters.