CHAPTER 6 POLITICAL ECONOMY

Direct Democracy-Unanimity Rules 0’ DrE Eve’s share (SE) S* box and labels 1st click – Adam’s D 2nd click – Eve’s D 3rh click – equilibrium r and S Adam’s share (SA) DrA r per year r* The Lindahl Model

Feasibility of Unanimity Rules Reaching equilibrium Practical problems Strategic behavior time to reach equilibrium

Direct Democracy-Majority Voting Rules Majority voting rule – one more than half of the voters must favor a measure for it to be approved Voter Choice Brad Jen Angelina First A C B Second Third

Direct Democracy-Majority Voting Rules Voting Paradox – community preferences can be inconsistent even though individual’s preferences are consistent Agenda Manipulation – process of organizing order of votes to ensure a favorable outcome Cycling – when paired voting on more than two possibilities goes on indefinitely without a conclusion ever being reached Voter Choice Brad Jen Angelina First A C B Second Third

Graphing Preferences Single-peaked preferences Utility Jen Double-peaked preferences axes and labels 1st click – Brad 2nd click – Jen 3rd click – Angelina 4th click – “Single-peaked preferences” and two arrows 5th click – “Double-peaked preferences” and curved arrow Brad Angelina A B C Missiles

Practical Importance of Double-peaked Preferences Availability of private substitutes Issues ranked along single dimension

Direct Democracy - The Median Voter Theorem Expenditure Donald $5 Daisy 100 Huey 150 Dewey 160 Louie 700

Direct Democracy - Logrolling I Voter Project Melanie Rhett Scarlet Total Net Benefits Hospital 200 -50 -55 95 Library -40 150 -30 80 Pool -120 -60 400 220

Direct Democracy - Logrolling II Voter Project Melanie Rhett Scarlet Total Net Benefits Hospital 200 -110 -105 -15 Library -40 150 -120 -10 Pool -270 -140 400 Melanie votes for library if Rhett votes for hospital; and Rhett and Scarlet trade votes for the pool and library

Direct Democracy - Arrow’s Impossibility Theorem “Reasonable” collective decision-making criteria It can produce a decision whatever the configuration of voters' preferences It must be able to rank all possible outcomes It must be responsive to individuals’ preferences It must be consistent Independence of irrelevant alternatives Dictatorship ruled out Arrow’s Impossibility Theorem All conceivable voting schemes have some potential for being unfair or producing a paradoxical result Meaning of theorem consistent rule not necessarily impossible to find, but cannot be guaranteed Buchanan’s critique Use of social welfare functions Left box by 2nd level paragraphs Right box by 2nd level paragraphs

Representative Democracy - Elected Politicians Representative Democracy - Elected Politicians Number of Voters Distribution and labels 1st click - Female politician locates on right 2nd click - Male politician locates directly to left of female 3rd click - female moves to left of male (but still to right of mean) 4th click - male politician moves just left of mean Liberal Conservative

Implications of the Median Voter Model Two-party systems tend to be stable Replacement of direct referenda by representative system has no effect on outcomes

Other Factors Influencing Voting Single-dimensional rankings Ideology Personality Leadership Decision to vote

Representative Democracy-Public Employees Function of bureaucrats Goals of bureaucrats

Niskanen’s Model of Bureaucracy $ V Axes and labels 1st click – V schedule 2nd click – C schedule 3rd click – two tangents, dashed line, Q* and “Efficient Output” tag 4th click – dashed line, Qbc, “Actual output” Actual output Efficient output Q* Qbc Q per year

Representative Democracy – Special Interests What are “Special Interests” Establishment of Special Interest Groups Source of Income: Capital or Labor Size of Income Source of Income: Industry of Employment Region Demographic and Personal Characteristics

Representative Democracy – Rent-Seeking $ Rents Axes, labels, D, MR, and S=MC 1st click - rents S=MC D tons of peanuts per year MR

Representative Democracy – Other Actors Judiciary Journalists Experts

Explaining Government Growth Citizen Preferences G = f(P, I) Marxist View Chance Events Changes in Social Attitudes Income Redistribution

Controlling Government Growth Government growth as a non-issue Government growth as a problem Commitments made in the past Basic flaws in the political system

Improving the Workings of the Political System Change bureaucratic incentives financial incentives privatization Change Fiscal Institutions Budget Enforcement Act (BEA) – 1990 Balanced budget rules at the state level Institute Constitutional Limitations Balanced budget amendment

Provisions of a Typical Balanced Budget Amendment Congress must adopt a budget statement “in which total outlays are no greater than total receipts” Total receipts may not increase “by a rate greater than the rate of increase in national income” “The Congress and President shall…ensure that actual outlays do not exceed the outlays set forth in the budget statement” The provisions can be overridden in times of war

Critique of Balanced Budget Amendments Forecasting issues Definitional issues Penalties for violation of the law Economic issues