ECO 481: Public Choice Theory Week 3: The Failure of Democracy & Voting Rules Dr. Dennis Foster

The Nature of the Polity 4 (self-interested) groups: Elected officials - want more votes… Voters - want more income & wealth. Bureaucrats - want income, security, budgets. Special Interests - want wealth (& income). As rational utility maximizers, they... Cope with scarcity and uncertainty. Experience diminishing marginal benefits to action. Experience increasing marginal cost to action.

The Nature of the Polity Decisions are made with incomplete information. Decisions are made in an environment of poor incentives. waste Decisions are likely to include a lot of “waste.” Decisions are likely to be exploitative and destructive to individual rights. “Few people possess the wisdom and information to divine the best interest of others, and still fewer offer to continuously sacrifice themselves to improve the well-being of others.” “Few people possess the wisdom and information to divine the best interest of others, and still fewer offer to continuously sacrifice themselves to improve the well-being of others.”

Collective Choice Requires rules: Majority rule? Plurality? Super majority? Hare? There must be winners and losers. – And, in markets... ? Pricing problems (Who? How much?) Gov’t. as monopoly w/coercive power. “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.” “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.”

VotingIssues I Voting Issues I Not especially rewarding. – Should it be easy? Should it require a test? Information is costly. – If your contribution is zero... We can’t pick results only promises. – And, in a market... ? – What if the Academy Awards... ? Benefits and costs are usually mismatched. – e.g., Flagstaff mayor’s race; CCC bond proposition. Paradox of collective choice.

Voting Issues II Inconsistent choices. – Any election can be “rigged.” – Peaks Parkways. – Liberal Democrats in the U.K. Proportional representation. – Everyone has a voice! – Coalitions of well-defined special interests. Single member constituency. – Loose coalitions, but “gridlock” complaint. Find a better system or reduce scope?

The Politician and Your $ To them, it’s OPM. – Incentive to get money’s worth? – e.g., FUSD and the Pentagon. To earn votes, spend “wisely.” – Visible, stream of benefits, “needed Investment” – e.g. bus systems, community centers, food stamps. To minimize lost votes, tax “wisely.” – Invisible, “in the public interest”, dispersed except “soak the rich,” which means, “soak the minority.” Tax tourists! Practice the art of compromise & bargain.

When you must cut back Cut fraud and waste! Sacrifices made across the board. Cut areas that have least resistance. Rely on natural rollover to reduce costs. NAU: efficiencies proportional cuts buyouts cut support staff “market adjustments”

A Taxing Decision Raise base/rate on existing tax. Sin taxes. “Crisis” tax. Earmark tax to popular spending. – So, how much support for a FAIR tax? Mandate spending to lower gov’t units. Tax positive events and call them licenses. At nat’l level, print money = inflation tax Can we rely on any fiscal constraint? Can we rely on any fiscal constraint?

Aside - Bureaucracy Budgets about 2x private sector. With no competition, we rely on oversight. How to survive lean times? – Insulate budget from annual scrutiny. – Get earmarked funds. – Add new services. – Spend all your budget. – When cut, threaten to eliminate most popular programs.

Bureaucracy Without pricing, planning substitutes for “rational economic calculation.” Odd success strategy - poor customer service! – Who raises prices during a recession? “Our well-meaning public servants live outside the world of supply and demand and in a culture where there almost never is an objective measure of the value of their work. The public firm has the additional advantage of not having to pay taxes, purchase licenses, or post bonds. They can be unfair competitors. Not unexpectedly, they remain inefficient. Without the goad of profit and bankruptcy they cannot be otherwise. Sadly, and all too often, they spend their time not in reducing costs but in rationalizing higher ones.”

Special Interests Actions motivated by “rent seeking.” They are not out to “improve” the system. Headquartered in D.C. (e.g. SFA) Limits: Competition, expensive, free riding, encourages opposition. “Democratic politics are not really government by the people but rather an intense competition for power by means of votes among contending politicians. In that competition, politicians find it highly rational to engage in obfuscation, play acting, myth making, ritual, the suppression and distortion of information, stimulation of hatred and envy, and the promotion of excessive hopes.”

ECO 481: Public Choice Theory Week 3: The Failure of Democracy & Voting Rules Dr. Dennis Foster