1. CHAPTER 6
POLITICAL ECONOMY

2. Direct Democracy-Unanimity Rules0’
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

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

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

11. 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

12. 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

13. 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

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

15. Representative Democracy-Public Employees
Function of bureaucrats
Goals of bureaucrats

16. 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

17. 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

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

19. Representative Democracy – Other Actors
Judiciary
Journalists
Experts

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

21. 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

22. 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

23. 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

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