1. McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 6 POLITICAL ECONOMY

2. 6-2 Political Economy  The field that applies economic principles to the analysis of political decision making.

3. 6-3 Political Economy  Social Welfare Function Unanimity Rules Majority Voting Rules Logrolling Representative Democracy Dictatorship

4. 6-4 Direct Democracy-Unanimity Rules r per year 0 0’ Adam’s share (S A ) Eve’s share (S E ) DrADrA The Lindahl Model DrEDrE r* S*

5. 6-5 Feasibility of Unanimity Rules  Reaching equilibrium  Practical problems Strategic behavior time to reach equilibrium

6. 6-6 Direct Democracy-Majority Voting Rules  Majority Voting Rule one more than half of the voters must favor a measure for it to be approved  Paired Voting

7. 6-7 Direct Democracy-Majority Voting Rules Voter ChoiceBradJenAngelina FirstACB SecondBBC ThirdCAA

8. 6-8 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 ChoiceBradJenAngelina FirstACB SecondBAC ThirdCBA

9. 6-9 Direct Democracy-Majority Voting Rules  How can B win the election?

10. 6-10 Direct Democracy-Majority Voting Rules  How can B win the election? C Preferred to A B Preferred to C

11. 6-11 Graphing Preferences Missiles Utility A BC Brad Jen Angelina Single-peaked preferences Double-peaked preferences

12. 6-12 Practical Importance of Double Peaked Preferences  Availability of Private Substitutes Gym  Issues Ranked

13. 6-13 Direct Democracy The Median Voter Theorem  Median Voter Theorem As long as all preferences are single peaked and several other conditions are satisfied, the outcome of majority voting reflects the preferences of the median voter  Median Voter The voter whose preferences lie in the middle of the set of all voter’s preferences; half the voters want more of the item selected and half want less.

14. 6-14 Direct Democracy - The Median Voter Theorem VoterExpenditure Donald$5 Daisy100 Huey150 Dewey160 Louie700

15. 6-15 Direct Democracy The Median Voter Theorem  Single Peaked Preferences Majority Voting = Stable Result  Multipeaked? Voting Paradox

16. 6-16 Direct Democracy - Logrolling I  Logrolling The trading of votes to obtain passage of a package of legislative proposals PORK! Measure of Desirability Up and Down Vote

17. 6-17 Direct Democracy - Logrolling I  Which would be accepted? Voter ProjectMelanieRhettScarletTotal Net Benefits Hospital200-50-5595 Library-40150-3080 Pool-120-60400220

18. 6-18 Direct Democracy - Logrolling I  How should Melanie get funding for the hospital? Voter ProjectMelanieRhettScarletTotal Net Benefits Hospital200-50-5595 Library-40150-3080 Pool-120-60400220

19. 6-19 Direct Democracy - Logrolling I  Trade her vote on the library for Rhett’s hospital. Voter ProjectMelanieRhettScarletTotal Net Benefits Hospital200-50-5595 Library-40150-3080 Pool-120-60400220

20. 6-20 Direct Democracy - Logrolling I  Trade her vote on the pool for Scarlet’s hospital vote. Voter ProjectMelanieRhettScarletTotal Net Benefits Hospital200-50-5595 Library-40150-3080 Pool-120-60400220

21. 6-21 Direct Democracy - Logrolling II Voter ProjectMelanieRhettScarletTotal Net Benefits Hospital200-110-105-15 Library-40150-120-10 Pool-270-140400-10

22. 6-22 Earmarks  McCain January 2006: “If we don't stop the earmarking, we're not going to stop the abuses of power here in Washington. In 1994, when the Congress was taken over by Republicans, there were 4,000 earmarks on appropriations bills. Last year there were 15,000. It's disgraceful, this process.“ Obama $740 million in 3 Years McCain at least $24.3 Million in 2006  Definitions

23. 6-23 Direct Democracy - Arrow’s Impossibility Theorem  Arrow’s Impossibility Theorem (Kenneth Arrow 1951) All conceivable voting schemes have some potential for being unfair or producing a paradoxical result

24. 6-24 Direct Democracy - Arrow’s Impossibility Theorem  “Reasonable” Collective Decision-Making Criteria 1. It can produce a decision whatever the configuration of voters' preferences 2. It must be able to rank all possible outcomes 3. It must be responsive to individuals’ preferences 4. It must be consistent  Transitive 5. Independence of irrelevant alternatives  A vs. B excludes A vs. C, etc. 6. Dictatorship ruled out  Otherwise Satisfication

25. 6-25 Direct Democracy - Arrow’s Impossibility Theorem  Meaning consistent rule not necessarily impossible to find, but cannot be guaranteed  Existence of Social Welfare Functions  James Buchanan 1960 Democracy at Work

26. 6-26 Representative Democracy – Elected Politicians  Who makes these decisions? Politicians!  Median Voter

27. 6-27 Representative Democracy - Elected Politicians Number of Voters LiberalConservative Where do you want to get your votes? Median

28. 6-28 Implications of the Median Voter Model  Stable Two-Party System  Same Outcome Median Voter

29. 6-29 Other Factors Influencing Voting  Single-dimensional rankings  Ideology  Personality  Leadership  Decision to vote

30. 6-30 Representative Democracy-Public Employees  Function of bureaucrats  Goals of bureaucrats

31. 6-31 Niskanen’s Model of Bureaucracy Q per year $ 0 V C Q* Efficient output Q bc Actual output

32. 6-32 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

33. 6-33 Representative Democracy – Rent-Seeking tons of peanuts per year $ S=MC D MR Rents

34. 6-34 Representative Democracy – Other Actors  Judiciary  Journalists  Experts

35. 6-35 Explaining Government Growth  Citizen Preferences G = f(P, I)  Marxist View  Chance Events  Changes in Social Attitudes  Income Redistribution

36. 6-36 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

37. 6-37 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

38. 6-38 Provisions of a Typical Balanced Budget Amendment 1. Congress must adopt a budget statement “in which total outlays are no greater than total receipts” 2. Total receipts may not increase “by a rate greater than the rate of increase in national income” 3. “The Congress and President shall…ensure that actual outlays do not exceed the outlays set forth in the budget statement” 4. The provisions can be overridden in times of war

39. 6-39 Critique of Balanced Budget Amendments  Forecasting issues  Definitional issues  Penalties for violation of the law  Economic issues