1. The Economics of Collective Decision Making
Chapter Six

2. The Size of Government
Government Expenditures as a Share (%) of GDP
3.0
6.5
9.4
1930
Federal
8.4
15.7
7.3
State & local
1940
21.1
14.7
6.3
1950
24.1
16.5
7.6
1960
30.2
19.4
10.9
1970
32.8
21.0
11.8
1980
34.2
21.6
12.6
1990
31.9
19.0
12.9
2000
34.3
20.6
13.7
2003
As is shown here, government expenditures as a share of GDP have risen over time.

3. Defense 18.8%
Social
Security 22%
Net Interest 7.1%
Transportation 3.1%
Income
Security 15.5%
Other 11.8%
Medicare and health 21.7%
Sources: Economic Report of the President, 2004, and Statistical Abstract of the United States, 2003.
A breakdown of the government expenditures at the federal level in 2003 are listed above.

4. Insurance trusts 7.7%
Public welfare & Health 22.3%
Education 32.2%
Police & Fire Protection 7.9%
Transportation 6.3%
Utilities & liquor stores 7.1%
Interest on debt 4.3%
Administration & other 12.2%
Sources: Economic Report of the President, 2004, and Statistical Abstract of the United States, 2003.
A breakdown of the government expenditures at the state and local level in 2000 are listed above.

5. Transfer Payments
Government expenditures that are not part of the GDP.
Monies are transferred from taxpayers to recipients.
Not associated directly with any production in the economy.

6. Transfer payments as a % of national income 13.4% 11.8% 11.1% 11.3%
State & local governments
11.8%
Federal government
11.1%
11.3%
7.7%
5.1%
5.2%
2.6%
1.1%
1930
1940
1950
1960
1970
1980
1990
2000
2002
Sources: Bureau of Economic Analysis,

7. Public Choice Analysis
– applies the tools of economics to the political process
-study of the complex interaction among:
voter-taxpayers
politicians
bureaucrats

8. Rational Ignorance Effect
Recognizing their vote is unlikely to be decisive, most voters have little incentive to obtain information on issues and alternative candidates.

9. Bureaucrats
Bureaucrats (persons that handle day-to-day operations of government) seek promotions, job security, power, etc.
Larger budgets and program expansion generally serve the interests of both bureaucrats and their constituent groups.

10. Benefits Derived by Voters from Hypothetical Road Project
Tax payment
Voter
Benefits received
Plan A
Plan B
Adams
$ 20 12 4 2
$ 5 5
$ 12.50
7.50
2.50
1.25
Chan
Green
Lee
Diaz
Total
$40
$25
$25.00

11. Distribution of benefits among voters
Widespread
Concentrated
Type 1
Type 2
Widespread
Distribution of costs among voters
Type 4
Type 3
Concentrated
Consider how the 4 possible distributions of benefits and costs among voters affect the operation of representative government.
When benefits or costs are either both widespread or concentrated (type 1 or type 3), representative government tends to undertake projects that are productive and reject those that are unproductive.

12. Sugar Trade restrictions cost each household an average of $20 a year.
Sugar grower benefit and contribute $13 million in campaign funds to keep restrictions in place.

13. THE IRON TRIANGLE
The House and Senate agriculture committees form the first leg of this triangle. Lawmakers who serve on the committees tend to come from farm districts and are staunch defenders of agriculture. This allegiance to agriculture can make it difficult for other interests to be heard as the committees hold hearings and draft legislation on matters reaching far beyond crops and meat production.
The second leg of the triangle is the farm lobby. The sugar industry and other farm-subsidy interests -- peanut, tobacco, wheat, and so on -- act as a lobbying bloc to preserve all agricultural price-support programs. They are also big campaign contributors.
The third leg of the triangle is USDA, a massive, sprawling department with a budget of roughly $60 billion a year and more than 100,000 employees. Critics have charged that the huge bureaucracy that administers farm programs exists to perpetuate itself.

14. Special Interest Effect
Logrolling: trading votes for projects with concentrated benefits and diffuse costs
Pork-barrel: inefficient projects with concentrated benefits

15. Rent Seeking
Actions by individuals and interest groups designed to restructure public policy in a manner that will either directly or indirectly redistribute more income to themselves.

16. Economic Organization & Incentives
Good is paid for by:
Consumer purchaser
Taxpayer or third party
Quadrant 1: Apples, oranges, TV sets, food, housing, & most other goods
Quadrant 2:
Health care, food purchased with food stamps
Private enterprise
Good is produced by:
Quadrant 3: Post Office, water & electricity in many cities, toll roads, and many hospitals
Quadrant 4: Public schools, roads, national defense, and law enforcement
Government
enterprise or
contracting

17. The Role of a Constitution
Constitutions establish the procedures used to make political decisions. They can also limit the activities of government.
The framers of the U.S. Constitution incorporated restraints on the economic role of government.
The challenge before us is to develop constitutional rules and political institutions more consistent with economic efficiency and prosperity.