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CHAPTER 6

CHAPTER 6. POLITICAL ECONOMY. Political Economy. The field that applies economic principles to the analysis of political decision making. Political Economy. Social Welfare Function Unanimity Rules Majority Voting Rules Logrolling Representative Democracy Dictatorship.

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CHAPTER 6

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  1. CHAPTER 6 POLITICAL ECONOMY

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

  3. Political Economy • Social Welfare Function • Unanimity Rules • Majority Voting Rules • Logrolling • Representative Democracy • Dictatorship

  4. Direct Democracy-Unanimity Rules 0’ DrE Eve’s share (SE) S* Adam’s share (SA) DrA 0 r per year r* The Lindahl Model

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

  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. Direct Democracy-Majority Voting Rules

  8. 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 Direct Democracy-Majority Voting Rules

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

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

  11. Graphing Preferences Single-peaked preferences Utility Jen Double-peaked preferences Brad Angelina Missiles B C A

  12. Practical Importance of Double Peaked Preferences • Availability of Private Substitutes • Gym • Issues Ranked

  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. Direct Democracy - The Median Voter Theorem

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

  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. Direct Democracy - Logrolling I • Which would be accepted?

  18. Direct Democracy - Logrolling I • How should Melanie get funding for the hospital?

  19. Direct Democracy - Logrolling I • Trade her vote on the library for Rhett’s hospital.

  20. Direct Democracy - Logrolling I • Trade her vote on the pool for Scarlet’s hospital vote.

  21. Direct Democracy - Logrolling II

  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. 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. 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 • Transitive • Independence of irrelevant alternatives • A vs. B excludes A vs. C, etc. • Dictatorship ruled out • Otherwise Satisfication

  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. Representative Democracy – Elected Politicians • Who makes these decisions? • Politicians! • Median Voter

  27. 0 Representative Democracy - Elected Politicians Number of Voters Where do you want to get your votes? Liberal Conservative Median

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

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

  30. Representative Democracy-Public Employees • Function of bureaucrats • Goals of bureaucrats

  31. Niskanen’s Model of Bureaucracy C $ V Actualoutput Efficientoutput 0 Q* Qbc Q per year

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

  34. Representative Democracy – Other Actors • Judiciary • Journalists • Experts

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

  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. 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. 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

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

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