Chapter 20
Political Economy and Public Choice
MODERN PRINCIPLES OF ECONOMICS
Third Edition
Outline
. Voters and the Incentive to Be Ignorant
. Special Interests and the Incentive to Be Informed
. A Formula for Political Success: Diffuse Costs, Concentrate Benefits
. Voter Myopia and Political Business Cycles
. Two Cheers for Democracy
Definition
Public choice:
the study of political behavior using the tools of economics.
Introduction
. Political economy, or public choice, uses the tools of economics to study political behavior.
. This chapter examines:
• The major institutions and incentives that
govern the behavior of voters and politicians.
• Problems with democracies: voter ignorance, control by special interests, and political
business cycles.
• Why nondemocracies typically fail to produce wealth or political or economic liberty.
Definition
Rational ignorance:
when the benefits of being informed are less than the costs of becoming
informed.
Rational Ignorance
. Most Americans know very little about political matters.
• Americans were asked the two largest sources of government spending out of six.
• 41% named the smallest – foreign aid.
• Most Americans say they know “not much” or
“nothing” about important legislation such as the USA Patriot Act.
• Most cannot estimate unemployment or inflation to within five percentage points.
Self-Check
“ Rational ignorance” means voters sometimes are not well-informed because the cost of being informed is:
a. Greater than they can afford.
b. Greater than the benefit of being informed.
c. Less than the benefit of being informed.
Answer: b – the cost of being informed is greater than the benefit.
Rational Ignorance
. The incentives to be well-informed about politics are low.
. Studying position papers and speeches doesn’t offer much concrete return.
. Studying politics doesn’t pay because elections are mostly determined by what other people do, not by what you do.
Rational Ignorance
. Rational ignorance matters because:
1. If voters don’t know the facts, then it’s difficult to make informed choices.
2. Rationally ignorant voters will often make
decisions on the basis of low-quality,
unreliable, or potentially biased information.
3. Not everyone is rationally ignorant.
Incentive To Be Informed
. The U.S. price of sugar is about double the world price due to government quotas on imported sugar.
. Sugar consumers are harmed, but the costs are diffused over millions of consumers.
. The cost is $5 or $6 per year for each consumer.
. Even if they know about the quota, they won’t spend much time or effort to oppose it.
Incentive To Be Informed
. Sugar producers have a lot of money at stake.
. Sugar production is concentrated among a handful of producers.
. Each producer benefits from the quota by millions of dollars.
. Sugar producers have an incentive to be rationally informed.
. They act to protect the sugar quota.
Incentive To Be Informed
Sugar producers make political contributions through
PACs and individually.
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Self-Check
Who has the greatest incentive to be informed about an import quota on clothing?
a. Foreign consumers of clothing.
b. Domestic consumers of clothing.
c. Domestic producers of clothing.
Answer: c – domestic producers have the greatest incentive.
Diffuse Costs, Concentrate Benefits
. The self interest of politicians does not always align with the social interest.
. One formula for political success is to diffuse costs and concentrate benefits.
• The people who are harmed are rationally ignorant and have little incentive to oppose the policy
• The people who benefit are rationally informed and have strong incentives to support the policy.
Diffuse Costs, Concentrate Benefits
. The formula for political success works for many types of public policies .
• Trade quotas and tariffs.
• Agricultural subsidies and price supports.
• Government projects such as roads, bridges, dams, and parks.
• Tax credits and deductions.
. When benefits are concentrated and costs are diffuse, resources can be wasted on projects with low benefits and high costs.
Voter Myopia
. Over the past 100 years, Americans have voted for the party of the incumbent when the
economy is doing well and against the
incumbent when the economy is doing poorly.
. More specifically, the incumbent party wins when:
• Personal disposable income is growing, • The inflation rate is low, and
• The incumbent party has not been in power for too many terms in a row.
Voter Myopia
Economic conditions in an election year predict
presidential Votes.
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Voter Myopia
. Voters don,t look at economic conditions over a president,s entire term.
. They focus on economic conditions in the year of an election.
. Politicians who want to be reelected do
whatever they can to increase personal
disposable income and reduce inflation in the year of an election.
Voter Myopia
Growth in disposable personal income peaks in an
election year, 1947–2007.
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Self-Check
Voter myopia means that voters focus on:
a. Short-term economic conditions.
b. Long-term economic conditions.
c. Future economic conditions.
Answer: a – voter myopia means that voters focus on short-term economic conditions, or conditions in the year of an election.
Two Cheers for Democracy
. Lobbies and special interests are likely get their way when a policy:
• Is specialized in its impact.
• Difficult to understand.
• Affects a small part of the economy.
. Voters are likely to have opinions when a policy:
• Is highly visible.
• Appears often in the media.
• Has a major effect on the lives of millions of Americans.
Definition
Median voter theorem:
when voters vote for the policy that is
closest to their ideal point on a line, then the ideal point of the median voter will
beat any other policy in a majority rule election.
Median Voter Theorem
Median voter
. Each voter has an ideal policy.
. Voters will vote for the candidate whose policy is closest to their ideal.
. The median voter is the one where half the other voters want more spending and half want less.
Median Voter Theorem
. Under majority rule, the ideal policy of the median voter will beat any other policy.
. Max and Sofia would vote for Candidate D, while Inez, Peter, and Alex would vote for Candidate R.
. Candidate R would win.
Median Voter Theorem
. Candidate R’s position can be beaten by a policy even closer to the ideal policy of the median voter.
. In this case, Candidate D’ would win.
Median Voter Theorem
. According to the median voter theorem, the median voter rules.
. If the median voter doesn’t change, then neither does policy.
. Under the conditions of the theorem, democracy does not seek out consensus or compromise or a policy that maximizes voter preferences.
. It seeks out a policy that cannot be beaten in a majority rule election.
Median Voter Theorem
. The theorem does not apply if:
• Voters don’t vote for the policy that is closest to their ideal point.
• There is more than one major dimension over which voting takes place.
. Sometimes a winning policy doesn’t exist.
. The theorem indicates that politicians have substantial incentives to listen to voters on issues that the voters care about.
Self-Check
The median voter theory says that a majority
rule election will be won by the policy closest to that of:
a. The average voter.
b. The median voter.
c. The majority of voters.
Answer: b – it will be won by a policy closest to that of the median voter.
Democracy and Nondemocracy
. The countries that are most democratic are among the wealthiest countries and have the most economic freedom.
. There is a strong correlation between democracy and a higher standard of living.
. This is partially because greater wealth creates a greater demand for democracy.
Democracy and Nondemocracy
Economic freedom, democracy, and living standards.
Self-Check
There is a strong correlation between democracy and:
a. The standard of living.
b. Population.
c. Total GDP.
Answer: a – the standard of living.
Democracy and Famine
. Many famines have been intentional.
. When Stalin came to power in 1924, he saw wealthy independent farmers as a threat.
. He collectivized the farms, expropriated the land, and sent hundreds of thousands to prisons.
. Agricultural productivity in Ukraine plummeted, but food was still shipped out of the country and millions died.
. The famine would not have happened in a democracy.
Democracy and Famine
. Nobel prize winner Amartya Sen has said “no
famine has taken place in the history of the world in a functioning democracy.”
. Economists Timothy Besley and Robin Burgess have tested Sen’s theory.
. They found that:
• Greater political competition is associated with higher levels of public food distribution.
• Government is more responsive to a food crisis when newspaper circulation is higher.
Democracy and Growth
. Democracies have a good record of supporting institutions that promote economic growth:
• Markets.
• Property rights.
• The rule of law.
• Fair government.
. The only way the public can become rich is
through policies that generate economic growth.
. Nondemocratic elites become rich by dividing the pie in their favor even if it means a smaller pie.
Takeaway
. Voters in a democracy often have little incentive to be informed about political matters.
. Rational ignorance means that special interests can dominate parts of the political process.
. Politicians can build support by concentrating benefits and diffusing costs.
. Voters focus on current economic conditions.
. Politicians typically increase spending before an election.
Takeaway
. The record of democracies on some of the big issues is quite good.
. Politicians in a democracy can’t ignore the major interests of voters.
. If things do go wrong, voters in a democracy can vote the politicians out.
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