The Economics of Collective Decision Making

1
The Economics of Collective Decision Making

• Chapter Six

2
The Size of Government
Government Expenditures as a Share () of GDP
Federal
1930
State local
1940
1950
1960
1970
1980
1990
2000
2003

• As is shown here, government expenditures as a
  share of GDP have risen over time.

3
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
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
1960
1970
1980
1990
2000
2002
1930
1940
1950
Sources Bureau of Economic Analysis,
http//www.bea.gov.
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
Plan A
Plan B
Voter
Benefits received
Adams
Chan
Green
Lee
Diaz
Total
40
25
25.00
11
Distribution of benefitsamong voters
Widespread
Concentrated
Widespread
Distribution of costs among voters
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.
• http//www.opensecrets.org/pubs/cashingin_sugar/su
  gar02.html

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
Privateenterprise
Good is produced by
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.