The Economics of Collective Decision Making

Chapter 6

5 Learning Goals1) Identify the size of government spending

in the economy

2) Identify the similarities and differences between market and political process of allocation of goods and services

3) Determine when the political process works well

4) Determine when the political process works poorly

5) Analyze crony capitalism

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The Size and Growth of the U.S.

Government

Watch Video: Stossel Macro 12-Is government too big?

The Size of the US Government: 1930-2010

Federal

State & local

Government Expenditures as a Share (%) of GDP

1930

1940

1950

1970

1980

1990

2000

3.0 6.5 9.4

8.4 15.77.3

1960 24.116.5 7.6

30.219.4 10.9

32.821.0 11.8

34.221.6 12.6

31.919.0 12.9

21.114.7 6.3

2010 39.725.4 14.3

The FactsTotal government spending accounted for only 9.4% of GDP in 1930, and only one third of this spending was at the federal level.

Government spending, particularly at the federal level, soared from 1930 to 1980. Total government spending rose from 9.4% of GDP in 1930 to 32.8% in 1980 (more than 3 times its 1930 level).

After remaining fairly constant between 1980 and 2000, the size of the US government has increased dramatically since (increasing to almost 40% of the U.S. economy in 2010).

This is not Democrat vs Republican

Importance of the chapter

If 40% of GDP is spent through the political process instead of the market process, you should better understand the political process

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Similarities and Differences Between

Governments and Markets

10

Combine with next section

11

Political Decision-Making:

An Overview

12

Public Choice

Using the tools of economics (i.e. Chapter 1 guidelines) to understand the political process is called public choice analysis

We are not making value judgments

Economics of VotingRational ignorance effect: a rational individual has little or no incentive to acquire information needed to cast an informed vote

Marginal benefit of voting: the chance that your vote was the deciding vote multiplied by how much you care that a certain candidate wins

Marginal cost of voting: the cost of informing yourself (information is costly), registering to vote, and actually voting.

Economics of VotingMedian voter theory: The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates, and the preferences of the median voter will be represented

Example: ice cream stand on the beach

Watch video: TED- stores next to each other

As a result, there are not usually wide swings in policy.

Q6.1 How would you vote for this proposal: All females in class receive $10 extra credit while all males lost $50 from the final exam.

1. I vote for the proposal

2. I vote against the proposal

Note: In my regular classes at FSU, a majority of students are women so this proposal usually gets passed. It makes the point that democratic voting can produce outcomes where the costs outweigh the benefits.

See Chapter 6 Activity

I strongly encourage you to do this activity on your own. For step 2, assume Cart 2 is the one that the majority votes for and you are forced to purchase.

Watch Video: Stossel MECA-political versus market choices

19

When the Political Process Works Well

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The political process works well when…

voters pay in proportion to the benefits they receive, then productive projects will be passed and unproductive projects will not

User charges: requires people who use a service more to pay a larger share of the cost

Example: gas tax

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When the Political Process Works Poorly

22

The political process works poorly when…

voters receive benefits in disproportion to the costs they incur, then unproductive projects will be passed and productive projects may not

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Causes of inefficiency (i.e. government failure)

1. Special Interest Effect

2. Shortsightedness Effect

3. Rent Seeking

4. Lack of Profit Motive

Watch Video: Popeye Vote for President-convincing voters (just for fun)

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Special Interest Effect

An issue that generates substantial benefits for a small group by generating minimal costs to a large group. (in aggregate, losses may exceed benefits).

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Special Interest Effect

How is this done?

1. Logrolling: The practice of trading votes by a politician to get the necessary support to pass desired legislation

2. Pork-barrel legislation: a package of spending projects benefiting local areas financed through the federal government

Watch Video: Stossel Macro 14- pork barrel spending

Additional articles about the story

US News & World Report- A bridge way too far

Balko-Ketchikan bridge article

Ted Stevens tirade

(These are not required; read them if you’re interested in more about the Ketchikan bridge story)

Q6.2 Why is legislation such as that to build the bridge in Ketchikan, Alaska, passed when most everyone knows that it is “pork”?

1. The benefits are concentrated to constituents in a part of Alaska while the costs are spread out over millions of taxpayers.

2. The benefits are diffused to millions of taxpayers and the costs are concentrated among special interest groups.

3. Such legislation will create permanent jobs and expand the local economy.

4. When it comes to federal spending, members of Congress often ignore the interests of their home districts.

Shortsightedness Effect

Politicians will favor programs that generate current visible benefits, even if long-term costs of the project outweighs the benefits

Rent Seeking

Actions taken by individuals and groups in order to use the political process to take the wealth of others

People spend time trying to gain political favors instead of producing

Q6.3 If your economics teacher instituted a policy where, at the end of the semester, he redistributed points from students with high grades to those who could lobby the best for those points, what would you expect to happen?

1. An increase in student studying and learning

2. Rent-seeking behavior by students who will spend less time studying and more time trying to lobby the teacher for these points.

3. Less efficient use of the teacher’s time as he spends more time listening and responding to student lobbying and less time coming up with better ways to teach the class

4. Both 2 and 3, but not 1

Lack of Profit Motive

Unlike private firms, the public sector lacks the incentive to produce efficiently

Watch Video: Stossel Macro 15- competition and efficiency of government

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Political Favoritism, Crony Capitalism, and Government Failure

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What is Crony Capitalism?

When political decision-makers direct subsidies, grants, tax breaks, and regulatory favors toward businesses willing to provide them with campaign funds and other forms of political support

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Market entrepreneurs get ahead by providing consumers with products that are more highly valued than the resources required for their production

Crony capitalists get ahead by providing political players with campaign contributions and other political resources in exchange for government contracts, subsidies, tax benefits, and other forms of political favoritism

Watch Video: Stossel-Stimulus and crony capitalism

Question Answers

6.1 = any

6.2 = 2

6.3 = 4