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Chapter 6
The Economics of Collective Decision Making
OUTLINE
I. The Size and Growth of the U.S. Government
A. Total government spending accounted for only 9.4% of GDP in 1930, and only one
third of this spending was at the federal level
B. 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).
C. 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).
D. Personal income and payroll taxes provide about one-half of government revenue.
E. The largest categories of government spending are education, health care, Social
Security and other transfer payments.
II. The Differences and Similarities Between Governments and Markets
A. Competitive behavior is present in both the market and public sectors.
B. Public-sector organization can break the individual consumption-payment link.
C. Scarcity imposes the aggregate consumption-payment link in both sectors.
E. When collective decisions are made legislatively, voters must choose among
candidates who represent a bundle of positions on issues.
F. Income and power are distributed differently in the two sectors.
III. Political Decision-Making: An Overview
A. Public choice analysis applies the tools of economics to the political process. The goal
is to provide insight concerning how the process works.
2. Political process can be viewed as a complex exchange process involving (1) voter-
taxpayers, (2) politicians, and (3) bureaucrats.
3. Incentives Confronted by the Voter
a. Voters will tend to support those candidates whom they believe will provide
4. Incentives Confronted by the Politician
5. Incentives Confronted by the Government Bureaucrat
a. Bureaucrats (persons that handle day-to-day operations of government) seek
promotions, job security, power, etc.
b. The interests of bureaucrats are often complementary with those of the interest
groups they serve.
c. Bureaucrats can usually expand their own interests, as well as that of their
constituents, by working for larger budgets and program expansion.
IV. When the Political Process Works Well
A. Other things constant, legislators will have a strong incentive to support the political
actions that provide voters with large total benefits relative to costs.
B. If a government project is really productive, it will always be possible to allocate the
V. When the Political Process Works Poorly
A. Special Interest Effect
1. Special Interest Issue: One that generates substantial personal benefits for a small
3. In contrast, the voters bearing the cost of special-interest legislation will often be
4. Politicians have a strong incentive to favor special interests even if action is
inefficient.
5. Logrolling and pork-barrel legislation strengthen the special interest effect.
B. Shortsightedness Effect
1. Issues that yield clearly defined current benefits at the expense of future costs that
are difficult-to-identify.
2. The political process is biased toward the adoption of such proposals even when
they are efficient.
C. Rent Seeking
1. Actions by individuals and interest groups designed to restructure public policy in
2. Widespread use of the taxing, spending, and regulating powers of government that
3. Rent seeking moves resources away from productive activities. The output of
economies with substantial amounts of rent seeking will fall below their potential.
D. Inefficiency of Government Operations
2. Neither is there a bankruptcy process capable of weeding out inefficient producers.
4.
are likely to be less conscious of cost than they would be with their own resources.
VI. Political Favoritism, Crony Capitalism, and Government Failure
A. .
1. political decision-makers direct subsidies, grants, tax breaks, and regulatory favors
2. It is a natural outgrowth of increases in government spending, constant changes in
taxes, and expansion in regulation.
B. Crony Capitalism is often driven by the bootlegger Baptist strategy: greedy action
packaged as moral behavior
1. Opportunistic rent-seekers often frame their programs in a manner designed to
attract support from naïve idealists.
3. But when one looks below the surface, one discovers that these programs are about
government favoritism providing handsome profits to the well-organized special
interest groups.
C. Bootlegger Baptist examples include:
1. Mattel incorporating costly testing procedures into the Consumer Product Safety
2. General Electric partners with environmentalists to advocate subsidies and tax
breaks for alternative energy sources.
a. This government favoritism increased demand for GE turbine engines, solar
panels, and wind farms.
b. Result: GE earned $15 billion in 2010 and paid zero corporate income taxes.
D. Market Entrepreneurs versus Crony Capitalists
1. Market entrepreneurs get ahead by providing consumers with products that are
more highly valued than the resources required for their production.
2. Crony capitalists get ahead by providing political players
with campaign contributions and other political resources
3. Crony capitalism reflects government failure and undermines the legitimacy of the
democratic political process
VII. The Economic Way of Thinking About Government
A. Both bad news and good news flow from public-choice analysis.
2. The good news: Properly structured constitutional rules can improve the expected
result from government.
ADDENDUM:
VIII. Economic Organization: Who Produces, Who Pays, and Why It Matters
A. The incentive to economize is influenced by who produces a good and who pays for it.
B. Economizing behavior will be strongest when consumers purchase goods produced by
C. The incentive to economize is reduced when payment is made by a third party (health
care) and when production is handled by the government (national defense, post office)
Chapter 6/The Economics of Collective Decision Making 79
OBJECTIVES
In this chapter, the basic tools of economics are utilized to analyze the collective decision-making
process. Using the individual as the unit of analysis, we develop theories of political behavior. This
chapter outlines both how we would expect the collective-choice process to work and why it will
sometimes fail to allocate resources efficiently.
When the market fails to allocate resources efficiently, the public sector can potentially act to
improve the welfare of all citizens government action need not be a zero-sum game. As we discuss
in the text, government action in such areas as crime prevention, national defense, provision of a
stable monetary environment, and regulation of monopoly power is rooted to the potential gains
from action to correct market failure.
However, there is good reason to expect that collective action will promote economic
IMPORTANT POINTS AND TEACHING SUGGESTIONS
1. At the outset, explain to students that the purpose of political economic theory is to expand our
understanding of real-
3. When externalities are present, political action has the potential to improve social (total)
welfare. A diagram such as Exhibit 3 in the previous chapter could help to illustrate this point.
4. The most compelling reason for public sector action is that market failure results in inefficiency
5. In addition to public sector action to improve allocative efficiency, the political process may
be utilized to redistribute income. Public choice analysis indicates that self-interest
7. The special-interest effect is one of the major sources of government failure. Be sure to explain
8. The shortsightedness effect stems from the inability of political entrepreneurs to gain from
maximizing long-range future political benefits. Since future benefits (and costs) tend to be
9. The text presents the argument that public sector firms (agencies, departments, etc.) are likely
to be operated less efficiently than their private sector counterparts, particularly competitive
firms. However, it is important to note that this conclusion does not presume that public sector
employees are lazy, incapable, and work less intensively. Rather, emphasis is placed on the
10. The Thumbnail Sketch summarizes the major weaknesses of both the market and public
sectors.
11. Discuss the incentive structure that generates the rational ignorance effect. Ask students
12. A good analogy to rational voter ignorance is rational student ignorance. Just as the incentives
facing voters lead them to be less informed about political decisions than private ones, the
13. A good extension of rational voter ignorance is why it leads to rational representative ignorance
c
14. As a way of integrating the material in this chapter with what has gone before, it is helpful to
explain that this is just another application of looking at incentive structures, with particular
15. The following analogies will help bring the conce
a. rational student ignorance (students recognize that it is rational to be relatively more
16. Discuss the differences and similarities between market and public-sector economic
17. Critical Analysis Questions 2, 6, 8, and 11 should provide discussion starters related to the major
HINTS FOR ANSWERING CRITICAL ANALYSIS QUESTIONS
5. Rent seeking is 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. The
incentive to engage in rent seeking is directly proportional to the ease with which the political
6. True. Because each individual computer customer both decides the issue (what computer, if
any, will be purchased) and bears the consequences of a mistaken choice, each has a strong
11. The shortsightedness effect results from voters and politicians tending to support projects that
promise substantial current benefits at the expense of difficult-to-identify future costs. In
15. The presence of the sugar price supports and highly restrictive import quotas reflect the
special-interest nature of the issue. Even though there are far more sugar consumers than