CHAPTER 6Political EconomyCopyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin6-2Direct Democracy-Unanimity Rulesr per year00Adams share (SA)Eves share (SE)DrAThe Lindahl ModelDrEr*S*6-3Feasibility of Unanimity RulesReaching equilibriumPractical problemsStrategic behaviorTime to reach equilibrium6-4Direct Democracy-Majority Voting RulesMajority voting rule one more than half of the voters must favor a measure for it to be approved VoterChoiceBradJenAngelinaFirstACBSecondBBCThirdCAA6-5Direct Democracy-Majority Voting RulesVoting Paradox community preferences can be inconsistent even though individuals preferences are consistentAgenda Manipulation process of organizing order of votes to ensure a favorable outcomeCycling when paired voting on more than two possibilities goes on indefinitely without a conclusion ever being reached VoterChoiceBradJenAngelinaFirstACBSecondBACThirdCBA6-6Graphing PreferencesMissilesUtilityABCBradJenAngelinaSingle-peaked preferencesDouble-peaked preferences6-7Practical Importance of Double-Peaked PreferencesAvailability of private substitutesIssues ranked along single dimension6-8Direct Democracy - The Median Voter TheoremVoterExpenditureDonald$5Daisy100Huey150Dewey160Louie7006-9Direct Democracy - Logrolling IVoterProjectMelanieRhettScarletTotal Net BenefitsHospital200-50-5595Library-40150-3080Pool-120-604002206-10Direct Democracy - Logrolling IIVoterProjectMelanieRhettScarletTotal Net BenefitsHospital200-110-105-15Library-40150-120-10Pool-270-140400-106-11Direct Democracy - Arrows Impossibility Theorem“Reasonable” collective decision-making criteriaIt can produce a decision whatever the configuration of voters preferencesIt must be able to rank all possible outcomesIt must be responsive to individuals preferencesIt must be consistentIndependence of irrelevant alternativesDictatorship ruled outArrows Impossibility TheoremAll conceivable voting schemes have some potential for being unfair or producing a paradoxical resultMeaning of theoremconsistent rule not necessarily impossible to find, but cannot be guaranteedBuchanans critiqueUse of social welfare functions6-12Representative Democracy - Elected PoliticiansNumber of VotersLiberalConservative6-13Implications of the Median Voter ModelTwo-party systems tend to be stableReplacement of direct referenda by representative system has no effect on outcomes6-14Other Factors Influencing VotingSingle-dimensional rankingsIdeologyPersonalityLeadershipDecision to vote6-15Representative Democracy-Public EmployeesFunction of bureaucratsGoals of bureaucrats6-16Niskanens Model of BureaucracyQ per year$0VCQ*EfficientoutputQbcActualoutput6-17Representative Democracy Special InterestsWhat are “Special Interests”?Establishment of Special Interest GroupsSource of Income: Capital or LaborSize of IncomeSource of Income: Industry of EmploymentRegionDemographic and Personal Characteristics6-18Representative Democracy Rent-Seekingtons of peanuts per year$S=MCDMRRents6-19Representative Democracy Other ActorsJudiciaryJournalistsExperts6-20Explaining Government GrowthCitizen PreferencesG = f(P, I)Marxist ViewChance EventsChanges in Social AttitudesIncome Redistribution6-21Controlling Government GrowthGovernment growth as a non-issueGovernment growth as a problemCommitments made in the pastBasic flaws in the political system6-22Improving the Workings of the Political SystemChange bureaucratic incentivesFinancial incentivesPrivatizationChange Fiscal InstitutionsBudget Enforcement Act (BEA) 1990Balanced Budget rules at the state levelInstitute Constitutional LimitationsBalanced Budget amendment6-23Provisions of a Typical Balanced Budget Amendment1.Congress must adopt a budget statement “in which total outlays are no greater than total receipts”2.Total receipts may not increase “by a rate greater than the rate of increase in national income”3.“The Congress and President shallensure that actual outlays do not exceed the outlays set forth in the budget statement”4.The provisions can be overridden in times of war6-24Critique of Balanced Budget AmendmentsForecasting issuesDefinitional issuesPenalties for violation of the lawEconomic issues