ECO 481:Public Choice Theory

The Failure of The Failure of DemocracyDemocracy

& Voting Rules& Voting Rules

Dr. Dennis Foster

The Nature of the The Nature of the PolityPolity

4 (self-interested) groups:4 (self-interested) groups:• Elected officials - want more votes…• Voters - want more income & wealth.• Bureaucrats - want income, security, budgets.• Special Interests - want wealth (& income).

As rational utility maximizers, they . . .As rational utility maximizers, they . . .• Cope with scarcity and uncertainty.• Experience diminishing marginal benefits to

action.• Experience increasing marginal cost to action.

• Decisions = f(incomplete information).• Decisions = f(an environment of poor

incentives).• Decisions a lot of “wastewaste.”• Decisions exploitative and destructive to

individual rights.

““Few people possess the wisdom and information Few people possess the wisdom and information to divine the best interest of others, and still fewer to divine the best interest of others, and still fewer offer to continuously sacrifice themselves to offer to continuously sacrifice themselves to improve the well-being of others.”improve the well-being of others.”

The Nature of the PolityThe Nature of the Polity

Collective Collective ChoiceChoice

Requires rules:Requires rules:• Majority rule? Plurality? Super majority? Hare?• There must be winners and losers.–And, in markets . . . ?

• Pricing problems (Who? How much?)• Gov’t. as monopoly w/coercive power.

““Government is not reason; it is not eloquent;Government is not reason; it is not eloquent;it is force. Like fire, it is a dangerous servantit is force. Like fire, it is a dangerous servantand a fearful master.”and a fearful master.”

VotingVoting IssuesIssues

• Not especially rewarding.– Should it be easy? Should it require a test?

• Information is costly.– If your contribution is zero . . .

• We can’t pick results only promises.–And, in a market . . . ?–What if the Academy Awards . . . ?

• Benefits and costs are usually mismatched.– e.g., Flagstaff mayor’s race; CCC bond

proposition.

• Paradox of collective choice.

The Politician and The Politician and Your $Your $

• To them, it’s OPM.– Incentive to get money’s worth?– e.g., FUSD and the Pentagon.

• To earn votes, spend “wisely.”–Visible, stream of benefits, “needed Investment”– e.g. bus systems, community centers, food stamps.

• To minimize lost votes, tax “wisely.”– Invisible, “in the public interest”, dispersed

• except “soak the rich,” which means, “soak the minority.”• Tax tourists!

• Practice the art of compromise & bargain.

When you must cut When you must cut backback

• Cut fraud and waste!• Sacrifices made across the board.• Cut areas that have least resistance.• Rely on natural rollover to reduce costs.

• NAU:efficienciesproportional cutsbuyoutscut support staff“market adjustments”

A Taxing A Taxing DecisionDecision

• Raise base/rate on existing tax.• Sin taxes.• “Crisis” tax.• Earmark tax to popular spending.– So, how much support for a FAIR tax?

• Mandate spending to lower gov’t units.• Tax positive events and call them licenses.• At nat’l level, print money = inflation tax

• Can we rely on any fiscal constraint?Can we rely on any fiscal constraint?

Aside - Aside - BureaucracyBureaucracy

• Budgets about 2x private sector.• With no competition, we rely on oversight.

• How to survive lean times?– Insulate budget from annual scrutiny.Insulate budget from annual scrutiny.– Get earmarked funds.Get earmarked funds.– Add new services.Add new services.– Spend all your budget.Spend all your budget.–When cut, threaten to eliminate most popular When cut, threaten to eliminate most popular

programs.programs.

BureaucracBureaucracyy

• Without pricing, planning substitutesfor “rational economic calculation.”• Odd success strategy - poor customer service!–Who raises prices during a recession?

Special Special InterestsInterests

• Actions motivated by “rent seeking.”• They are not out to “improve” the system.• Headquartered in D.C. (e.g. SFA)• Limits: Competition, expensive, free riding,

encourages opposition.

“Democratic politics are not really government by the people but rather an intense competition for power by means of votes among contending politicians. In that competition, politicians find it highly rational to engage in obfuscation, play acting, myth making, ritual, the suppression and distortion of information, stimulation of hatred and envy, and the promotion of excessive hopes.”

ECO 481:Public Choice Theory

The Failure of The Failure of DemocracyDemocracy

& Voting Rules& Voting Rules

Dr. Dennis Foster