The Economics of Collective Decision Making Chapter 6 The Economics of Collective Decision Making

5 Learning Goals Identify the size of government spending in the economy Identify the similarities and differences between market and political process of allocation of goods and services Determine when the political process works well Determine when the political process works poorly Analyze crony capitalism

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 Government Expenditures as a Share (%) of GDP 3.0 6.5 9.4 1930 Federal 8.4 15.7 7.3 State & local 1940 21.1 14.7 6.3 1950 24.1 16.5 7.6 1960 30.2 19.4 10.9 1970 32.8 21.0 11.8 1980 34.2 21.6 12.6 1990 31.9 19.0 12.9 2000 39.7 25.4 14.3 2010

The Facts Total 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

Similarities and Differences Between Governments and Markets

Combine with next section

Political Decision-Making: An Overview

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 Voting Rational 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 Voting Median 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. I vote for the proposal 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

When the Political Process Works Well

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

When the Political Process Works Poorly

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

Causes of inefficiency (i.e. government failure) Special Interest Effect Shortsightedness Effect Rent Seeking Lack of Profit Motive

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

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).

Special Interest Effect How is this done? Logrolling: The practice of trading votes by a politician to get the necessary support to pass desired legislation 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”? The benefits are concentrated to constituents in a part of Alaska while the costs are spread out over millions of taxpayers. The benefits are diffused to millions of taxpayers and the costs are concentrated among special interest groups. Such legislation will create permanent jobs and expand the local economy. 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? An increase in student studying and learning Rent-seeking behavior by students who will spend less time studying and more time trying to lobby the teacher for these points. 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 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

Political Favoritism, Crony Capitalism, and Government Failure

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

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