Thursday, December 8, 2011

Public Choice: Politics without Romance

The economic analysis of politics, Public Choice (which subtitle according to James Buchanan, Nobel Prize in Economics, should be Politics with Romance - I encourage you to read that short article by the way), is in my opinion one of the most exciting research programs in economics. It's fascinating to see (1) how increasingly people become disillusioned about politics and though they keep voting, pushing for bad public policies, and calling for politicians to solve their problems; (2) politicians can be elected and reelected despite repeatedly changing their positions and lying to voters; (3) the belief among voters that somehow that politicians are different from regular citizens and, more particularly, the belief that the President (of the US, but also France, etc.) has special rights than an ordinary citizen doesn't have.

I will not address point (3) because it's not relevant to the core of the discussion but points (1) and (2) can be addressed with the following short findings of economics:

(1) Politicians (and bureaucrats) are no different than market participants, they are self-interested individuals whose utility function is not as dependent of money than it is for market participants but is highly dependent on power and the ability to affect the life of other people (what's the saying: power is the greatest aphrodisiac). To get that power politicians must be elected and, therefore, they must maximize votes.

(2) To maximize votes, politicians must make promises to voters, more particularly to the voters which votes will swing the elections in their favor (median-voters), they must address issues that these median-voters care about EVEN IF these issues are far away from concerns from most of voters that vote for this candidate because of the basic ideological principles his/her party represent. Politicians to get votes and more particularly campaign money to be elected or reelected use their power to pass policies that will benefit to few people (interest groups) but for which the costs will be borne by many (widespread costs). The typical examples we use are Sugar quotas that allow US producers of sugar to charge sugar prices 3 to 4 times higher than the world price of sugar to consumers. Individually, these higher costs are only few cents but globally these costs amount to several billion of dollars and thousands of dollars over years for each consumer; tax policy, tariffs are other examples. Why do people don't oppose these policies? The answers are [1] because for most the cost of being informed about these policies is greater than the benefits that you will get by being informed; therefore, people remain rationally ignorant (standard public choice argument). How many of you knew about the US sugar quotas costing billion of dollars to the consumers? And therefore, the people who are rationally informed about these policies are those who benefit from these policies and actually spend resources to get these policies passed. [2] Bryan Caplan's argument is that people hate foreigners, perceive the economic pie as a fixed pie and therefore assume that when money goes to foreign people, it means less money for the citizens, see trade, exchange, competition between individuals as a zero-sum game. There is a lot of debates about whether Bryan Caplan's argument is incompatible with the Rational Ignorance argument. This is how I reconcile both. People have biases, beliefs that I just described above and are comfortable with believing that what they believe is the right thing. Therefore, finding out that they actually are wrong might be a terrible emotional and psychological experience for them. In other words, people remain rationally ignorant not only because most of these policies don't concern them or concern them little but more importantly because I believe that the cost of being informed is greater than the actual cost of getting the information, there is a cost associated with finding out that what you believed was the truth is actually NOT the truth!

(3) Politicians to get reelected rely on voters' myopia. There are studies that show for example that when the economy is doing well, the incumbent is systematically reelected and when the economy is not doing good, the incumbent doesn't get reelected. Voters rely on economic indicators such as disposable income (wages, dividends, interests, unemployment compensation), inflation, unemployment rate to decide whether to reelect or not the incumbent. More particularly, studies show that voters don't look at the entire term, they exclusively focus their attention on the year of the election. As a result of that, we observe that incumbent systematically adopt policies to increase voters' disposable income in election year (look at how nice President Obama has been to "cancel" your student loans and impose a cap on loans!) and then adopt policies that will decrease disposable income after being elected.

(4) Politicians are neither Angels no Demons. They respond to incentives and face constraints. Unfortunately, the politicians incentives are bad.

(5) To control what politicians can and cannot do, you have two mechanisms: the Constitution and terms. The Constitution is a document that states what and what the government cannot do. Unfortunately, Constitution has been amended many times and, my personal opinion, is despite the US Supreme Court, the Constitution has come to mean almost nothing (look at the US president going to kill his own citizens in foreign country and by doing that violating due process) and interpretations are so different that it's become the tool for politicians to do many things that the founders of this country certainly would be oppose to. Terms do tie the hands of politicians but voters myopia strongly limit the effectiveness of that mechanisms. Also contrary to markets, where when you make a bad decisions, most of the time (not in the case of Crony Capitalism) you directly pay the costs of your bad decisions, in politics your bad decisions are costly to the taxpayers and the society.
On this I do encourage the SWEET to read Randall Holcombe's From Liberty to Democracy book, it's an excellent book that explains why the government's size and scope are so big now. The US Constitution originally intended to prevent government abuse but as any written documents it has in it the very shortcomings that has allowed the government to grow in size and scope as we have today.

Here are a few links you might want to check:

1 comment:

  1. Thanks for the post. We have enjoyed you insights.
    Have a good holiday season.