Transcript Macro_online_chapter_06_14ex

Chapter 6
The Economics of Collective
Decision Making
5 Learning Goals
1) Identify the size of government spending
in the economy
2) Identify the similarities and differences
between market and political process of
allocation of goods and services
3) Determine when the political process
works well
4) Determine when the political process
works poorly
5) Analyze crony capitalism
The Size and Growth of
the U.S. Government
3
Watch Video: Stossel Macro 12-Is
government too big?
The Size of the US Government: 1930-2010
Government Expenditures as a Share (%) of GDP
1930
1940
1950
1960
1970
3.0
6.5
8.4
7.3
14.7
16.5
21.1
7.6
19.4
24.1
10.9
21.0
1990
21.6
2010
State & local
15.7
6.3
1980
2000
Federal
9.4
19.0
11.8
32.8
34.2
12.6
12.9
25.4
30.2
31.9
14.3
39.7
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
9
Combine with next section
10
Political Decision-Making:
An Overview
11
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
12
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.
1. I vote for the proposal
2. 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
19
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
20
When the Political Process
Works Poorly
21
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
22
Causes of inefficiency
(i.e. government failure)
1.
2.
3.
4.
Special Interest Effect
Shortsightedness Effect
Rent Seeking
Lack of Profit Motive
23
Watch Video: Popeye Vote for Presidentconvincing 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).
25
Special Interest Effect
How is this done?
1. Logrolling: The practice of trading votes
by a politician to get the necessary
support to pass desired legislation
2. Pork-barrel legislation: a package of
spending projects benefiting local areas
financed through the federal government
26
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”?
1. The benefits are concentrated to constituents in a part of
Alaska while the costs are spread out over millions of
taxpayers.
2. The benefits are diffused to millions of taxpayers and the
costs are concentrated among special interest groups.
3. Such legislation will create permanent jobs and expand
the local economy.
4. 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?
1.
2.
3.
4.
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 15competition and efficiency of government
Political Favoritism, Crony
Capitalism, and
Government Failure
35
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
36
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
37
Watch Video: Stossel-Stimulus and crony
capitalism
Question Answers
6.1 = any
6.2 = 2
6.3 = 4