Public Choice: The Economics of Politics Jerry Ellig Senior Research Fellow
Key Economic Insights <ul><li>Knowledge, abilities, talents dispersed </li></ul><ul><li>People gain from exchange </li></u...
Economic analysis of government <ul><li>Collective, rather than individual, decisions </li></ul><ul><li>Collective decisio...
Government and the public interest <ul><li>What is the “public interest”? </li></ul><ul><li>How can policymakers identify ...
What is the “public interest”? <ul><li>“ Greatest good for the greatest number”? </li></ul><ul><li>Maximize welfare of lea...
Identifying the public interest <ul><li>Public interest = whatever the government did? </li></ul><ul><li>Benevolent despot...
Public interest = what the govt. did <ul><li>“…  plaintiffs’ proposed final judgment is the collective work product of sen...
Despots or experts? <ul><li>Knowledge (of desires, abilities, circumstances, etc.) is </li></ul><ul><li>Dispersed </li></u...
Revelation through voting <ul><li>Cyclical majorities </li></ul><ul><li>Agenda manipulation </li></ul><ul><li>Nonvoting an...
Cyclical majority <ul><li>1. Spending cuts without tax cuts </li></ul><ul><li>2. Spending cuts with tax cuts </li></ul><ul...
Stakeholder bargaining <ul><li>Organization costs exclude some affected parties </li></ul><ul><li>Diversity within stakeho...
Incentives and the public interest <ul><li>Wealth transfers and “rent-seeking” </li></ul><ul><li>Concentrated benefits and...
What rules mitigate the knowledge and incentive problems? <ul><li>Subsidiarity/federalism </li></ul><ul><li>Division of po...
Insights from the Economic Approach   <ul><li>Politics is exchange conducted under a different set of rules </li></ul><ul>...
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Ellig Public Choice January 2005

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Ellig Public Choice January 2005

  1. 1. Public Choice: The Economics of Politics Jerry Ellig Senior Research Fellow
  2. 2. Key Economic Insights <ul><li>Knowledge, abilities, talents dispersed </li></ul><ul><li>People gain from exchange </li></ul><ul><li>Incentives matter </li></ul><ul><li>“ Rules of the game” create incentives and </li></ul><ul><li>knowledge flows </li></ul><ul><li>Policymakers affect outcomes by changing rules </li></ul>
  3. 3. Economic analysis of government <ul><li>Collective, rather than individual, decisions </li></ul><ul><li>Collective decisions require exchange between interest groups </li></ul><ul><li>“ Rules of the game” create incentives and knowledge flows </li></ul><ul><li>Rules affect outcomes </li></ul>
  4. 4. Government and the public interest <ul><li>What is the “public interest”? </li></ul><ul><li>How can policymakers identify the public interest? </li></ul><ul><li>What incentives do policymakers face? </li></ul><ul><li>What “rules of the game” might improve knowledge and incentives? </li></ul>
  5. 5. What is the “public interest”? <ul><li>“ Greatest good for the greatest number”? </li></ul><ul><li>Maximize welfare of least well-off? </li></ul><ul><li>From each according to his ability, to each according to his need? </li></ul><ul><li>Preserve certain rights/liberties necessary for humans to flourish? </li></ul><ul><li>What rules would people choose if they didn’t know what position they would be in? </li></ul><ul><li>Make people virtuous? </li></ul>
  6. 6. Identifying the public interest <ul><li>Public interest = whatever the government did? </li></ul><ul><li>Benevolent despot </li></ul><ul><li>Government by experts </li></ul><ul><li>Revelation through the voting process </li></ul><ul><li>Stakeholder bargaining </li></ul>
  7. 7. Public interest = what the govt. did <ul><li>“… plaintiffs’ proposed final judgment is the collective work product of senior antitrust law enforcement officials of the United States Department of Justice and the attorneys general of 19 states, in conjunction with multiple consultants. These officials are by reason of office obligated and expected to consider – and to act in – the public interest …” </li></ul><ul><li>--Judge Thomas Penfield Jackson, order directing the rbeakup of Microsoft </li></ul>
  8. 8. Despots or experts? <ul><li>Knowledge (of desires, abilities, circumstances, etc.) is </li></ul><ul><li>Dispersed </li></ul><ul><li>Tacit </li></ul><ul><li>Subjective </li></ul><ul><li>Time-dependent </li></ul><ul><li>Often untested </li></ul>
  9. 9. Revelation through voting <ul><li>Cyclical majorities </li></ul><ul><li>Agenda manipulation </li></ul><ul><li>Nonvoting and rational ignorance </li></ul>
  10. 10. Cyclical majority <ul><li>1. Spending cuts without tax cuts </li></ul><ul><li>2. Spending cuts with tax cuts </li></ul><ul><li>3. Tax cuts without spending cuts </li></ul><ul><li>Fiscal conservative favors 1, 2, 3 </li></ul><ul><li>Fiscal liberal favors 3, 1, 2 </li></ul><ul><li>Tax cutter favors 2, 3, 1 </li></ul><ul><li>1 vs. 2: 1 wins … 1 vs. 3: 3 wins … 2 vs. 3: 2 wins! </li></ul>
  11. 11. Stakeholder bargaining <ul><li>Organization costs exclude some affected parties </li></ul><ul><li>Diversity within stakeholder groups </li></ul>
  12. 12. Incentives and the public interest <ul><li>Wealth transfers and “rent-seeking” </li></ul><ul><li>Concentrated benefits and dispersed costs </li></ul><ul><li>The “Prisoners’ Dilemma:” Why skinflints pork-barrel </li></ul><ul><li>Lack of ownership and time horizons </li></ul>
  13. 13. What rules mitigate the knowledge and incentive problems? <ul><li>Subsidiarity/federalism </li></ul><ul><li>Division of powers </li></ul><ul><li>Super-majority voting </li></ul><ul><li>Focus public management on outcomes </li></ul>
  14. 14. Insights from the Economic Approach <ul><li>Politics is exchange conducted under a different set of rules </li></ul><ul><li>Rules of the game influence outcomes </li></ul><ul><li>It’s nothing personal! </li></ul>

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