Macroeconomics: Ch. 6 The Economics of Collective Decision MakingThe Size and Growth of the US Government- Since 1930, the US government has grown tremendously in size with government spending taking up only about 9 percent of the GDP in 1930 to taking up 40 percent in 2010.- Transfer payments: payments made to individuals or groups who have not necessarily supplied a good or service to the government in order to receive that payment. (ex.- Social Security, welfare, unemployment payment, farm subsidies etc.)How are Governments and Markets Similar and Different?- Public choice analysis: using the tools of economics (incentives, supply and demand etc.) to understand the political process. Is subjective; does not make a judgment on valueof government programs and such.- The Economics of Voting o Rational ignorance effect: the rationally thinking person has little to no incentiveto make an informed vote. Since a single vote is unlikely to decide the outcome ofan election, one person is unlikely to spend time (time is a resource) to educate him or herself on the ballot or various candidates. o Median voter theory: the idea that a politician who wishes to win the most votes (in a two-party system) will present himself close to the middle of the political spectrum. In this way the views of the median voter are well represented and thereis not much of a difference between two candidates.When the Political Process Works Well - The political process works the best when voters pay in proportion to the benefits they receive, when this happens, productive projects will be undertaken and unproductive projects will be rejected. o A rest stop on the interstate the government wishes to build costs $100. Sally values the rest stop at $50 while Jimmy and Monica both value the rest stop at $25 each. If Sally pays $50 and Jimmy and Martha each pay $25 to build the rest stop, all will be satisfied and would vote yes to build this hypothetical reststop. However, if all three people were to pay equally ($33.33) the rest stop would not be built since Jimmy and Martha would vote no because they feel that they are not going to receive much in benefits compared to what they must pay for the rest stop.o User charges: payments users of a certain good or service must pay to use a certain good or service provided by the government. Ex. gas tax, garbage collection, electricity etc. (the more you use it, the more you pay.)When the Political Process Works Poorly- The Special Interest Effecto The government finances many programs because of the lobbying of special interest groups who often make campaign donations to the politicians that help toallocate government funding to the special interest group’s cause. o Special interest issue: an issue that benefits a relatively small group of people while the larger group of people must pay for this program. The costs may exceed benefits Interest groups often provide politicians that support them with campaign donations giving politicians an incentive to do what these groups want, even if the program the interest groups want is an inefficient one.o Logrolling: politicians trade votes in order to gain enough votes to pass desired legislation. “I’ll vote for your bill if you vote for mine”o Pork barrel legislation: a bundle of unrelated projects attached to a bill (one that is most likely to pass). Often times these projects benefit a small regional or interest group and would not pass if they were voted on outside of the bill they were attached to.o Earmarking: funds given to certain projects and locations. Provides major benefits to businesses, interest groups, and localities where the funds are being directed. Often times, these funds go to groups that make significant campaign contributions. o Note: because of the rational ignorance effect, many voters do not know of the spending projects their politicians often vote on. Therefore a politician has a weak incentive not to engage in such activities because of the benefits he gains from the interest groups. o The political process works poorly when the interests of a small group of people benefit at the expense of the larger group. Special interests create a dilemma in politicians between getting elected and using resources efficiently.-The Shortsightedness Effecto Shortsightedness effect: poor distribution of resources coming from public-sector bias: In favor of proposals that give benefits immediately with less clear long term effectsAgainst proposals with immediate costs but less identifiable costs in the futureo Debt spending comes from the shortsightedness effect: politicians want to spend money on current projects yet don’t want to create taxes to pay for these projects.The projects will get a politician reelected, but taxes won’t. In 2009-2011 the government financed 40% of its expenditures through borrowing-Rent Seekingo Rent seeking: groups and individuals engaging in behavior looking to influence public policy in a way that will allocate government funds to themselves or to a program they desireo People take time to engage in rent seeking behavior which means they are not using time to produce goods or servicesThis means, if they are rational individuals, they hope to gain more from rent seeking than they would from producing a good or serviceo The government also spends time and resources deciding who should receive these favors or benefits rather than coming up with other policies that may benefit a larger amount of people.-Inefficiency of Government Operationso The players in the private sector are motivated to work efficiently by the profit/ loss system and market effects. o In the public sector, often times government agencies have little incentive to work and use resources efficiently; in fact they are often somewhat penalized when resources are used efficiently. At the end of the year, if an agency has money that hasn’t been used yet, they must spend it or their budget will be cut for the next year.Political Favoritism, Crony Capitalism, and Government Failure Crony capitalism: the situation where the free market is still present, but certain allocation of resources is determined by politics rather than the free market in certain cases. In this situation, business activities are controlled by government spending, subsidies, tax credits, and regulations. In return for these political favors, businesses donate sums
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