Prof. Bryan Caplan

Econ 849

Fall, 2001


Week 7: Political Competition and Political Collusion

I.                     Restrictions on Political Competition: Term Limits and Spending Limits

A.                 So far we've implicitly assumed that politicians compete without restriction.

B.                 But elections have been increasingly regulated over the past few decades.  There are two main types of restrictions on electoral competition, which frequently have very different supporters.

C.                Restriction #1: Term limits.  Restricting the total number of terms a politician may serve in a given office.

D.                Obvious argument against term limits: It limits voter choice, and magnifies the "end-game problem."  If a candidate would have won an election, but can't run due to term limits, voters have to settle for their second choice.

1.                  "We already have term limits.  They're called elections."

E.                 Arguments for?  The main one is probably "incumbency advantage."  An inferior incumbent is somehow able to beat a superior challenger.

F.                 A more specific complaint is that incumbents are more strongly under the influence of special interests.  But why don't voters just take this drawback into account?

G.                Empirical studies of term limits have quite mixed results.  Some find evidence of intensified end-game problems, others of better performance. 

1.                  One GMU dissertation found that term limits make government grow.  Note that there are at least two ways to interpret this result.

H.                 Restriction #2: Spending limits.  Restricting the amount candidates and their supporters are allowed to spend on campaigns.

I.                     Obvious argument against spending limits: Advertising is just information.  How are voters supposed to decide without it?

1.                  Also: If you believe in incumbency advantage, the well-funded challenger may be the only counter-balance.

J.                  Empirical studies of spending limits rarely find them to be beneficial.  This is complicated by choice of metric: Why should we think that "closer" elections are better to begin with?

K.                 While both sorts of restrictions supposedly aim at "making democracy work better," they seem to implicitly assume irrational voters.  (More on this later).

L.                  Leaving aside the effect on politicians, what about policy?  Would term and/or spending limits change what government does?  In what direction?  Wouldn't someone else just offer the same platform?

II.                   Pure Versus Local Public Goods

A.                 We often implicitly imagine that public goods literally benefit everyone; or at least, that there is no easy way to exclude non-paying beneficiaries.

B.                 But frequently, only a select group of "nearby" people experience the positive externalities. 

C.                This gives rise to the distinction between pure and local public goods. 

1.                  Pure public goods affect everyone (or, more weakly, there is no way to identify the beneficiaries)

2.                  Local public goods affect only an identifiable subset of the population

D.                Ex: Preventing global warming versus reducing car exhaust.  The first affects everyone; the second mostly just affects people who breathe the nearby air.

III.                  Tiebout and Inter-Governmental Competition; Perverse Incentives

A.                 Competitive supply of a pure public good is problematic: Everyone benefits, so there may be no way to exclude.

B.                 But the concept of local public goods suggests that we should think more intently about their competitive supply. 

1.                  There may be no way to exclude people in a local area, but you can exclude people from that area.

2.                  This argument gets stronger if there is congestion or decreasing returns to scale in public good provision.

C.                The economist Tiebout reached a simple insight: You can think about local governments as perfectly competitive suppliers of local public goods.

1.                  If the benefit and tax package in a local area is unattractive, residents move away to other localities with more attractive benefit/tax packages.  Thus, on the local level, politicians face economic competition from other localities, as well as political competition from other politicians. 

2.                  If there are decreasing returns to scale, localities can sub-divide to the efficient level.

D.                Upshot: So even if you have doubts about the efficiency democracy, you might still conclude that local governments work well.

E.                 One big problem with this argument: It assumes that competition between non-profits works just like competition between for profits.  Two problems:

1.                  Problem #1: Lack of incentives - politicians don't get paid more when the local economy does better

2.                  Problem #2: Perverse incentives - their lives may be easier when things don't go well

3.                  The case of school choice

IV.               Federalism: For and Against

A.                 Within any nation, there are normally districts, states, or other "sub"-governments.

B.                 Definition: The more independent and powerful these sub-governments compared to the central government, the more "federalist" they are.

C.                There are many popular arguments in favor of federalism that sound a lot like standard economic arguments:

1.                  Benefits of competition (Tiebout)

2.                  Diversity of tastes

3.                  Level of innovation

D.                However, throughout this century the U.S. has generally moved to a lower degree of federalism.

E.                 Economic rationales?

1.                  Externalities (e.g. cross-state pollution)

2.                  Cost savings of uniformity

F.                 Classic inter-state externality argument: "The race to the bottom."  States allegedly competitively cut welfare spending to encourage recipients to leave the state.

G.                Then again, you might view "The race to the bottom" as a pejorative way of describing the competitive outcome, and federal grants as a grand effort to eliminate inter-state competition.

H.                 Application: The race to the top?  The case of law enforcement.

V.                 Federal Grants and the "Race to the Bottom"

A.                 There is a complex system of federal grants that some see as an attempt to correct for inter-state externalities.

B.                 Standard microeconomics suggests that different kinds of grants will have different effects:

1.                  Unconditional non-matching grant

2.                  Conditional non-matching grant

3.                  Matching open-ended grant

4.                  Matching closed-ended grant

C.                In theory, it seems like only matching grants could avert the "race to the bottom."  Otherwise states will simply reallocate and the externality remains unsolved.

D.                Major empirical puzzle:  Even non-matching grants seem to "stick where they hit."  This is known as the "fly-paper effect."