Economics 854 Midterm

Prof. Bryan Caplan

Spring, 2010

Part 1: True, False, and Explain

(10 points each - 2 for the right answer, and 8 for the explanation)

State whether each of the following six propositions is true or false. In 2-3 sentences (and clearly-labeled diagrams, when helpful), explain why.

1. Suppose citizens’ willingness to pay to vote (including opportunity cost) in a given election always equals $50.

T, F, and Explain: Economic growth will raise voters’ probability of decisiveness.

TRUE. Since voters’ willingness to pay is fixed at $50, we only need to look at the cost of voting. Since economic growth raises wages – and therefore the value of time – growth reduces turnout. Using the probability of decisiveness formula, lower N implies higher P(decisiveness).

Many students pointed out ways that the benefits of voting would increase – for example, the richer the society, the greater the value of the political spoils. Since I ruled this out by assumption, I only gave such answers partial credit.

2. Suppose half of voters are perfectly informed, and the rest are not. Perfectly-informed voters’ bliss points for defense spending are uniformly distributed between 15% and 25% of GDP. Less-informed voters bliss points are uniformly distributed between 0% and 50% of GDP.

T, F, and Explain: If the Median Voter Theorem holds, the Miracle of Aggregation ensures that the median position of the well-informed will prevail: defense spending will equal 20% of GDP.

FALSE. The medians and means of the two distributions differ, so the key assumption of the Miracle of Aggregation fails. The median of the overall distribution is actually 20.83%>20%. Contrary to several students, the median of the overall distribution is not the average of the medians of the two sub-distributions.

3. Suppose free immigration is Kaldor-Hicks efficient but contrary to the interests of the median native voter. People vote selfishly.

T, F, and Explain: The Mean Voter Theorem implies that a guest worker program (which allows foreigners to immigrate but not vote) will be adopted.

TRUE. According to the Mean Voter Theorem, political bargaining guarantees the efficient outcome, whatever it is. The fact that immigrants can’t vote isn’t a problem. The people who can vote will simply impose e.g. extra taxes to ensure that the median voter profits from immigration.

4. Over time, the Democrats have become more popular in the North and less popular in the South.

T, F, and Explain: Peltzman (“An Economic Interpretation of the History of Congressional Voting in the Twentieth Century”) accepts the standard “civil rights” explanation for this trend – but ignores the possibility that this reflects group-interested voting rather than self-interested voting.

FALSE. Peltzman’s piece never even mentions civil rights. His story is that poorer states are more liberal, exactly as the SIVH predicts. However, the South is temperamentally more conservative than the North: Liberalism is a good in the North, but a bad in the South. When the South was poorer, its economic interests masked its conservative temperament. As the South got richer relative to the North, the masking effect got weaker – and the South moved away from the Democratic party.

Part 2: Short Essays

(20 points each)

In 6-8 sentences, answer all of the following questions.

1. The GSS question HELPSICK asks:

In general, some people think that it is the responsibility of the government in Washington to see to it that people have help in paying for doctors and hospital bills; they are at point 1. Others think that these matters are not the responsibility of the federal government and that people should take care of these things themselves; they are at point 5. a. Where would you place yourself on this scale, or haven't you made up your mind on this?

Here are the results when you regress responses HELPSICK on education, log(real income), self-rated health (1-4, 1 being healthiest), demographics (males have sex=1, females have sex=2), and self-rated ideology (1-7, 7 being most conservative). N=12,552.

How well do these results fit with all of the main lessons you have learned about voter motivation? Be careful to note any anomalies, and pay attention to absolute magnitudes. Name two additional variables that you would like to see in this regression – and explain why they’re worth adding.

The main lessons we’ve learned about voter motivation are:

1. Evidence for the SIVH is very weak.

2. Evidence for group-interested voting is fairly strong.

3. Apparent effects of income on policy views are usually education effects in disguise.

4. There is strong evidence for ideological voting.

How do these results compare?

1. Income and health both move beliefs in the self-interested direction, but the magnitudes are quite small. On a four-point scale, increasing log income by one point (a huge change) only moves beliefs by .106. Moving from worst to best health only moves beliefs by about .27. You could also argue that age is a proxy for your expected future health. If you buy this argument, then it’s striking that age has the wrong sign!

2. If age is a measure of group interest (e.g. the elderly identify with the elderly), then it’s got the wrong sign. But the race and sex dummies have the expected signs, and the coefficient on Black is quite large. This makes sense from a group interest point of view – even if a black person happens to have high income and good health, he wants to help the members of his group that aren’t so lucky.

3. Anomaly: Income actually beats education.

4. Ideology is the single strongest predictor – moving from most liberal to most conservative changes beliefs by over a point.

Two additional variables worth adding: Most obviously, insurance status. The uninsured have a strongest interest in government support. Other good candidates: Health status of family members and risky behavior (smoking, drinking, etc.).

2. If drug policy were left to the states, how would U.S. drug policy change? How would your answer change if governors’ and state legislators’ pay were proportional to property values in their states? Be sure to identify and discuss any possible “races to the bottom.”

Policy would clearly become more diverse: Voters in California feel very differently about marijuana than voters in Alabama. These changes would probably increase over time because people would move to states that better suit their preferences, leading to a sort of “diversity spiral.” One state might even become the “Nevada of drugs.” If politicians’ pay were based on property values, this would probably further expand the range of options and the speed of adjustment – better matching and sorting tends to make everyone’s property more valuable. You might think that no one (even drug users) wants to live in a community of drug users, but in the real world we often see enclaves of “undesirables” clustering together. It’s very unlikely there would be a race to the bottom to legalize drugs everywhere – large majorities favor the status quo. It’s somewhat more likely there’d be a race to the top – the first community to liberalize might quickly attract a “bad element” that burdens the rest of the population, discouraging deviation from the status quo.

3. “Caplan’s and Gelman’s analyses of the American voter are much more similar than they initially appear.” Carefully explain why you agree or disagree.

I agree. On the surface, they directly contradict each other. Caplan says the SIVH is almost completely false; Gelman is trying to resuscitate the SIVH by showing that the state income-vote correlation and the individual income-vote correlations have opposite signs. On closer look, however, Gelman’s analysis fits all of Caplan’s main lessons from Weeks 4-6: (a) While the rich are more Republican, the effect is small, and to a large degree a proxy for race. (b) There is a big flat range: Republican voting is constant from 30k to 150k. (c) The strong state-level effects look like group-interest or ideological voting, not the SIVH. The difference in emphasis probably reflects their different disciplines: Economists are surprised that the SIVH doesn’t work well, but political scientists are surprised when the SIVH works at all.

4. Explain and criticize Bartels’ proposed explanations for the disconnect between public opinion and government spending. What do you think is the best way to interpret his results? Propose an empirical test of your preferred interpretation of the facts.

Bartels presents three explanations. Here they are, with my critiques:

1. Failure of democratic representation – politicians are just ignoring voters. This is implausible; if it were true, why don’t “big spenders” win elections more consistently?

2. Fiscal discipline – the public wants fiscal discipline even more than it wants spending increases. Bartels rejects this on the grounds that budget-cutting preferences and unmet demand for spending are negatively correlated. The countries where overall spending cuts are most popular are the ones where the difference between actual and desired spending is smallest. But couldn’t this just reflect ideological heterogeneity between relatively pro- and anti-government countries?

3. Economic capacity – “Poorer countries obviously have less wherewithal to satisfy citizens’ demands for spending on government programs than richer countries do.” Maybe. But if you’re willing to say that the budget constraints are “less salient” to the public than to policymakers, why not consider more radical theories, like my favorite:

The public’s preferences are simply contradictory and confused; what many of them want is not just economically unfeasible but logically impossible.

A test of my hypothesis: Ask the public about perceived spending, taxes, deficits, and inflation. On my theory, better perceived outcomes will predict more support for incumbents, even when the perceptions are mutually inconsistent.