Economics 854 Midterm

Prof. Bryan Caplan

Spring, 2016

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. T, F, and Explain: The deadweight cost of a pollution tax is always negative.

FALSE. Pollution taxes definitely can reduce deadweight costs by discouraging pollution where Marginal Social Benefit<Marginal Social Cost. But excessively high pollution taxes also discourage pollution where MSB>MSC, so such taxes can conceivably raise deadweight costs rather than reducing them.

2. Suppose you test the Median Voter Model using binary-response questions like, “AGREE or DISAGREE: Spending on X should be increased.”

T, F, and Explain: On real-world data, you will usually reject the Median Voter Model.

TRUE. With binary response options, ANY result other than a perfect 50/50 split violates the Median Voter Model. To fairly test the model, you at least need to include an intermediate (“status quo” option on the response menu.

3. T, F, and Explain: Empirical public opinion research predicts that journalists will be extremely liberal both socially and economically.

FALSE. Journalists tend to be politically liberal but well-educated, and the well-educated tend to be socially liberal but economically conservative. For social liberalism, then, journalists’ ideology and education push in the same direction, leading to extreme social liberalism. For economic liberalism, in contrast, journalists’ ideology and education push in opposite directions, leading to moderation.

4. Suppose you gave two votes to every citizen high in Agreeableness.

T, F, and Explain: If the Median Voter Theorem holds, Gerber et al.’s results imply that policy will become more market-oriented but less socially conservative.

FALSE. Gerber et al. find that Agreeable people are markedly LESS market-oriented. For social conservatism, however, they find little effect of Agreeableness. The upshot: If Agreeable people had more votes, equilibrium policy would be more economically conservative, but about as socially conservative as it is now.

Part 2: Short Essays

(20 points each)

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

1. “Sociotropic and group-interested voting show that the ‘logic’ of collective action is simply wrong.” Explain why someone would believe this position. Is it correct? Carefully defend your answer.

According to the logic of collective action, people act in their self-interest, not the interest of their group or society as a whole. Yet the empirical evidence on voting seems to show that people usually DO vote on the basis of group and social interests, with little effect of self-interest.

This argument is plausible but wrong. Since one vote is extremely unlikely to change an electoral outcome, voting is essentially talk, not action. Since the expected cost of voting against one’s own interests is therefore near-zero, unselfish voting is at most very weak evidence against the logic of collective action.

2. “Both Aristotle and Madison shared the opinion that poor people, if sufficiently numerous in a democracy, would use majority rule to redistribute wealth and destabilize the state.” (Cooter, The Strategic Constitution) Explain why (a) Cooter and (b) Meltzer and Richard would disagree with Aristotle and Madison.

(a) Right after the quoted sentence, Cooter adds, “[I]nstability has an advantage: no group or faction can form a stable majority to exploit others. Any coalition that would like to enrich itself by using state power to exploit others knows that another coalition dominates it. Knowing this, the governing coalition may refrain from exploiting others for fear that its victims will be the next rulers.” In other words, Cooter appeals to intransitivity: The poor don’t abuse majority rule because their majority is inherently precarious.

(b) Meltzer and Richard, in contrast, argue that while the poor want more redistribution than the rich, they don’t want to kill the goose that lays the golden eggs – much less “destabilize the state.” Instead, the poor want to leave the non-poor incentives to produce, so there are plenty of goods available to purchase with their welfare checks.

3. In the GSS, ABANY asks “Please tell me whether or not you think it should be

possible for a pregnant woman to obtain a legal abortion if: The woman wants it for any reason?” (1=Yes, 2=No). PARTNERS is number of sexual partners in the last year, binned into 8 categories. (0=no partners, 1=1 partner, 2=2 partners, 3=3 partners, 4=4 partners, 5=5-10 partners, 6=11-20 partners, 7=21-100 partners, 8=100+ partners).

[…]

Considered separately, what does EACH regression show about the link between abortion opinions and self-interest? What do the two regressions considered TOGETHER show about this issue? Focus on magnitudes, not statistical significance.

In Regression #1, the SIVH receives marginal support. The young and people with more partners are more likely to face unwanted pregnancies, and both groups are more pro-choice. At the same time, however, the SIVH has trouble explaining why gender has no significant effect; you would think that women bear more of the burden of unwanted pregnancies and would therefore be more pro-choice. In any case, all of these effects are surprisingly small: It takes 10 years of age to reduce your expected pro-choice probability by 1 percentage-point, and the gap between virgins and people with over 100 partners is only 25 percentage-points.

In Regression #2, we see that political and religious measures crush the SIVH. While the extra controls do expose an effect of gender in a self-interested direction, the magnitude is trivial compared to the effects of left-right ideology, church attendance, and Biblical literalism. Furthermore, the effect of number of sexual partners noticeably falls, and age now has the wrong sign.

Overall, the evidence heavily favors an ideologically/religiously filtered version of sociotropic voting. Self-interest, in contrast, doesn’t just have weak effects; these weak effects often go in the wrong direction.

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.