Politicians, Legislation, and the Economy: An Inquiry into the Interest-Group Theory of Government PDF
Preview Politicians, Legislation, and the Economy: An Inquiry into the Interest-Group Theory of Government
Politicians, Legislation, and the Economy ROCHESTER STUDIES IN ECONOMICS AND POLICY ISSUES Other titles in the series: Economics and Social Institutions, edited by Karl Brunner The Great Depression Revisited, edited by Karl Brunner Published in cooperation with The Center for Research in Government Policy & Business Graduate School of Management University of Rochester Rochester, New York POLITICIANS, LEGISLATION, AND THE ECONOMY An Inquiry into the Interest-Group Theory of Government ROBERT E. MCCORMICK Graduate School of Management University of Rochester ROBERT D. TOLLISON Center for Study of Public Choice Virginia Polytechnic Institute and State University MARTINUS NIJHOFF PUBLISHING BOSTON/THE HAGUE/LONDON DISTRIBUTORS FOR NORTH AMERICA: Martinus Nijhoff Publishing Kluwer Boston, Inc. 190 Old Derby Street Hingham, Massachusetts 02043, U.S.A. DISTRIBUTORS OUTSIDE NORTH AMERICA: Kluwer Academic Publishers Group Distribution Centre P.O. Box 322 3300 AH Dordrecht, The Netherlands Library of Congress Cataloging in Publication Data McCormick, Robert E. 1946- Politicians, legislation, and the economy. (Rochester studies in economics and policy issues; 3) Includes index. I. Pressure groups. 2. Income distribution. I. Tollison, Robert D., joint author. II. Title. III. Series. JF529.M316 322.4'3 80-25941 ISBN-13: 978-94-009-8155-3 e-ISBN-13: 978-94-009-8153-9 001: 10.1007/978-94-009-8153-9 Copyright © 1981 by University of Rochester Center for Research in Government Policy and Business No part of this book may be reproduced in any form by print, photoprint, microfilm, or any other means without written permission from the publisher. To Jenny and Anna CONTENTS Preface ix 1 ANALYZING GOVERNMENT 1 Two Approaches to Analyzing Government 3 The Interest-Group Theory of Government 7 Plan of the Study 12 Notes 13 2 QUESTIONS TO BE ANSWERED 15 Wealth Transfers and Organization Costs 16 The "Market" for Wealth Transfers 18 What This Analysis Is Not About 22 What This Analysis Is About 23 Summary 25 Appendix: Heterogeneity Begets Wealth Redistribution 25 n N~s vii Vlll CONTENTS 3 THE DEMAND AND SUPPLY OF WEALTH TRANSFERS 29 Maximizing the Returns from Legislation in a Bicameral Vote Market 30 Empirical Evidence from State Legislatures 45 Summary 55 Notes 57 4 LEGISLATURES AS WAGE CARTELS 61 Theory and Preliminary Implications 63 A Test of Relative Wage Implications 70 Wage Pay and Malfeasance 75 Summary 75 Notes 76 5 THE OUTSIDE EARNINGS OF POLITICIANS 79 The Market for Legislators 81 Empirical Evidence from State Legislatures 86 Low Wage Pay as an Entry Barrier in Politics 96 Summary 97 Notes 97 6 THE SUPPLY OF MAJORITY LEADERSHIP 101 Competition for Majority Leadership 102 Empirical Evidence from State Legislatures 108 Summary III Notes III 7 THE DETERMINANTS OF EXECUTIVE BRANCH COMPENSA TION 113 Gubernatorial Compensation 114 The Question of Malfeasance 119 Summary 120 Notes 120 8 SUMMARY, CONCLUSIONS, AND FUTURE DIRECTIONS 123 Notes 128 Name Index 131 SUbject Index 133 2 QUESTIONS TO BE ANSWERED The interest-group theory of government is based upon the premise that a major portion of governmental activity is devoted to the transfer of resources among citizens. Some citizens are net winners in this process and some are net losers. Moreover, the wealth-transfer pro cess is not a simple process in which well-organized and wealthy producers increase their wealth through legislation at the expense of widely dispersed and poorly organized consumers. The more generally correct characterization of the wealth-transfer process does not pit consumers against producers but allows each economic unit to seek transfers from the other units in the economy-polity. Our primary interest in this process will be to analyze the role of the political representative in broke ring transfers among the various groups in a society. In one sense the political middleman is analogous to his counterpart in a private setting. Politicians get paid for pairing suppliers and de manders of wealth transfers, that is, for reducing information costs in the market for wealth transfers. However, unlike many of their private sector counterparts (e.g., agricultural middlemen), the process of entry 15 16 CHAPTER 2 into the occupation of political representation is not "free." Indeed, entry into the market for political representation is governed by rela tively strict constitutional rules; for example, successful entry requires approval by a simple majority or plurality of voters.! Entry barriers in politics must be interpreted cautiously, however. There are a large number of people who compete to become political middlemen, and as we shall see, there are distinct advantages from this competition.2 The interesting questions from our point of view concern how elements of political competition are manifested in polit ical behavior and, moreover, what are the positive economic expla nations of competitive and noncompetitive outcomes in the market for political brokers of wealth transfers. WEALTH TRANSFERS AND ORGANIZATION COSTS A discussion of wealth transfers by a representative government must be predicated on the existence of certain information and transaction costs. Without the existence of such costs wealth would never be willingly given up by an individual unless such a transfer were Pareto superior in nature - that is, in a costless world all equilibrium states will be Pareto-optimal, and only welfare-enhancing transfers would be enacted by political representatives. When positive (and differential) information and transaction costs exist, some groups will be able to organize and acquire information more cheaply than others, and these differences among groups will give rise to a demand and supply of wealth redistributions (see the Appendix to this chapter for further discussion of this point). Consider some of the implications of these costs for our analysis. No Pareto-inferior policies will be adopted where a unanimity rule governs political decisions and voting is costless. As we move away from this idealized setting toward a world of costly voting, transfer seeking activities will become more prevalent. Some voters may even shirk and allow some of their wealth to be taken away under a unan imity rule if the costs of voting exceed the benefits. Majority rule will raise the amount of transfer-seeking because it lowers the costs of influencing collective decisions. As we stressed above, however, the key to understanding transfer seeking lies in the costly voting side of the problem - namely, What is the nature of the information and QUESTIONS TO BE ANSWERED 17 organization costs facing voters to effect a political decision in a majority-rule regime? The individual faces basically two types of information costs in transfer seeking: He must discover the effects of an issue on his personal wealth, and he must identify other individuals who will join him on the issue. Several possibilities are relevant in this regard: (I) The winners and losers on an issue are well identified and know who each other are; (2) the winners and losers are not easily identified, either to themselves or to each other; (3) obviously, winners can be easily identified while losers cannot, and conversely. The positive implication that follows from this taxonomy of information costs is the well-known result that more wealth transfers are expected in a cate gory such as (3). Political brokers will have incentives to search for this type of issue, which in general represents the traditional model of well..organized groups gaining transfers at the expense of the general polity. In this case the winners are easily identified, and the losers poorly identified. Moreover, the losers may lose on an issue only in an opportunity cost sense (for example, the value of deregulation), they may find the benefits of deregulation hard to predict, and they may find it not worthwhile on an individual basis to invest in procuring deregulation. A second general point about organization costs is that these costs are like start-up costs. Once they are borne, they do not affect marginal costs (though if the "firm" is to survive, they must be borne over time). Groups that have already borne these start-up costs, for reasons unrelated to lobbying, will have a comparative advantage in seeking transfers and will therefore be more successful in procuring transfers as a result. This is simply a point about jointness in production. Some groups will be able to produce political lobbying as a by-product of performing some other function, thereby avoiding start-up costs for lobbying. There are many examples of such groups in the economy, among which are labor unions, trade associations, corporations, and the like.3 In addition to organization and information costs there is another category of costs related to our analysis that are due to the potential for individuals to "free ride" on the costly lobbying efforts of others. Within each of the (2n - l) coalitions in our theory (see note 5), there is a cost associated with collective action, and anyone participant may receive some of the benefits of collective action without bearing
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