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Posts Tagged ‘public choice’

I agree with pretty much everything Marc has to say on the deal below. (For my own thoughts, see here.) Nevertheless, from a political point of view, something very like this deal was inevitable.

First, the Republicans held a bad hand. All the Bush tax cuts were going away, so they had very little leverage. The only leverage they had was over letting unemployment benefits, stimulus tax credits, and corporate welfare expire, and letting the sequester take effect immediately. However, Republicans are scarcely fonder of the sequester than are Democrats, both because of its cuts to defense and because of the blunt, across-the-board nature of the domestic discretionary cuts. As soon as the negotiations turned to dealing with taxation and spending separately, Republicans were never going to get significant spending cuts out of a taxation deal, because they had very little to offer Democrats on taxation. In the end, Republicans got a higher income threshold for tax increases, but paid for it with extensions of the foregoing expenditure programs.

Why were Republicans not willing to give a little more on tax increases on the rich in exchange for cuts in tax expenditures? Here the optics play a role. Pushing hard to let the low-income and higher ed tax credits expire could easily be demagogued. Letting extended unemployment benefits expire when Republicans continue to insist that the economy is weak would also be jarring. On the corporate welfare side, the diffuse-costs, concentrated-benefits logic applies in full force. Besides people who read sites like this one and the concentrated interests who benefit from such programs and spend literally hundreds of millions of dollars a session lobbying for them, no one cares about corporate welfare, and many even think of it as “pro-business” (as I’ve read journalists oh-so-neutrally describe them in articles on the deal) and therefore somehow pro-recovery.

Now, if this analysis is correct, then in two months when the spending side of the fiscal cliff is dealt with, Democrats will hold a similarly weak hand, and we should look for essentially zero Republican concessions on taxes. If the outcome deviates from this prediction in either direction, then we will have good reason to think that extraneous factors, such as “negotiation skills,” played some kind of role.(*) But I would look for the Nash Equilibrium to obtain.

(*) Another possibility, of course, is that I misread the (House) GOP’s preferences. They may hate defense spending cuts so much that they are willing to allow more tax increases to prevent them. That would, of course, be a perfectly awful outcome from a limited-government perspective — and therefore very much within the realm of possibility.

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Media are reporting the results of the Puerto Rico status referendum as if the statehood option had won. Now, it may indeed be the case that the resident commissioner will present legislation of accession to the Union in the House of Representatives, but only an oddly structured ballot devised by the pro-statehood party allowed the referendum to “succeed.” In fact, a majority of Puerto Ricans voted against statehood.

The ballot asked two questions. The first question asked voters, “Do you agree to maintain current territorial political status?” The “no” option received 54% of the vote, 934,238 votes of 1,730,245 valid votes. The second question asked voters to choose among three status options: statehood, associated free state, and independence. Statehood received 61.15% of the valid votes, 802,179 votes in all.

But note two things. First, many voters who opposed statehood in favor of, say, independence would have voted “no” on the first question. Second, 25% of the ballots on the second question were left blank, apparently out of protest at a question the pro-status quo party regarded as unfair. If you add blank ballots to the total on the second question, the statehood option received less than 45% of the vote.

This is a good example of how political leadership tries to use a cyclical majority to secure its favored alternative.

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The quotation above comes from page 16 of a public finance textbook by Robin Boadway and Anwar Shah (Fiscal Federalism: Principles and Practice of Multiorder Governance, Cambridge UP 2009).

Is that right? Let me throw out just one counterexample: Bates, Markets and States in Tropical Africa.

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The latest issue of Journal of Economic Behavior and Organization is dedicated to James Buchanan’s work. Some of the most provocative pieces here include Kliemt on Buchanan as Kantian, Leeson on why clubs have self-enforcing constitutions and governments do not, and Voigt on how to test hypotheses drawn from constitutional economics. Especially recommended for those interested in the overlap between Austrian economics and public choice.

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MoreĀ  problems for the Chevy Volt – but GE is coming to the rescue:

Recently, President Obama selected General Electric ( GEnews - people ) CEO Jeffrey Immelt to chair his Economic Advisory Board. GE is awash in windmills waiting to be subsidized so they can provide unreliable, expensive power.

Consequently, and soon after his appointment, Immelt announced that GE will buy 50,000 Volts in the next two years, or half the total produced. Assuming the corporation qualifies for the same tax credit, we (you and me) just shelled out $375,000,000 to a company to buy cars that no one else wants so that GM will not tank and produce even more cars that no one wants. And this guy is the chair of Obama’s Economic Advisory Board?

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