Government Failure

SPHA511, John Ries

Overview

1. Government might intervene to address to market failures or equity concerns. These actions constitute normative explanations for government involvement in the economy.

2. There are cases, however, when governments act in a way contrary to what normative analysis prescribes. I term this “government failure.” The positive analysis of government includes government policies based on normative reasons (i.e., public interest) as well as for "wrong" reasons.

Overview

We will consider three types of government failure in this lecture:

• properties of voting and electoral systems

• interest group activity

• direct self interest

Voting behaviour

Two forms of democratic decision-making

• a direct (pure) democracy involves direct voting by individual citizens on alternatives

• a representative democracy involves the election of delegates who are vested with the power to vote on alternatives and who represent the interests of individuals they represent.

Voting behaviour

• expense

• voters make lack expertise to judge some issues

• voting does an imperfect job of revealing aggregate preferences

Shouldn’t a direct democracy be superior to a representative democracy? Not necessarily:

Hotelling's theory

Campaign platforms in two-party systems will gravitate towards the centre.

Left RightA CenterB

Hotelling's theory

Implications:• there will be comparatively little difference in

substance between major parties• the overall policy platform (of either party) will

closely match the preferences of the median voter

• there will be an opportunity for a third party to enter and grab substantial votes (Green Parties in Canada and the United States)

Hotelling's theory

• Is it desirable to have the government policies reflecting the preferences of the median voter?

Voting Paradox Voting can get complicated when there are more thanTwo choices: Agenda manipulation with pairwise voting

Preference order

Person

A B C

1st x z y

2nd y x z

3rd z y x1st Round 2nd Round Result

x vs. y winner vs. z z

x vs. z winner vs. y y

y vs. z winner vs. x x

Electoral systems• Majoritarian System - an electoral system that requires the

winning candidate to have an absolute majority of votes - that is, more than 50% of the total votes cast. The Alternative Vote system used in Australia and "run-off" systems that may require a second round of voting are examples of majoritarian systems.

• Plurality System - an electoral system that requires that the winning candidate receive more votes than any other candidate.

• Proportional System - an electoral system that ensures a fairly close relationship between the popular vote a party receives and the number of candidates it elects.

• Pure P.R. - this is a proportional representation electoral model that gives a strictly proportional result: a party's share of seats will match exactly its share of the popular vote. Under this system, this is just one ballot for the entire country, province, or state, and voters vote for parties rather than candidates.

• Source: www.gov.bc.ca/referendum_info

Majority versus plurality

• Consider the 2000 U.S. Presidential election where George Bush ran against Al Gore and Ralph Nader

• Bush and Gore received 48% of the popular vote and Nader 3%

• Bush won but what would have happened has he had a runoff against Gore without Bush in the picture?

More extreme example• Dominated winner paradox: Imagine a parliament

composed of 100 MPs elected from ridings with equal populations. Assume that 51% of the electorate in 51 of the ridings favour the Liberal Party while 100% of the electorate in the remaining ridings favour the Conservative Party. In an election, the Liberal Party wins the majority of seats even though it is a minority choice of the total electorate.

• The NDP won only 2 of 79 seats in the BC legislature despite getting 22% of the popular vote, the Green Party received no seats despite a 12% of the votes.– In 2005 and 2009, BC voters turned down the complicated

“single transferable vote (STV) system” aimed at providing more proportional representation.

BC legislature: plurality system

• What are advantages the current system used to choose the BC legislature where each district elects one MLA based on plurality where each party puts forth one candidate?– encourages fewer, larger and inclusive political

parties; – tends to produce majority governments; – is simple to use and understand; – maintains a direct link between a local representative

and his or her constituency.

Voting outcomes

Lesson: While voting seems like a "fair" process, different voting schemes can yield different outcomes. We would like a scheme that allows all votes to count. Even if the voting system is fair, however, the process may be too expensive and voters may not have the expertise to make proper judgements.

Interest group activity

Definition: special interest groups are small coalitions advocating a specific policy or viewpoint to elected delegates.

2. Two types:

(1) economic interest groups: primarily concerned with promoting own self interest(2) social interest groups: promoting particular moral or social values

Transfer (or rent)-seeking activities

"Rent" defined: economic rent (profit) is the income earned by the owner of a resource unit, over and above normal returns (i.e., the minimum amount required to induce a factor of production into employment in a given activity).

Brander: "Rent-seeking is the process of using resources to redistribute wealth from others, rather than create new wealth"

Transfer (or rent)-seeking activities

• Resources consumed in rent-seeking are wasted

• There is a transfer of wealth to the rent seeker

• The policy induced by rent seeking usually has a pure waste associated with it (efficiency is compromised)

Three consequences of rent-seeking

Special interest groups

• they may convey information (intensity of preferences, technical information)

• they offset some basic public policy biases. Business lobbies campaign for free trade and fiscal responsibility that serves to rein in public officials wanting to increase the size and influence of government.

Why do they arise?

Negative view: they exist for rent-seeking purposes

Positive view:

Lobbyist Registration Act

What is lobbying?

Lobbying occurs when an individual is paid to communicate with a public-office holder in an attempt to influence government policy

Lobbyist Registration Act

• Consultant lobbyists. These are individuals who, for pay, lobby for clients.

• In-house lobbyists (corporate). These are employees who, as a significant part of their duties, lobby for an employer that carries out commercial activities for financial gain.

• In-house lobbyists (organizations). These are not-for-profit organizations in which one or more employees lobby, and the collective time devoted to lobbying amounts to the equivalent of a significant part of one employee's duties. The senior officer of the organization must register.

There are three categories of lobbyist

Lobbyist Registration Act

• Free and open access to government is an important matter of public interest.

• Lobbying public office holders is a legitimate activity. • It is desirable that public office holders and the public

be able to know who is attempting to influence government.

• The system for the registration of paid lobbyists should not impede free and open access to government.

Principles of Act

Lobbyist Registration Act

Active Registrations for: 2007/08/31

Consultant registrations: 2915

In-House Corporation registrations: 286

In-House Organization registrations: 429

Total active registrations: 3630

http://orl-bdl.gc.ca/epic/site/lobbyist-lobbyiste.nsf/en/h_nx00012e.html

Department or Agency Active RegistrationsIndustry Canada 2239

Finance Canada 1696

Privy Council Office 1376

Members of the House of Commons 1292

Foreign Affairs and International Trade 1259

Environment Canada 1157

Health Canada 1102

Transport Canada 895

Treasury Board of Canada 877

Prime Minister's Office 869

Natural Resources Canada 840

Revenue Canada 815

Government Departments and Agencies in Active Registrations for: 2007/08/31

Campaign financing in Canada

• Corporations and unions would be prohibited from contributing to a political party and would be limited to $1000 donations to individual politicians

• Individuals would be limited to $5,000 in total donations to a party, riding association, or individual politicians.

• Parties would get a government subsidy costing taxpayers $40 million in election years and $23 million in non-election years. Every vote received by a party in the previous election will earn a $1.75 taxpayer subsidy.

In 2003, the Liberal government passed legislation reduce private campaign donations. Key points:

Lobby group spending during elections

• One way to side-step speding limits is to for special interest (lobbies) to advertise during elections.

• In 2004, the Canadian Supreme Court upheld rules limited lobby groups to spend $150,000 nationally and $3,000 in any one riding on TV and radio advertising

Campaign financing in the US

• The U.S. also has limits campaign financing• Political Action Committee (PAC) play an important role

– A political action committee is an organization that receives voluntary contributions in order to influence the outcome of elections. PACs are a primary source of campaign financing in the United States

• Federal law limits PAC and individual contributions– Individuals: $2300 to candidate, $28,500 to party– PACs: up to $5000 to candidate, $28,500 to party

• Candidates in the U.S. presidential election have raised (and spent) over $1 billion dollars!– www.fec.gov/DisclosureSearch/mapApp.do?cand_id=P80003338

In Fine Print, a Proliferation of Large DonorsNew York Times, Oct 21, 2008

• “Enabled by the fine print in campaign finance laws, [donors] have written checks that far exceed normal individual contribution limits to candidates, to joint fund-raising committees that benefit the candidates as well as their respective parties.” – “Mr. Obama’s campaign has leaned on wealthy benefactors to

contribute up to $33,100 at a time to complement his army of small donors over the Internet as he bypassed public financing for the general election. More than 600 donors contributed $25,000 or more to him in September alone…”

– “And Mr. McCain’s campaign, which had not disclosed most of these donors until last week, has taken the concept to new levels, encouraging deep-pocketed supporters to write checks of more than $70,000, by adding state parties as beneficiaries of his fund-raising. “

Direct self interest and bureaucracies

1. Definition: the bureaucracy is a non-elective government body responsible for implementing the decisions of elected delegates.

2. Principal-agent problem: Voters are principals who delegate authority to civil servants and ask them to act on their behalf. But bureaucrats might have their own interests which conflict with those of the principals (conflict of interest). Especially a problem when monitoring is difficult and expensive.

Direct self interest and bureaucracies

Objectives of bureaucracies• - high salaries and perquisites in office

• - tenure in office

• - agency growth

OSHA leaves Worker Safety in the Hands of Industry

Rupinder

• What is OSHA and what is it supposed to do?• What happened to workers at a microwave popcorn

plant in Jasper, Missouri?• Why is OSHA limiting new rules and rolling back existing

ones? What has it done under the Bush administration?• How do agency officials defend their performance?• What is the logic underlying a “voluntary compliance

strategy”?• What do critics say about voluntary compliance?• What is the relations between OSHA and campaign

financing?

Conflicts of Interest and Canadian Steamship Lines

Sarah

• What are the three elements of conflict of interest? • What is the responsibility of the Ethics Counsellor?• What is Canada Steamship Lines?• How did Paul Martin’s relationship to Canada Steamship Lines

evolved over time? Why?

Role of the ethics commissioner

• Who created ethic counsellor position and what high profile cases did it investigate ?

• What were criticisms of it?• When was the ethics commissioner established and how was it

different? • Who was appointed?

“Mulroney tried to cover up cash payments he received in hotel rooms: Schreiber”

• Who is Karlheinz Schreiber?• What were the cash payments in question? When

were they made and why?• What was the affidavit and when was it supposed to

be signed?• What happened when Schreiber refused to sign?• What was the cataclysmic event that disrupted

Mulroney’s life in 1995? Why does this seem to be an invalid excuse for not disclosing income?– What was the outcome of the cataclysmic event?

When was it settled?

Georgette

A blatant misuse of public funds

Rebecca

• What was the purpose of the sponsorship program? Who ran it?

• What misuses of public funds occurred? How much momey was involved? Give a couple of examples.

• How was the RCMP implicated? • According to the opposition (to the ruling Liberal

party), why did money flow to particular groups?

Public-Finance Dilemma

Anita

• How much funding can US presidential candidates get for the general election under public funding?

• Why was Obama thinking about breaking his promise to accept public funding? Why?

• What risks did McCain face by opposing private funding?• What does the US public think of public funding?• Why isn’t Obama’s promise to not accept donations from

lobbyists or PACs very meaningful?• What are other sources of funds to candidates accepting

public funding?

You are what you grow

Robert

• What did obesity researcher Adam Drewnowski discover he could buy with $1? What are the health implications?

• What is the “rational” economic strategy if you are poor? • What are the five crops supported by the farm bill? What

affect does this have on the prices of fresh foods relative to junk food?

• What perverse incentives exist in the school lunch program?

• What are international consequences of subsidized corn?

• What are the politics underlying the farm bill?

Doctor’s ties to drug makers are put in close view

Suzanne , Amanda

• How many doctors received payments from 1997-2005 from drug makers? How much?

• What were the payments for? • What are the arguments in favor of such payments? Against?• What does research show about the relationship between payments and

prescriptions?• Who is Allan Collins and why is he being criticized?• How big are payments to individual doctors? What specialties garnered the

most? • What is the public’s view on these payments?• How many states require disclosure?• How does the courting of doctors start?• How rapidly are drug marketing lectures growing? Payments to doctors in

Minnesota? • What percent of doctors that write clinical practice guidelines have financial

ties to drug makers?

The Goose Bay Boondoggle

Christina

• Where is Goose Bay Air Force base and why is it politically important?• How did the Liberals win in Goose Bay and why was the project there a

“boondoggle”?• What did the Conservatives do to try to win the seat?• What is the cost of maintaining the base? How many people live in the

surrounding Happy Valley?• What does the author recommend doing about the base and Happy

Valley?

Residency Program Addresses Drug Company Influence

• What is “detailing”?• How much money is being spent on these activities? How many

pharmaceutical company representatives are there?• What practices are used to influence doctors? How are they justified?• How are these practices regulated? What is the McGill Psychiatric

Faculty done?

   

                                                                                                 

                                                                                               

   

   

The New York Times

   

   

   

Advisory panels to government

Self regulation by industry/professions

• Professional organizations are often given the power to self-regulate (e.g., CMA, RNBC).

• What are the advantages and disadvantages of self-regulation?

Prisoner’s dilemma and self regulation

Firm 2

honest deceptive

Firm 1 honest (2,2) (-1,3)

deceptive (3, -1) (0,0)

Best outcome is (honest, honest) but incentive for each firm to cheat (a prisoner’s dilemma). In this case an industry will want to self regulate and support the honest behaviour.

Firm 2

honest deceptive

Firm 1 honest (2,2) (-1,3)

deceptive (3, -1) (3,3)

In this case, the equilibrium is (deceptive, deceptive). The difference is the High benefit of deception. Why? Either consumers are fooled or perhaps the products/services are essential and there are no close substitutes. These industries should by regulated by government

Summary of Lecture

• Properties of voting: many outcomes possible• Interest group activity: may convey useful information

but also reflect rent seeking.• Direct self interest: bureaucrats may place their

interests above those of society. Doctors and other healthcare authorities that serve as “gatekeepers” may act in direct self interest to the detriment of patients.

Positive theory of government includes analysis of why policies exist that are not in the aggregate public interest. We investigated three sources of “bad” government policies.