Transcript Government Failure - Sauder School of Business

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
Shouldn’t a direct democracy be superior to a
representative democracy? Not necessarily:
• expense
• voters make lack expertise to judge
some issues
• voting does an imperfect job of revealing
aggregate preferences
Hotelling's theory
Campaign platforms in two-party systems will
gravitate towards the centre.
Left
A
Center
B
Right
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 than
Two choices: Agenda manipulation with pairwise
voting
Preference
order
Person
A
B
C
1st
x
z
y
2nd
y
x
z
3rd
z
y
x
1st 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 "runoff" 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.
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
Three consequences of rent-seeking
• 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)
Special interest groups
Why do they arise?
Negative view: they exist for rent-seeking purposes
Positive view:
• 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.
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
There are three categories of lobbyist
• 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-forprofit 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.
Lobbyist Registration Act
Principles of 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.
Lobbyist Registration Act
Active Registrations for: 2007/08/31
Consultant registrations:
In-House Corporation registrations:
In-House Organization registrations:
Total active registrations:
2915
286
429
3630
http://orl-bdl.gc.ca/epic/site/lobbyist-lobbyiste.nsf/en/h_nx00012e.html
Government Departments and Agencies in Active Registrations for: 2007/08/31
Department or Agency
Active Registrations
Industry 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
Campaign financing in Canada
In 2003, the Liberal government passed legislation
reduce private campaign donations. Key points:
• 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.
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 Donors
New 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 fundraising 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
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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”
Georgette
• 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?
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
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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
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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
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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?
Advisory panels to government
The New York Times
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
Firm 1
honest
honest
(2,2)
deceptive
(-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
Firm 1
honest
deceptive
honest
(2,2)
(3, -1)
deceptive
(-1,3)
(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
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.
• 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.