Political Economy of Public Policy

ARROWS THEOREM

Suppose the following: at leat 3 ppl with at least 3 alternatives where the 3 people are allowed to have any rational preference they like.

Given that society, there is only one aggregation rule that always returns transitive social preferences; is not sensitive to irrelevant alternatives; and always respects unanimty of preference: and that is dictatorship.

The notion of the general will is incoherant. How we set priorities is not founded on some notion of what is best for everyone. How we ask a social question and how it is answered is deeply dependent upon how we ask and tally the results. The general will is never certain to be what will be fefined. The proper goals of public policy are not institution gfree. The objectives of societie and politicians are shaped by institutions employed: policymaking is deeply political and institutions contrain and explain policymaking.

Agenda Setting: A Sample:

Lets suppose a committee of three have preferences over the use of resources over issues like guns and butter. Preferences can be represented spatially.

Euclidean preferences are those that moving any direction from the point of greatest utility in the same distance yields equal indifference.

The windset of x is the set of policies that would win majority rule against X. So on the graph, where C and B overlap is a windset and any proposed policy would defeat the status quo on a majority rule vote. A cannot win a vote on his choice utility so he will make a deal with C on an agreement amenable to their own interests. In theory, with no agenda setter, this process could go on forever as B could continue to propose policies C would like better than A and A would be retaliate by proposing C.

Majority rule can lead to outcomes that the whole society thinks are universally worse than other alternatives.

If C is the agenda setter, the game ends when C is satisfied. C proposes X instead of Q as the new status quo, helping B and A, but not C. He then proposes point Y, which A and C like better, but B does not. So he moves to point Z, which is his desired outcome, which B prefers to Y, but not to X or Q. A prefers X, Q, and Y to Z. C then ends the game.

Point X allowed A to get a little better off, but by making B unhappy, plays into C's hands. C got his ideal point by manipulating B and A through a series of votes.

Limits to Agenda Setting Power:

Strategic voting allows one to avoid agenda manipulation by the agenda setter. Other institutions, including the privileged place of the status quo and amendment rights in Congress, create a scenario where no matter what you vote on, the status quo always gets the last say: meaning an agenda setter cannot make a preference that the majority of people find more offensive than the status quo.

If the agenda setter wants to move the status quo in a certain direction, he can offer amendment rights. All of this suggests that outcomes are a complicated function of institutional incentives.

Strategic voting: an example using a tree

A: Y > X > Q > Z
B: X > Q > Z > Y
C: Z > Q > Y > X

If the first choice is X vs. Q, X would win a straight up vote because both A and B prefer X to Q. But B and A should both share an interest of preferring Q to Z and should vote to prevent Z from ever becoming preferable to any alternative, in this case Y. So, B should vote on X vs. Q knowing that if X had to take on Y, Y would win, and if Z ever took on Y, Z would win. A should realize that while Y is his most preferable option, that it would lose as soon as C put Y against Z. Therefore, both will fight to make sure Q remains the policy as it is less disagreeable to their interests than Z. In X versus Q, both will select X and hold it knowing that any other outcome leads to Z.

Israeli Election Reform:

Prior to 1992, Isreal had pure proportional representation in its legislature, where a majority coalition would elect Prime Minister and form a government. Voters cast one ballot for one of five political parties. Knowing that only the moderate parties could muster enough support to form coalitions, extremists had an incentive to vote for moderates in the hopes that the moderate party more agreeable to their interests forms a government. More important to have their ideology represented somewhere in the government than have it lead it.

In 1996, the status quo changed. Voters now have two ballots: one for the Prime Minister, and one for the party they want in Congress. Extremists can now claim more voters as their ideological comrades voting for moderates have no incentive to use their ballot for the coalition on the moderate party. Which, according to elementary rational choice theory, is exactly what happened.

Japanese Electoral Reform:

Prior to 1994, the Japanese Parliament was elected through single nontransferable ballots in multimember districts: the five candidates with the most votes won the election.

In 1994, the rules changed as the chamber became mixed-member majoritarian as some members were elected in single member districts and some by proportional representation.

Let us suppose in district X, 80% of the people supports the LDP and 20% support someone else. If 80% of the people vote for the same LDP candidate, only one LDP candidate wins. To prevent fringe people from taking control, leaders of the LDP crearted baliwicks, geographical areas usually close to a poltician's hometown, where each would use their political power to remain elected. To support this system, Japanese politicians had to provide many private goods to supporters at home. Many believed this led to localism and corruption in Japanese politics and wanted institutional change.

The coordination problem was eliminated with the reform and led to a greater suffusion of the vote.

Political Economy of Public Policy

Public Policy: Lecture 1

This class provides a broad theoretical introduction on how politics constrains policy-making. It is divided into four broad categories: why political economy matters; why thinking about feasible policies matter; what kind of political institutions best lead to accountability; and how to get from bad institutions to good ones.

Politics and the Public Interest:

The making of public policy is about serving the general good. What policies are in the social interest? A clearly political question: what is good in the context of the people. What's good for the collective: politics is about groups of people determining what they want to do.

Constraints limit the number of policy options that can be feasibly implemented. How do we structure our institutions (the rules, interaction of bureaucracies, and structure of the government) to make the world a better place? To paraphrase Rousseau, the goal of public policy is the attainment of laws and regulations that serve the general will which leads to the general good. The goal of government, therefore, is to promote the general interests of society: which means the aggregate interests of individuals.

The public interest cannot be determined theoretically: context matters because at different times different people think different things about what is important. An underlying assumption of rational choice is that people know what is best for them. People have preferences over options which must be rational in a limited sense. Preferences must be transitory and are dependent on context. Transitivity is important because it is the minimum requirement of rationality: one cannot prefer beef to chicken and chicken to fish but prefer fish to beef.

The problem of imperceptible differences can arise: if you are indifferent to x and y and y and z, then you must be indifferent to x and z, yet eventually a chain of indifference yields some preference . . .

An outcome is in my individual preference if it reflects my interest. Society/social interest is really the collective interest from a group of individual ones.

An example of majority rule: if X gets more votes than Y, then X is preferred to Y. Lets suppose there are three tax rates: low, medium, and high and three voters: poor, middle class, and rich.

Poor's preferences: high, medium, low
Middle Class: medium, high, low
Rich: low, medium, high.

Medium is preferred to high and high to low, and medium to low, therefore, medium wins.

Majority rule can fail to produce coherent preferences:
1. x, y, z
2. y, z, x
3. z, x, y.

X > Y, Z >X, and Y > Z which renders society intransitive as it lacks rational preferences. In this case majority rule fails to identify the collective interest. While a majority may prefer one policy to another, another majority will be found that prefers another policy to the one enacted.

In this example, however, nothing is specified about the rules of the political process: the outcome in the real world will be determined by a game.

Borda Count:

The Borda Count is a crude utilitarian method of assigning points to each alternative based on individual preferences, producing a result that sums up the scores.

X3, Y2, Z1
Y3, Z2, X1
Z3, X2, Y1

In this method, society is indifferent to the outcome as all points added up yield the same result.

While intuitively appealing, the Borda Count fails to recognize that social preferences are not immune to the adding of irrelevant alternatives: for example:

If two people think X>Y>Z
one person: Y>Z>X
one person: Y>X>Z

where first choice gets 3, second, 1, third 0, y gets 8, x gets 7, and z gets 1

If you add W, then
two people: x>w>y>z
one person: y>z>x>w
one person: w>y>x>z

X gets 6, W gets 5, Y gets 4, and z gets 1. In other words, the group now prefers X to all others, even though they preferred y before. This is aking to saying you prefer chicken to beef, but when fish is added to the mix, you prefer beef to chicken or fish. This is not a good way to figure out preferences. The problem, however, was not the decision-making, but the aggregation method.

In an amendment procedure which the professor moved too quickly through for me to copy all down, a majority might agree X>Y, but the weighting of votes allowed Y to win.

Arrow's Impossibility Theorem:

Arrow assumes that a society with three people, three alternatives, and the capacity to order alternatives in any way they want: there is only one way aggregation rule that will return a transivtive outcome with a unamity of preferences and is sensistive to alternetives: the rule of dictatorship.