ECON 369-1 – Public Sector Economics

 Fort Lewis College – Spring 2016

CRN 30963 (4 credits)

Time: MWF 12:35-1:45

Location of Class:  EBH 108

COURSE INFORMATION

Introduction:

This is a course about how economists study the public sector (i.e., government).  To really understand the public sector, we must understand not only how the government might allocate resources internally (traditionally known as Public Finance), but also how the political decisions of voters and their elected representatives will tend to be translated into public sector policies (known as Public Choice).  Therefore, Public Sector economics is a combination of public finance and public choice.

So Public Finance:  As the head of the Department of Defense -- should you allocate more revenue into intelligence or into tanks?  How should the government raise its revenue -- income tax, sales tax, head tax, etc.?  How does an individual respond to an increase in their income tax (work more or less, for example).  So an economist might study the decisions that people make in their "private" lives due to changes in the rules of the game related to financing the government.

Public Choice:  "Politics without romance," according to James Buchanan.  How is it that one department in the government (defense, for example) might end up with more revenue than another department (education, as an example)?  Or why is Bob, on net, subsidized by taxpayers, while Deb is a net payer of taxes?  Why do consumers and taxpayers end up footing the bill for Bob, an individual in a special interest group?  Why does an individual vote for one tax and not another, etc. -- decisions people make in their "public" lives.

Public Finance, as traditionally taught, studies individual behavior in the private realm of his or her activity.  It does not examine individual behavior in the public realm of activity.  This is where Public Choice theory has contributed to, and in my opinion, substantially strengthened our understanding of political decision-making.  Economic theory has been developed mostly to explain how organized markets work with respect to the use of scarce resources.  It has only been recently (the last 35 years or so) that economists have started to devote a substantial amount of time to the study of individual participation in collective decision-making.  Part of the reason for this increase in emphasis on resource allocation through political means instead of through private means is because of the increase in the size of government. 

This course will combine the traditional approach to Public Finance with the contributions of Public Choice analysis to study how changes in rules will in turn change the behavior of individuals, both in their private and public lives, which in turn will ultimately change economic outcomes. 

Just as markets should be studied as ever-changing processes that emerge from the interaction of individuals, so should politics (in my opinion).  The political arena is a social arena - where people deal with each other.  And out of those "dealings" we get political outcomes; just as we get economic or social outcomes from people dealing with each other through market exchange.

Of course, what develops in the political arena has vast consequences for the market arena - they are not mutually exclusive by any means.

But also - I want to bring in what might be called some "cutting edge" topics in public sector economics (mostly public choice):  for example, perhaps talk about some empirical public opinion research, ideology, some critiques of the political failure literature, some different voting models, and my favorite, the economics of anarchy (after all, is it really prudent to just assume that government should exist in the first place?).

So why study the public sector? 

• First, you might simply be interested in knowing how government works from the perspective of the economist.
• Second, a better understanding of how government works can lead to better decisions by voters, politicians, etc. if better institutions are an outcome of this understanding.
• Third, by better understanding the theory of how public sector decisions are made, we can better comprehend what the government does and why (especially when so many questions and myths surround this topic).
• Fourth, studying the public sector will put us in a better position to understand what activities should be undertaken by government (if any) and what activities are better left to the market (private choice).
• Fifth - to determine ways that the inefficiencies of the political process can be lessened.

Catalog Description:  Application of economic theory to the study of non-market (political) decision making.  An analysis of the types, incidences, and consequences of taxation; government expenditures and borrowing and their economic effects.

Course Delivery Format:  This class is a lecture class with in and out of class student exercises.

Prerequisites:  None

Required Readings: 

            Class handouts (handed out in class and/or posted on my web page). 

            Note that there is no textbook assigned for this class.  That is because I don’t like any of the Public Finance or Public Choice texts on the market (per the introduction above).  Therefore, the notes from the class lectures will be very important.  I will post outlines of the lectures on my web page and hand them out in class.  But remember, these are just outlines and need to be filled in with notes from class.  If you miss a class it is your responsibility to get the notes from one of your classmates and not from me!!  Do not expect me to redo an entire lecture just for you. The following list of books includes most (but not all) of the sources I will be using for the class:

The Calculus of Consent by James M. Buchanan and Gordon Tullock

Readings in Public Choice Economics, ed. by Jac C. Heckelman

Fiscal Sociology and the Theory of Public Finance:  An Exploratory Essay by Richard E. Wagner

Public Sector Economics:  The Role of Government in the American Economy by Randall Holcombe

Economic Policy in a Liberal Democracy by Richard E. Wagner

Public Finance in Democratic Process:  Fiscal Institutions and Individual Choice by James M. Buchanan.

The Myth of the Rational Voter:  Why Democracies Choose Bad Policies by Bryan Caplan

Government Failure:  A Primer in Public Choice by Gordon Tullock, Arthur Seldon and Gordon L. Brady.

Public Finance and Public Choice:  Two Contrasting Visions of the State by James M. Buchanan and Richard A. Musgrave.

Beyond Politics: Markets, Welfare, and the Failure of Bureaucracy by William C. Mitchell and Randy T. Simmons.

The Logic of Collective Action:  Public Goods and the Theory of Groups by Mancur Olson

Public Finance and Public Policy in the New Century, ed. By Sijbren Cnossen and Hans-Werner Sinn.

Public Finance and the Price System by Edgar K. Browning and Jacquelene M. Browning.

Economic Politics:  The Costs of Democracy by William R. Keech

Public Finance and the American Economy by Neil Bruce.

Environmental Politics:  Public Costs, Private Rewards by Michael S. Greve and Fred L. Smith.

Economics of the Public Sector by Joseph E. Stiglitz.

What Should Economists Do? by James M. Buchanan.

Fair Play by Steven Landsburg

The Machinery of Freedom by David Friedman

The Armchair Economist by Steven Landsburg

Crony Capitalism in America, 2008-2012 by Hunter Lewis

Deficits, Debt, and Democracy by Richard Wagner

Power and Market by Murray Rothbard

The Social Dilemma by Gordon Tullock

The Strategic Constitution by Robert Cooter

What Americans Know About Politics and Why It Matters by Michael Delli Carpini and Scott Keeter

Democracy and Decision by Geoffrey Brennan and Loren Lomasky

The Myth of Democratic Failure by Donald Wittman

Collective Preferences in Democratic Politics by Scott Althaus

Bureaucracy by Ludwig von Mises

Law, Legislation and Liberty by Friedrich Hayek

Also various journal articles and various publications by the American Legislative Exchange Council, the Mercatus Center, the Manhattan Institute, the CATO Institute, the Mises Institute and other public policy organizations.

The following are my own personal goals or outcomes for this class:

General Outcomes -

Students completing this course successfully will be able to:

• analyze how self-interest in the political process affects policy outcomes;

• determine who the relevant actors in the political policy process are and what their motivations are;

• understand the process of rent seeking, its costs and its relationship with economic stagnation and the distribution of income;

• analyze ways by which the inefficiencies of the political process can be lessened;

• understand the limits economists face when analyzing political decision-making;

• explain the assumptions made in normative economic analysis;

• explain under what conditions (if any) government should provide goods and services;

• explain what types of goods and services (if any) government should provide and at what level of government they should be provided;

• explain the concepts of “public goods” and “externalities”;

• explain the effects of diverse institutions (rules) on fiscal choices;

• analyze individual demand for public goods;

• analyze the pros and cons of democracy;

• understand why special interests often win out over the "general interest";

• understand how elections might affect the timing and incentives for economic policy;

• analyze the incentive structure that bureaucrats face;

• analyze the different theories of regulation;

• explain how diverse voting rules (and logrolling) effect resource allocation;

• explain why government grows;

• explain diverse tax structures (both direct and indirect) and their economic effects on fiscal choice;

• explain the effects of earmarking vs. general-fund financing;

• explain diverse government spending rules and their economic effects;

• explain how subsidies effect income distribution and economic growth;

• explain income transfer programs and their economic effects;

• explain the economic effects of social insurance – social security and health care;

• explain the economic effects of deficit spending and unbalanced budgets;

• explain fiscal illusion;

• understand the ideas behind a constitutional government;

• analyze the pros and cons of federalism.

Course Assessment Tools:

Exams (including definitions, multiple choice questions, essay questions, graphical analysis, analytical problems), homework assignments (including definitions, essay questions, graphical analysis, analytical problems), in class exercises, and readings quizzes.  Also a project (see below).

Course Requirements and Expectations:

Reading Assignments:  I will expect you to keep up with any assigned readings.  The class will include discussions about the handouts I will put on my web page or hand out in class -- therefore, if you have not read the assigned reading, you will not be able to participate in the discussions and will not gain as much from the lectures.  Reading quizzes will be given periodically.

Homework Assignments:  Students will be given written assignments to complete and turn in throughout the semester (typically once per week or every other week).  I will announce these assignments and their due dates during the course of the semester.  The purpose of these assignments will be to further students understanding of the topics and issues discussed in class.  In particular, these assignments are designed to enhance student exposure to and understanding of classroom material.  General directions for all assignments are as follows:

Super Committee Analysis Paper:  

You can do an individual paper or work in a group up to 3 people.  Your choice.

A few years ago a "super committee" was formed from members of both political parties (democrats and republicans) in order to come up with $1.2 trillion in cuts to the budget deficit -  over a 10 year period.  They were supposed to decide on both “spending cuts” and “revenue enhancements” - fancy phrase for tax revenue increases.  Of course, the debt has just increased since then because deficits have flown through the roof.

So now we are going to form another committee and ....

You are now on the "super committee" - but you are to come up with $2 trillion in cuts over a 3 year period.  You need to decide how you are going to do this and then justify your decision.

So your analysis should include:

1.  Your strategy and be specific.  If you are cutting from defense - say what/where you are cutting.  This also includes any assumptions you might make regarding behavior changes due to your changes.  For example - will increasing the income tax rate increase tax revenue?  Maybe, or maybe not -- so what are your assumptions regarding these kinds of strategies and make sure you back them up with good theory.

2.  Your justification.  Justify each of your strategies - on both the spending side and the tax side.

3.  Who will benefit and who will lose (you can only talk about this in terms of money - not in terms of subjective utility).

4.  What economic outcomes will take place due to your strategies?  Will more jobs be created?  Explain why.  Will businesses outsource more or less?  Explain why.  Etc.

The paper should be a maximum of 4-5 pages long (not including any graphs or other diagrams you might want to use) - longer papers will NOT be graded (typed, double-spaced using 12 point font) – there is no minimum length. 

Here is the cite to the budget - to get you started.  Please make sure you cite any sources you use with appropriate information (including web page addresses).

Grading Policy:

Your semester grade will be determined as follows: (approximately 700 points total)

Exams (5 at 50 points each = 250 points)

Written homework assignments (100-160 points -- this point total is approximate)

Reading Quizzes (12 pts. each, 72-120 pts.)

Super Committee Paper - (100 pts)  Short Presentation - (20 pts.)

Class participation, mostly attitude, attendance, etc. (points at my discretion and via the syllabus)

Final Exam (100 points)

Total Points Possible: 700 points (tentative) possible for the class.  I will grade on a curve.  The person with the highest number of points in the class will set the curve.   For example, if the highest number of points earned in this class is 550 points, any student with 90 to 100% of 550 points (495-550 points) will receive an A or A- in the class; any student with 80 to 89% of 550 points will receive a B+, B or B- in the class; and so on.  An A requires 94% or higher in the class.  An A- requires 90% - 93.9%.  B- requires 80 to 83.9%.  B requires 84 to 86.9%.  B+ requires 87 to 89.9%.  Use these same percentages to determine C-, C, C+, D, D-, D+ but in the 70 and 60% ranges.  (NOTE regarding midterm grades:  I do not give + or - on midterm grades but I do give them on final grades).

Course Schedule and Dates of the Exams and Super Committee Analysis:

Super Committee Paper :  

You can do an individual paper or work in a group up to 3 people.  Your choice.

A couple of years ago a "super committee" was formed from members of both parties in order to come up with $1.2 trillion in cuts to the budget deficit -  over a 10 year period.  They were supposed to decide on both “spending cuts” and “revenue enhancements” - fancy phrase for tax revenue increases.  Of course, the debt has just increased since then.

So now we are going to form another committee and ....

You are now on the "super committee" - but you are to come up with $2 trillion in cuts over a 3 year period.  You need to decide how you are going to do this and then justify your decision.

So your paper should include:

1.  Your strategy and be specific.  If you are cutting from defense - say what/where you are cutting.  This also includes any assumptions you might make regarding behavior changes due to your changes.  For example - will increasing the income tax rate increase tax revenue?  Maybe, or maybe not -- so what are your assumptions regarding these kinds of strategies and make sure you back them up with good theory.

2.  Your justification.  Justify each of your strategies - on both the spending side and the tax side.

3.  Who will benefit and who will lose (you can only talk about this in terms of money - not in terms of utility).

4.  What economic outcomes will take place due to your strategies?  Will more jobs be created?  Explain why.  Will businesses outsource more or less?  Explain why.  Etc.

The paper should be a maximum of 4-5 pages long (not including any graphs or other diagrams you might want to use) - longer papers will NOT be graded (typed, double-spaced using 12 point font) – there is no minimum length. 

Here is the cite to the budget - but you can use other sources as well.  Please make sure you cite any sources you use with appropriate information (including web page addresses).

Due Date for the Super Committee Paper Assignment is Wednesday, April 20.  Presentations will be held on Wednesday, April 20 and Friday, April 22.  So a short PowerPoint would probably be a good idea.