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Conference on Political Economy.

Conference on Political Economy

The NBER held a conference on political economy in Cambridge on May 19-20. Alberto Alesina, NBER and Harvard University, organized the following program:

Sebastian Edwards and Guido Tabellini, NBER and

University of California at Los Angeles, and Alex

Cukierman, Tel Aviv University, "Seigniorage and

Political Instability"

Discussant: Nouriel Roubini, NBER and Yale


John Londregan and Keith Poole, Carnegie-Mellon

University, "Coups d'Etat and the Military Business


Discussant: James Alt, Harvard University

Linda Cohen, University of California at Irvine,

"Political Perceptions of Economics: The Case of

Synthetic Fuel Development"

John Ferejohn and Charles R. Shipan, Stanford

University, "The Threat of Legislation: Congress and

Administrative Agencies"

Discussant: Paul L. Joskow, NBER and MIT

Matthew McCubbins, University of California at San

Diego, "Party Governance and U.S. Budgetary


Discussant: Robert P. Inman, NBER and University

of Pennsylvania

David Baron, Stanford University, "Regulatory

Incentives Mechanisms, Commitment, and Political


Jean Tirole, MIT, and Jean-Jacques Laffont, Harvard

University, "The Politics of Government

Decisionmaking: Regulatory Institutions" and "The Politics

of Government Decisionmaking: A Theory of

Regulatory Capture"

Discussant: Thomas Romer, Carnegie-Mellon


Barry Weingast, Stanford University, "The Political

Economy of Regulatory Agency Decisionmaking"

Discussant: Jeffrey Banks, University of Rochester

Seigniorage is an optimal source of governmental revenue if there is tax evasion or there are large tax collection costs. Edwards and Tabellini argue that the efficiency of the tax system also reflects deliberate political decisions, as well as its stage of development or the structure of the economy. In particular, the equilibrium efficiency of the tax system, and hence seigniorage, also depend on political stability. They find that more unstable countries rely on seigniorage much more than stable and homogeneous societies do.

The transfer of power through the use of military force is a commonplace event in world affairs. No two coups d`etat are identical, but their common denominator generally is poverty, according to Londregan and Poole. They analyze political and economic data from 121 countries for 1950-82 and find that the poorest countries are 21 times more likely than the richest to experience coups. Poverty also increases the likelihood that a government is overthrown by a coup. Thus even authoritarian governments have powerful incentives to promote economic growth, not out of concern for the welfare of their citizens, but because failure to deliver adequate economic performance may lead to their removal. Londregan and Poole also find that the aftereffects of a coup include a heritage of political instability and an increased likelihood of further coups.

The synthetic fuel development program was arguably the worst of the energy policies instituted by the U.S. federal government following the oil crises in the 1970s. Project choices were made in haste, using technologies that were poorly suited to the program's goals and that had little chance of technological success. The program was characterized by boom and bust cycles, and was cancelled in the early 1980s. Cohen analyzes roll call votes in Congress and relates program failures to changes in the coalition of support groups in Congress. She shows that the program was not a simple pork barrel. Support in Congress depended on a shaky coalition that formed after OPEC oil shocks in the 1970s, but evaporated once oil prices started falling in the 1980s. Cohen finds that the poor choices made in this program were the result of compromises and pressures created by different elements of the congressional coalition.

Ferejohn and Shipan examine the role of congressional committees in setting telecommunication policy. Congressional committees signal their view to regulatory agencies, and agencies are influenced by congressional preferences, whether or not legislation is actually enacted. Ferejohn and Shipan find that the FTC did seem to be influenced by congressional actions other than the passage of legislation.

Although the United States has run budget deficits in 50 out of the last 60 years, the rate of growth and the size of the budget deficits in the 1980s are unprecedented, with the annual budget shortfall exceeding $200 billion in 1986. According to McCubbins, annual budget deficits between World War II and 1981 were, in part, a consequence of countercyclical responses by the federal government to changes in the economy: Congress and the president spend more on domestic programs to counteract downturns in the economy. Armed conflicts also explain some budget deficits, as the government borrows to increase defense spending. The runaway deficits of the 1980s, however, are the result of conflicts between the political parties that control the different branches of government, McCubbins believes. Democratic control of the House with Republican control of the Senate led to a bilateral veto game in which the equilibrium was to increase spending on domestic and defense programs alike. Spending during Reagan's two terms in office climbed from $600 billion to almost $1.2 trillion. On the revenue side, Reagan used his institutional position, and the veto provided him by the Constitution, to forestall any tax increases and to protect the tax cuts won in 1981. Thus the deficits of the 1980s are the political fallout of a divided government.

Baron considers the political and economic strategies of participants in regulation and characterizes an optimal regulatory policy that anticipates both types of strategies. In his model, political action arises from the conjunction of incomplete information, which lows the firm to earn rents on its information, and the public observability of the performance of the regulated firm. In equilibrium, the regulator anticipates political action by choosing prices low enough that its commitment to its policy can be preserved. Political action by consumer interest groups make the regulated firm better off and consumers worse off.

Tirole and Laffont compare two approaches to regulating a monopoly: average cost pricing (associated with the absence of transfers) and marginal cost pricing (associated with the possibility of transfers). The regulator may identify with the industry, but a regulatory hearing offers the advocacy groups (watchdogs) an opportunity to alter the proposed rule. The advantages of the two approaches depend on the deadweight loss associated with collusion and on the effectiveness of watchdog supervision.

In their second paper, Tirole and Laffont study the potential identification of a regulatory agency with the interests of a regulated firm or with nonindustry groups. They show that: 1) the organizational response to the possibility of agency politics is to reduce the stakes that the interest groups have in regulation; 2) the threat of producer protection leads to low-powered incentive schemes for the regulated firm; 3) consumer politics may induce uniform pricing by a multiproduct firm; and 4) the regulatory agency is not necessarily captured by the interest group with the highest willingness to pay.

Can politicians still influence bureaucrats after an agency has been created? Probably, Weingast shows, because politicians anticipate a problem and adapt to it in a variety of ways. Politicians do not depend on an agency for information, but rather rely on their constituents. In work with Matthew McCubbins and Roger Noll, Weingast shows how administrative procedures limit the ability of agencies to manipulate their sponsors. For example, the Administrative Procedures Act prevents agencies from secretly conspiring against politicians. Instead, agencies must announce well in advance what issues they will consider. Also, under the Freedom of Information Act, any agency's information must be available to politically relevant constituents.

Also attending the conference were: Robert J. Barro, Martin Feldstein, and N. Gregory Mankiw, NBER and Harvard University; Geoffrey Carliner, NBER; I. M. Destler, Institute for International Economics; Dennis Epple and Howard Rosenthal, Carnegie-Mellon University; Henry S. Farber and Nancy L. Rose, NBER and MIT; Herschel I. Grossman, NBER and Brown University; Robert P. Inman, NBER and University of Pennsylvania; Robert Powell and Kenneth A. Shepsle, Harvard University; Stephen W. Salant, University of Michigan; James Snyder, University of Chicago; and Charles Stewart, MIT.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Jun 22, 1989
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