Unit 10 Women’s right to vote and the reduction in child mortality in the United States
10.13 Citizens and elected leaders as principals and agents
In a democracy, it is often said that ideally the government is the servant of the people. In economic terms, elected leaders are the agents and the citizens are the principals.
- principal–agent relationship, principal–agent problem
- A principal–agent relationship or problem exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute, that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. See also: incomplete contract.
But this immediately raises two questions:
- Why would the agent (the elected leader) do what the principals (the citizens) desire? As in any principal–agent relationship the agent has their own objectives, which differ from the principal’s objectives. Our model of a rent-seeking government illustrated how the government need not serve the interests of the people in an undemocratic society. We saw that the problem does not disappear in a democracy.
- Who are ‘the people’ (the principals)? Why are some principals more influential than others? In economic examples where the principal is a lender or employer, we can simplify by representing them as a single individual. But there are many citizen-principals and they have differing priorities for what the government should do, whether the question is abatement of pollution, school improvement, policies to boost innovation, tax-funded transfers to the poor, and so on.
Democratic accountability of elected officials
Building block
For an introduction to principal–agent problems and how they can be solved, read Section 6.6 of the microeconomics volume.
Think about the first problem—motivating the elected leader to do what the citizens prefer—as a principal–agent problem, like the employer trying to motivate a worker to contribute to the profits of the firm. In the ‘citizen–official’ principal–agent problem there are many principals and few agents, the opposite of the ‘employer–employee’ principal–agent problem. But the basic problem is similar: there is no way for the principal to guarantee that the agent does what they want.
What are the possible solutions when the employer tries to motivate workers? The employer could:
- pay the agent an economic rent (a wage better than the worker’s next best alternative); they will fear losing it if they do an unsatisfactory job
- monitor the work activity of the employee to detect signs of inadequate work
- replace the worker by another worker if the work is found to be unsatisfactory.
In a democracy, elected leaders are held accountable to the electorate by a similar set of strategies:
- Give the elected leader a sufficient salary, prestige, and other amenities of office: They would then like to keep the job.
- Monitor the activities of the government: This is to determine the quality of the government’s performance using legal principles of transparency and judicial review, along with a free press and free speech.
- Hold periodic elections: A government that has not performed well in the citizens’ eyes is replaced by a different set of political leaders.
This is how democracies solve the principal–agent problem of making elected leaders accountable to the public. But it comes with a downside: the fact that elected leaders, like employees in a firm, are subject to periodic review gives them an incentive to undertake projects whose benefits to voters will become visible before the next election.
- structural unemployment
- The level of unemployment where the supply side of the economy is in equilibrium. In the WS–PS model, it is the unemployment level at which the price-setting real wage equals the wage-setting real wage. See also: WS–PS model, Nash equilibrium, supply side.
For example, governments sometimes introduce expansionary fiscal policies (cutting taxes or expanding spending) in the run-up to elections, so that disposable incomes will be rising and unemployment falling when people vote. Attempts to push employment above the long-run sustainable level (the equilibrium level of structural unemployment) will eventually lead to unsustainable inflationary pressures. But these unwanted consequences would occur only after the election.
Because future elections are an incentive for short-term thinking by political leaders, a partial solution is to transfer some policymaking from the hands of elected leaders to people who are appointed by democratically elected leaders but not themselves subject to removal by an election. This is the argument for an independent (not elected) judicial system, and for the political autonomy of the central bank.
For example, the governors of the US Federal Reserve system are appointed by the president for 14-year terms which are staggered, so that it is unlikely that a president will appoint many of them while in office. Figure E5.1 in Section 5.9 shows that countries with a greater degree of central bank independence in the 1980s had lower average inflation over a 30-year period.
Policymaking in a democracy is also sometimes biased in favour of smaller groups. Here is the reason. Consider a policy—such as a reduction in tariffs on imports of clothing—that will make less-expensive clothing available to the population but reduce the employment and income of workers in the domestic clothing industry. Suppose that it will confer a total of €1 million of costs on the 500 clothing workers and at the same time will confer €2 million of benefits on 2 million consumers of clothing.
Now consider the challenges facing those seeking to organize campaigns against and for the policy:
- Each worker in the domestic industry would lose €2,000 a year if the legislation were passed, so most would support the ‘anti-import’ cause, and be against the tariff reduction.
- Each consumer would benefit by €1 if the legislation were passed, so few people would be willing even to send an email to their legislator.
Exercise 10.12 Imposing tariffs
Consider a policy that imposes tariffs on one industry in the economy.
- Use a numerical example similar to the one in this section to illustrate the costs and benefits to affected parties, and how each party would act.
- Choose a recent or historical example of tariffs. Compare the similarities and differences between the outcomes from your numerical example and the outcomes from the real-world example. Suggest some reasons for any differences you find.
- Explain how your answer to Question 1 would change if tariffs were imposed on many industries in the economy instead of just one.
‘All animals are equal. But some are more equal than others.’
This quote is from George Orwell’s 1945 book Animal Farm, which was a satirical critique of Joseph Stalin’s dictatorship of the Soviet Union. But it also applies to how democracies work in practice. All citizens are legally equal in their rights, but some have much more power to influence government policy than others.1 2 3 4
This relates to the second question at the beginning of this section: when persuading elected leaders to favour one policy over another, citizens are far from equal. Wealthy citizens in particular may have a disproportionate voice in a democracy, or borrowing from Orwell, ‘some principals are more equal than others’. This is because they:
- Invest: Their decisions about investment (the case of Chile, for example) may determine the fate of a government.
- Donate to politicians: Their contributions to electoral campaigns (in countries where this is allowed), or even direct personal payments, may influence who occupies positions of political leadership and how they exercise their power.
- Control communications: Some own and direct newspapers and TV stations, which allows them to influence public opinion and voting patterns.
- Employ lobbyists: They, or the firms they own, employ professionals—often former politicians—to influence elected officials.
For evidence on how political contributions (as well as special interests) influenced US housing market policy prior to the crisis, read: Atif Mian, Amir Sufi, and Francesco Trebbi. 2013. ‘The Political Economy of the Subprime Mortgage Credit Expansion’. Quarterly Journal of Political Science 8: pp. 373–408.
The result is that economic inequality feeds political inequality, which in turn feeds economic inequality.
For example, the relationship between economic inequality and political inequality affects gender outcomes. In many countries, women participate much less in political life and leadership than men. In India, the reservation of positions for women to head village councils has been shown to increase public spending on the public services that women prefer, like wells, so that they do not have to carry water so far. It also reduces receipts of bribes by those in power and was found to transform stereotypes. Men in villages that were randomly reserved for women leaders subconsciously perceived women more positively as leaders, as compared with viewing them solely in domestic roles.
Note for EBW: The following tinyco.re link needs to be updated to point to the web book, rather than YouTube, once the URLs for this unit have been confirmed.
In our ‘Economist in action’ video, Esther Duflo explains what happened when it was mandated that randomly selected villages elect a woman to head their local council.
Question 10.10 Choose the correct answer(s)
According to the Economist in Action video featuring Esther Duflo:
- The villages that had to increase female representation in their council were essentially chosen by lottery, so we can reasonably conclude that any changes in policymaking are due to greater female representation and not due to other characteristics of the village or village council.
- Rather than asking villagers directly, Duflo had them listen to the same policy speech read by either a male or a female actor, and asked them to rank which speech they preferred.
- This is a long-term effect of the local council reform.
- After exposure to women policymakers, girls’ aspirations increased and they were less likely to drop out of middle school.
How economists (and political scientists) learn from facts Does money talk?
People often say ‘money talks’. Many are concerned that it talks particularly loudly when it comes to politics.
To some, it is obvious that when a candidate for political office receives a large contribution for their electoral campaign from a business, or a trade union with an economic interest at stake, the candidate will be more likely to take the side of the contributor when it comes to using political power to influence policy.
We know the election campaigns for the US Congress in 2012 spent on average $8.5 million per congressional seat, as a paper on procuring access to congressional representatives relates. But did the winners provide favours for the donors that would not have occurred without the donors’ contributions?
We might ask if the members of Congress who received contributions from those with investments in the oil industry tended to favour the interests of those firms afterwards. Or did those receiving funds from trade union members support an agenda that favoured the union’s interests? The answer in both cases is that they did.
But this does not demonstrate that donor contributions purchased influence over the legislator. Remember that causation can work both ways: those with oil wealth are likely to donate to candidates who already favour that industry’s interests. Trade union members will donate money to those who already support the interests of trade unions. Simply showing a correlation between the source of the funding and the policies supported by the legislator does not show that the contributions caused the legislator to act differently.
Political scientists Joshua Kalla and David Brockman designed a clever experiment to determine if the donation caused the Congress member to behave in the donor’s interest. They reasoned that citizens could influence legislators by meeting with them and expressing their views. Members of Congress are busy people, so gaining access to them for a meeting is something that groups compete for.5 6 7
They wanted to find out if those who gave money to a Congress member were more likely to be granted a meeting. With the cooperation of a (real) interest group Credo Action, they contacted 191 members of Congress to ask for a meeting. All of the constituents making this request had contributed some funds to the member’s campaign. The control group, randomly chosen, and half of the total sample, said only that they were residents of the member’s district. The treatment group also identified themselves as donors. All callers in both groups read from a script, so the requests for a meeting were otherwise identical.
Among those not identified as donors, 2.4% gained a meeting with either the Congress member or the chief of staff. For those identified as donors, 12.5% got a meeting.
The authors concluded: ‘The vast majority of Americans who cannot afford to contribute to campaigns in meaningful amounts are at a disadvantage when attempting to express their concerns to policymakers.’ (p. 555)
Special interests: The story of Chile, continued
What happened after the election of Allende in Chile in 1970 tells a story not only of economic limits to feasible policies, but also of political limits.
Amid faltering economic performance, due in part to potential investors holding back on investment in Chile, opposition to Allende mounted, some of it supported in secret by the US government. In 1973, the Chilean armed forces attacked the presidential palace, defeating troops loyal to Allende. They took over the government, ending democracy and replacing Allende with the unelected General Augusto Pinochet.
Figure 10.20a Stock market prices in Chile: The military overthrow of the socialist government, 1973.
Note: Time zero is the first trading day on the Santiago stock market following the military takeover.
The wealthy anticipated that Pinochet would introduce pro-business policies, so stock prices rose again (Figure 10.20a). The Pinochet dictatorship would remain until a constitutional referendum in 1988 demanded a return to democracy, which the armed forces respected.
Once again (Figure 10.20b) a sharp change in behaviour of the wealthy is recorded in the stock market prices on the day following the referendum.
Figure 10.20b Stock market prices in Chile: The 1988 referendum, ending military rule.
Note: Time zero is the first trading day on the Santiago stock market following the referendum.
In summary, Allende’s economic programme was infeasible for two reasons:
- It was economically infeasible: He could not force private firms to invest in Chile, and without their investment the economy would stagnate or even shrink.
- It was politically infeasible: Though democratically elected, he did not control the Chilean armed forces which, with the support of businesses and the US Central Intelligence Agency, turned against him.
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Kenneth Scheve and Daniel Stasavage. 2010. ‘The conscription of wealth: mass warfare and the demand for progressive taxation’. International Organization 64 (04): pp. 529–561. ↩
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Kenneth Scheve and Daniel Stasavage. 2012. ‘Democracy, war, and wealth: lessons from two centuries of inheritance taxation’. American Political Science Review 106 (01): pp. 81–102. ↩
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Kenneth Scheve and Daniel Stasavage. 2016. Taxing the rich: A history of fiscal fairness in the United States and Europe. Princeton University Press. ↩
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Jacob S. Hacker and Paul Pierson. 2010. ‘Winner-take-all politics: Public policy, political organization, and the precipitous rise of top incomes in the United States’. Politics & Society 38 (2): pp. 152–204. ↩
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Joshua L. Kalla and David E. Broockman. (2015). ‘Campaign contributions facilitate access to congressional officials: A randomized field experiment’. American Journal of Political Science 60 (3): pp. 1–14. ↩
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Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal. 2013. ‘Why hasn’t democracy slowed rising inequality?’ The Journal of Economic Perspectives 27 (3): pp. 103–123. ↩
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Martin Gilens and Benjamin I. Page. 2014. ‘Testing theories of American politics: Elites, interest groups, and average citizens’. Perspectives on politics 12 (03): pp. 564–581. ↩
