“It’s the economy, stupid!”
The above is the phrase Bill Clinton used in the presidential campaign against W.H. Bush in 1992. Clinton’s campaign advantageously used the economic recession prevailing then in the United States. He succeeded in winning the election. Since then, “it’s something, stupid!” has become part of American political culture. “It’s the deficit, stupid,” for instance.
This episode indicates the reality of a clear connection between politics and the economy, which is the topic of this column. Since public policy is produced through political processes, for a better understanding of public policy, it is crucial to understand the relationship between the economy and politics. The PPE programs in England and America emphasize such an approach. PPE represents philosophy, politics and economics. I wish to follow such an approach in my columns.
History of political economy shows that economic activities influence political actions. F.D. Roosevelt‘s “New Deal” in the 1930s was in response to the Great Depression. In the twenty first century, the governments in advanced economies will exert greater efforts to protect the environment and to provide even more government health care benefits to its citizens.
On the other hand, one cannot study economic policy without taking into account political influences, and one cannot completely understand politics without comprehending economic influences. Government policies on unemployment compensation, the minimum wage, health care, and the level of national debt are all the result of political decisions that affect the economy. Ask yourself why Japan has a higher national debt than the U.S. or the Republic of Korea.
Then, how are political decisions made? Public choice or benevolent despot? In democracies, government decisions are made by some collective decision-making procedure; usually by elected representatives. The purpose of public choice and public finance is to understand how voters’ choices are translated into economic effects. One example in public choice is the median voter theorem in majority rules. However, our understanding of one-party political systems, such as in China, is poor.
Society consists of conflicting interests. And the result of public choice better be optimal or efficient in the Pareto sense. (See No.1 in this forum for Pareto efficiency.) One impediment to efficient decision-making is that policy makers may have no good way of measuring the citizens’ demand for the public good or government service. They may not have enough information to do so. The government sector uses a huge portion of the nation’s resources. Even in a market-oriented country like the United States, the government sector is one third of GDP. Considering the importance of the size, voters’ understanding of the political issue is crucial for an efficient outcome.
Politics involves complex exchanges that compound already complicated market exchanges. While study of the market is concerned with efficiency, the goals of public policy in a democratic society include equity as well as efficiency. Most people put a high value on fairness. As a result, a policy may move away from an optimum. Public policy has to answer questions like: what is each person’s fair share of the tax burden? However, what is fair is a value judgment. In this effort, people first should agree on the underlying facts. Then there is some hope. Although there may be conflicting interests, there are many shared values on which the populace can find common ground.
This essay is a reprint of No. 95, November 21, 2019 on the Japanese website.
One Person One Vote and One Yen One Vote
Last time I asked the following question. If one person repaints the wall of her or his house a shade of red that she or he likes more than the original white, can the society in which this wall becomes red be said to be a “better society” if it gives other people an unpleasant feeling or causes them a loss?
Let’s assume a society consisting of 5 persons: 1 building owner and her or his 4 neighbors. In this society, the payoff (benefit) of making the building’s wall red are as follows: +2 million yen for the building owner, −1 million yen for neighbor 1, −0.3 million yen for neighbor 2, −0.2 million yen for neighbor 3, and −0.1 million yen for neighbor 4. The neighbors who suffer losses have thus received a negative payoff. Based on the payoff alone, when people judge the policy of making this wall red, there is one building owner in favor and four neighbors against. Therefore, in the case of majority rule of “one person one vote”, this policy would be rejected.
However, according to the concept of “one yen one vote”, this policy would be passed because there are +2 million yen in favor and -1.6 million yen in opposition. The net benefit that this policy brings to society as the whole is 0.4 (= 2−1.6) million yen, so this policy is desirable from the point of view of the whole society. This policy evaluation based on “one yen one vote” is therefore a value judgment based on the compensation principle or utilitarianism.
If the total gains of the people who are in favor exceed the total losses of the people who are against, the compensation principle judges that a better society will be realized by the implementation of the policy. If the total gains still exceed the amount of compensation, even after compensation is given to the people who incur losses, a Pareto improvement is possible in the sense that some people will be better off without making any member of society worse off. In this way, the compensation principle leads to utilitarianism in that it is desirable to maximize the social net benefit.
However, the policy evaluation based on “one yen one vote” leads to a solution of the problem by using money, even if each person honestly expresses her or his payoff, but it does not consider the fairness of income distribution. On the other hand, a policy evaluation which is based on “one person one vote” generates the problem of “political externality” in which minorities must follow the majority’s decisions. Which policy evaluation would you choose?
(Author: Akira Yokoyama)
This essay is the English version of No. 7, May 7, 2019 on the Japanese website.
Pareto Improvement and Externality
As I wrote in the section “Greetings from the President”, the field of “Policy Studies” comprehensively investigates human activities that can change the existing society and thereby create a “better society”. If people are different, a “better society” is also different for each person. However, I believe that few people would argue against the following idea.
Imagine that one person wears a “red” shirt, and that it is better for her or him to wear a “red” shirt rather than “white”. If other people do not care about the color of the shirt worn by that person, the society in which the person wears the “red” shirt is better than the society in which the person wears the “white” shirt. This idea is based on considering the value judgment known as a “Pareto improvement”, named after an Italian economist called Pareto (1848-1923), to be a good judgment. Here, a Pareto improvement is defined as a social change in which at least one individual is made better off but no individual is made worse off. This improvement is then considered good for the whole society. We think that society after an improvement is a “better society” compared with the society before the improvement.
In other words, this way of thinking is that if nobody is bothered, it is a good thing for the whole society to realize a social state in which everyone pursues their own happiness and thinks it is good for her or him. This idea also leads to liberalism.
However, if the person wants to replace the white-walled building she or he purchased with a red color that she or he prefers to white, what will happen? If there is such a person (e.g. a neighbor) who is bothered and suffers as a result of the building wall becoming red instead of white, this change will not be a Pareto improvement. In this way, when one chooses a form of behavior that affects the interests of other third parties, it is said that “externality” exists. The externality is positive if the effect is positive, but negative if the effect is negative. Then, compared to the society where the white building remains, can we say that the society where the building wall is changed to red is actually a “better society”? Let’s consider next time how we can evaluate this change from the viewpoint of the whole society.
(Author: Akira Yokoyama)
This essay is the English version of No. 1, April 9, 2019 on the Japanese website.
New Year’s Day 2020
Happy New Year!
On New Year’s Day, there are some things that I would like the next generation of young people to think about. When did you have your best-ever days? How did you behave and who supported you during that time? The brilliance of that time was not born only by your own efforts. It was a gift given as a result of family support, meeting with friends, and having people you can respect. In the future will it be possible for you to recreate such brilliance and when could it occur? Who you can meet depends completely on luck. And luck is a chain of chance, but it also influenced by your choices.
Your choices depend on your will, preferences, and emotions. Your choices will determine the shape of society that will affect you and the people you care about. A society where you can be happy depends on your choices. The society in which you are now is a collective consequence of each individual’s choices on every day in that society. As a result, it is not an immutable thing, but it is transformed every day into a new society by each individual’s choice on every day.
Don’t be afraid to change yourself as the society changes. Listen to your inner voice and make the choices that seem best, or at least make the choices that avoid the worst. The options may be to calmly observe society and do nothing, or to change the society, or to leave the society.
When selecting from a number of options, please think about your own value-judgement criteria, that is selection criteria, and then choose one option (or a mixed option obtained by respectively weighting multiple options). Your choice will follow from your own selection criteria. The selection criterion may be a single criterion, or a mixed selection-criterion obtained by respectively weighting multiple selection criteria. Over time, your own selection criteria will change, but I would like you to respect your own choices for making the current society a “better society” on the basis of your current selection criteria by considering the future society that you are dreaming of.
(Note) The main part of this essay is based on Akira Yokoyama, “Respect ‘Your Own Choices’ that are to Underpin Public Choice,” Green Grass (No. 301, p. 35, Chuo University Parents Liaison Meeting, May 2017) [in Japanese].
(Author: Akira Yokoyama)
This essay is the English version of No. 112, January 1, 2020 on the Japanese website.
The aims of “The Policy Studies Forum” are to contribute to the realization of a better society by carrying out investigations, research, analyses and planning, and providing advice, recommendations, and information concerning policy studies.