This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
- 2.
Hamilton (2008) observed that “(t)he ability to create money to pay for whatever you might deem worthwhile is one that few human beings are capable of exercising responsibly.”
- 3.
These lyrics come from the legendary rock band, Led Zeppelin’s, cover of the song.
- 4.
Payoffs to all possible combinations of actions are reported at the bottom of the game tree and follow the convention that the top payoff goes to the first mover – the accused in this example.
- 5.
This interest appears considerable in light of how prominently the speeches, testimony, and even day-to-day actions of Federal Reserve officers are featured in news media.
- 6.
Falaschetti and Orlando (2008) reviewed a more formal, though qualitatively identical, illustration of how time inconsistency creates problems for monetary policy.
- 7.
Notice that, unless monetary policy accommodates expectations in this case, the real cost of production factors can temporarily increase.
- 8.
An alternative to this institutional remedy is to task the monetary authority with increasing output and ask society to fool itself into believing that such an arrangement does not create perverse policy incentives. Individual members of society can do better for themselves, however, by constructively anticipating high inflation when others are irrationally (but charitably) expecting low inflation. In the end, society will thus tend toward rational expectations about inflation.
- 9.
Alan Gibbard (1973) and Mark Satterthwaite (1975) showed that the benefits from this sort of strategic delegation are robust to the particulars of Vickers’ (1985) example. Roughly, the “Gibbard–Satterthwaite theorem” says that truthfully revealing one’s preferences is almost never a dominant strategy (i.e., there almost always exist opponent strategies that encourage players to act in a less than truthful manner). But notice that delegating authority to a perfect agent essentially reveals the principal’s true preferences. And since making such a revelation is almost never “dominant” (i.e., the best action that one can play, regardless of what one’s opponent does), hiring a perfect agent can almost never be dominant.
- 10.
Insights like these led Drazen (2000, p. 141, emphasis in original) to observe that, “Even if it were possible for the principal to appoint an agent with the same objectives, it may not be optimal to do so. That is, in delegating the decision over a specific policy objective, a government may come closer to achieving its preferred objective by having an agent aim for a different objective!”
- 11.
“Society can sometimes make itself better off by appointing a central banker who does not share the social objective function” (Rogoff 1985, p. 1169).
- 12.
See Drazen’s (2000) chapter 5.
- 13.
- 14.
Districts banks reside in Boston, New York, Philadelphia, Cleveland, Richmond (VA), Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
- 15.
“Board members cannot be fired, forced to resign, or voted out of office” (Waller 1992, p. 415).
- 16.
The FOMC meets eight times a year to determine monetary policy. “Monetary policy” refers to actions that “influence the availability and cost of money and credit to help promote national economic goals” (The Federal Reserve Board, http://www.federalreserve.gov/FOMC/default.htm; accessed on 21 September 2004).
- 17.
Residual earnings from this portfolio represent seignorage in the sense that the Fed transfers them to the Treasury (i.e., the US fiscal authority).
- 18.
See, for example, Acemoglu (2003).
- 19.
This section builds on Falaschetti (2008).
- 20.
The Act would ban automatic pay increases for Members of Congress in years that follow a Federal budget deficit. Representative Cliff Stearns (R-FL) introduced HR 229, the “Deficit Accountability Act of 2007”, to the House of Representatives on 4 January 2007. As of this book’s writing, the bill does not appear to have gone further than being referred to the Committee on House Administration and the Committee on Oversight and Government Reform (see The Library of Congress’s “Thomas” database, http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.+229:, accessed on 15 November 2008). Representative Stearns, sometimes teaming with other Members of Congress, has introduced this bill to several Congresses (e.g., see Representative Stearns’ press release for the “Deficit Accountability Act of 2004” at http://www.house.gov/stearns/PressReleases/PR2004Releases/pr-040210-payraise.html, accessed 15 on November 2008).
- 21.
See, for example, Phillips and McKinnon (2008).
- 22.
James Surowiecki (2004) described this implication as the “wisdom of crowds.”
- 23.
Norman Schofield authoritatively developed this conclusion in a more general form- see, for example, Schofield (2008). We will see another application of this important insight in Chapter 6 of this book, where democratic corporate governance may lead to the unintended consequence of destabilizing business strategies.
- 24.
A 27 November 2007 panel at the Stanford Law School (Ruling the law: judges, legislators, and the struggle for judicial independence) included former Supreme Court Justice Sandra Day O’Connor and highlighted both the long history of such risks and the possibility that they are increasing (iTunes.stanford.edu, accessed on 16 November 2008). Famous Presidents such as Thomas Jefferson, Andrew Jackson, Theodore Roosevelt, and Franklin D. Roosevelt, for example, arguably placed considerable distributive pressures on the judiciary while making it more “accountable.” Contemporary democratic pressures to reign in “activist” judges appear to have encouraged Congressional threats of judicial budget cuts and impeachment, and even a state-level “jail for judges” ballot initiative to hold judges (and jurors) accountable for “erroneous” decisions.
- 25.
Eric Maskin and Jean Tirole (2004) developed a related analysis.
References
Acemoglu, Daron (2003). The form of property rights: oligarchic vs. democratic societies. NBER Working Paper 10037 (October).
Albornoz, Facundo, Sebastian Galiani, and Daniel Heymann (2008). Investment and expropriation under oligarchy and democracy in a Heckscher-Ohlin world. SSRN Working Paper, http://ssrn.com/abstract=1085360.
Alesina, Alberto and Guido Tabellini (2007). Bureaucrats or politicians? Part I: a single policy task. American Economic Review, 97(1), 169–179.
Barro, Robert (1999). Determinants of Economic Growth: a Cross-Country Empirical Study. Cambridge, MA: MIT Press.
Drazen, Allan (2000). Political Economy in Macroeconomics. Princeton: Princeton University Press.
Falaschetti, Dino (2002). Does partisan heritage matter? The case of the Federal Reserve. Journal of Law, Economics, and Organization, 18(2), 488–510.
Falaschetti, Dino (2008). When deficits make sense. Hoover Digest (3), 72–75.
Falaschetti, Dino, and Michael J. Orlando (2008). Money, Financial Intermediation, and Governance. Gloucestershire: Edward Elgar Publishing.
Gibbard, Alan (1973). Manipulation of voting schemes: a general result. Econometrica 41(4), 587–601.
Gilligan, Thomas W. and Keith Krehbiel (1987). Collective decisionmaking and standing committees: An informational rationale for restrictive amendment procedures. Journal of Law, Economics, and Organization 3(3), 287–335.
Hamilton, James (2008). Central bank independence. Econbrowser: Analysis of Current Economic Conditions and Policy, April 13. http://www.econbrowser.com/archives/2008/04/central_bank_in.html. Accessed 13 November 2008.
Maskin, Eric and Jean Tirole (2004). The politician and the judge: accountability in government. American Economic Review 94(4), 1034–1054.
Meyer, Laurence H. (2000). The politics of monetary policy: balancing independence and accountability. Remarks by Federal Reserve Board Governor to the University of Wisconsin, LaCrosse, October 24. http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2000/20001024.htm. Accessed 14 November 2008.
Phillips, Michael M. and John D. McKinnon (2008). Legacy of deficits will constrain Bush’s successor. Wall Street Journal (February 1), A3.
Posen, Adam (1993). Why central bank independence does not cause low inflation: there is no institutional fix for politics. In Richard O’Brien (Ed.), Finance and the International Economy, Volume 7 (pp. 40–65). Oxford: Oxford University Press.
Posen, Adam (1995). Declarations are not enough: financial sector services of central bank independence. In Ben Bernanke and Julio Rotemberg (Eds.), NBER Macroeconomics Annual 1995 (pp. 253–274). Cambridge: MIT Press.
Posen, Adam (1998). Do better institutions make better policy? International Finance 1(1), 173–205.
Rogoff, Kenneth (1985). The optimal degree of commitment to an inter mediate monetary target. Quarterly Journal of Economics 100(4), 1169–1189.
Rogoff, Kenneth (1987). Reputational constraints on monetary policy. In Karl Brunner and Allan Meltzer (Eds.), Carnegie-Rochester Conference Series on Public Policy, Volume 26 (pp. 141–181). Amsterdam, New York, and Oxford: North-Holland Publishing Company.
Satterthwaite, Mark (1975). Strategy-proofness and Arrow’s conditions. Journal of Economic Theory 10(2), 187–217.
Schelling, Thomas C. (1960). The Strategy of Conflict. Cambridge, MA and London: Harvard University Press.
Schofield, Norman J. (2008). The Political Economy of Democracy and Tyrrany. Munich:Oldenbourg.
Surowiecki, James (2004). The Wisdom of Crowds. New York: Random House, Inc.
Vickers, John (1985). Delegation and the theory of the firm. Economic Journal, 95(Supplement – Conference Papers), 138–147.
Waller, Christopher J. (1992). A bargaining model of partisan appointments to the central bank. Journal of Monetary Economics 29(3), 411–428.
Willett, Thomas D. and Edward Keen (1990). Studying the Fed: Toward a broader public choice perspective. In Thomas Mayer (Ed.), The Political Economy of American Monetary Policy(pp. 13–26). Cambridge: Cambridge University Press.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2009 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Falaschetti, D. (2009). Politics. In: Democratic Governance and Economic Performance. Studies in Public Choice, vol 14. Springer, New York, NY. https://doi.org/10.1007/978-0-387-78707-7_4
Download citation
DOI: https://doi.org/10.1007/978-0-387-78707-7_4
Published:
Publisher Name: Springer, New York, NY
Print ISBN: 978-0-387-78706-0
Online ISBN: 978-0-387-78707-7
eBook Packages: Business and EconomicsEconomics and Finance (R0)