Majority Voting under Benefit Cost Constraints

We move somewhat closer to reality when we drop the assumption that collective action requires unanimous consent of all participants. As suggested, under a genuine unanimity rule, individual decisions can keep government under effective controls. Things become quite different, however, once any departure from unanimity is introduced. When the costs of securing agreement are acknowledged, departures from true government by consent be come necessary if the political community is to function as a collectivity. In the conceptual constitutional compact establishing this community, some set of rules for making collective or governmental decisions is selected, and these rules, once made operative, are enforceable on all members, whether or not they belong to the decisive coalition which effectively makes particular choices under the rules.

The most familiar decision rule, both in the analytical models of political process and in existing historical structures that are appropriately classified as "democratic," is that of majority voting. We may assume that some constitutional structure exists, a structure that defines individual property rights and enforces contracts among persons and, further, requires that all collective or governmental decisions secure the majority of the representatives of citizens in some legislative assembly. Even in this formulation we have, by assumption, already bypassed a significant part of the issue being discussed. At the stage of constitutional contract, when individual rights are initially defined, few persons would conceptually agree to wholly unconstrained departures from a unanimity rule for collective decision-making. The reason is, of course, that once an individual's consent is not required for a decision that will be enforced upon him, the individual holds no protection of his own nominal assignment of claims, no guarantees that his rights will not be exploited on behalf of others in the name of governmental objectives. At the same time that a collective decision rule, say that of majority voting, is adopted, procedural limits on the exercise of this rule may be incorporated into the constitutional document or understanding. Experience indicates, however, that the procedural limits incorporated in constitutional structures historically have not been very effective in curbing the appetites of majority coalitions.

Nonetheless, it will be useful for analysis to develop the argument in two stages. In the first, we assume that an economically meaningful constraint on majority decision exists. Assume that a constitutional provision requires that all proposals for public or governmental outlay satisfy a benefit-cost criterion; gross benefits must exceed gross project costs, regardless of the array of votes in the legislative assembly.

We want to look at public-goods proposals that do not benefit all members of the group sufficiently to offset fully tax-costs, but which do, nonetheless, meet the benefit-cost criterion imposed. If, for example, in a three-person group there should be only two beneficiaries of a project costing $100, and if each of these beneficiaries expects to secure a value of $51, the proposal would meet the benefit-cost criterion no matter how costs are distributed. If the costs are equally distributed among all members, say, by a general tax, the proposal would secure majority approval. The effect would be to impose net losses on the minority. The benefit-cost constraint guarantees, however, that if compensation should be required, the majority could arrange to secure minority acquiescence with appropriate side payments. Another way of saying this is to state that the benefit-cost criterion insures that all spending projects are "efficient" in the strict economic meaning of this term. Still another version, and related to the preceding section, is to say that all projects could conceptually secure unanimous approval if the costs of making side payments are ignored.

If each and every proposal for spending funds governmentally is required to meet the efficiency criterion, how could the aggregate budgetary level fail to do so? How could the overall budget be too large or too small? Since each project, considered independently, meets the efficiency test, it would seem that the test could also be met by the aggregate of all projects. As the discussion of the preceding section may suggest, however, this result need not follow when there exists interdependence among the separate decisions.

Consider, as an example, two interdependent proposals for budgetary spending, Projects I and II. In the absence of, and independent of, the other project, each of these proposals is estimated to cost $100, of which $90 is for outlay on the purchase of resource inputs, and $10 is for outlay on collection and enforcement. For each project, similarly, estimated benefits are $103. Hence, regardless of the way benefits are distributed, each proposal is economically efficient. Suppose now that Project I is approved initially under these conditions and that it is included in budgetary plans. Project II is now considered independently, but subsequent to majority approval for Project I. Direct outlay on resource inputs is again $90, as with Project I. But, because more revenues are now required in total, collection-enforcement costs are now estimated to be $12, for a total project cost of $102. Benefits are estimated to be $103; hence, the project remains apparently efficient, and we assume that Project II is also approved by a majority. In adding Project II to the budget, however, collection-enforcement costs for Project I may also have been increased, from the $10 initially estimated to the $12 estimated for Proj ect II. The external or spillover cost that the addition of Project II generates for Project I is $2, but this was wholly left out of account in the choice-making sequence that we have outlined.

Note that, in the numerical example, aggregate benefits of the two projects ($206) exceed aggregate costs ($204). Note, however, that gross fiscal surplus is reduced below that which is attainable on the approval of only one of the two projects; the surplus falls from $3 to $2 in the process of adding Project II, which, treated independently, is equivalent to Project I. The numerical example is, of course, illustrative only, and the totals need not be taken as at all descriptive. In terms that are familiar to economists, we can say that there exists a divergence between the direct or separable costs of a single project and the genuine social costs, which must include all external or spillover effects on other projects or components in the budgetary set. When stated in these terms, economists might suggest ''internalization'' through simultaneous consideration of all the interrelated budgetary items. Care must be taken, however, to insure that the appropriate maximand is selected. Taken as a two-part budgetary package, both projects in the numerical example would secure approval, even if they were jointly selected. Joint benefits exceed joint costs.

The more general phenomenon that the example represents has considerable real-world relevance in terms of widely acknowledged economic effects and of observed political institutions.3 Collection and enforcement costs are always present, and these costs increase as budget size grows, possibly disproportionately beyond certain ranges. More important, taxation necessarily modifies incentives toward the earning of taxable incomes and accumulating taxable wealth in the private economy. These effects are directly related to budgetary size, and these are genuine social costs that incremental budget-making can scarcely incorporate.

Politically, budgets are made piecemeal.4 Different legislative committees consider budgetary components independently, and possibly divergent majority coalitions are organized in support of each component. So long as

3. For a very general and early treatment, see James M. Buchanan and Alberto di Pierro, ''Pragmatic Reform and Constitutional Revolution,'' Ethics 79 (January 1969): 95-104.

4. Cf. C. E. Lindblom, ''Policy Analysis,'' American Economic Review 48 (June 1958): 298-312.

benefits exceed costs, why should members of the effective supporting coalitions be concerned about spillover costs on components, past, present, or future? Political realism suggests the implausibility of achieving reforms at the level of incremental decision-making. Comprehensive budgeting, at either the executive or the legislative level or both, need not eliminate the inefficiency, as we have noted. Consider the position of a budget director or chairman of a legislative committee. By our restrictive assumption, any component must meet the overall benefit-cost constraint. But since this criterion is also satisfied for the budget in the aggregate, or may be, what incentive does this official have for reducing or eliminating particular components or line items so as to increase net fiscal surplus? Even if the official is ideally responsive to the demands of the citizenry, he will be led to incorporate too many components in the budgetary package. Consider again our two-project example. A budget director has overall coordinative responsibility; he must approve a project before it is submitted for a vote. If he eliminates one of the two projects, he incurs the displeasure of all direct beneficiaries. He pleases general taxpayers, but as we have assumed and as the real-world patterns suggest, taxes are more widely shared than the benefits. The indirect net costs that will be reduced by budgetary constraints are not likely to be sensed by the citizenry, and especially not in connection with specific budgetary choices.5

The inefficiencies that emerge when there exists interdependence among the separate components of a budget can be reduced only if these are predicted at some planning stage of deliberation. Because of the tendency of budget-makers and of legislative majorities to approve budgets that aggregate to sizes beyond those which maximize fiscal surplus, explicit size limits or other constraints on revenues and/or outlays may be incorporated in the fiscal constitution with the expectation that such limits will be legally en-forced.6

5. It is not clear that the indirect costs should, in fact, be tied to specific choices. These costs emerge from the overall size of the budget, and are generated by all projects jointly. The problem of imputation here is identical to that involved in all joint-cost problems.

6. The discussion in this section has been limited to those interdependencies among budgetary components that tend to generate overexpansion in total spending rates unless constraints are imposed constitutionally. The facts of modern government spending should be sufficient to convince even the most skeptical observer that these are the interdependences of importance. The analysis may, of course, be applied to interdependences that

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