Personal Loss Functions and Procedural Norms

Governmental decision-making in its operative form departs from volunta-ristic contracting, despite the contractarian basis for the state's productive role. Indeed the relative efficacy of governmental institutions in providing genuinely public goods and services is presumed to stem from the cost-reducing impact of allowable departures from strictly voluntaristic negotiations. But, in their turn, these departures guarantee that some participants in almost every decision will be coerced into abiding with undesirable terms. Budgetary and taxing decisions are not reached through Wicksellian unanimity, and to the extent that they are not, some participants suffer losses in an opportunity-cost sense. The existence of these opportunity losses becomes an additional source for the basic governmental paradox.

Consider a politically organized municipality that has long operated under a constitution that specifies simple majority voting as the rule for making budgetary choices. Spending and taxing decisions are made in town meetings. (This simplest of models is used here to avoid unnecessary complexities that are introduced by representation.) Assume that a proposal is made to finance a new auditorium through an increase in the general property-tax rate. The proposal secures a majority in the assembly, and it is adopted. Each person who opposed the measure will, however, experience an opportunity loss consequent on the political action taken, a loss by comparison with his own individually preferred outcome. To these disappointed members of the losing minority coalition, the budget is too large, but observed voting behavior suggests that a proposal for reversal cannot carry the day. Members of this losing coalition, singly and in groups, will be motivated to search out and to propose other spending schemes which are personally preferred and which promise to yield benefits in excess of the allocable tax costs. Such persons, or a political entrepreneur who senses their interest, will try to locate new budgetary propositions that may succeed in generating majority sup port. But as a second such proposal, say, a new swimming pool, is added to the municipal budget, a new and different disappointed minority emerges. Even to some of those who approved the initial proposal for spending on the auditorium, the budget may now have become too large; they, too, will experience opportunity losses. To persons outside either of these two majorities, the opportunity loss increases as the budget grows, and they are now more strongly motivated to secure "budgetary justice'' by getting the enactment of at least some projects that they value differentially.

In a continuing process of this sort, and so long as the tax institution remains more general in incidence than the particular benefit projects, each member of the community may experience opportunity loss from governmental action. The total outlay may seem too large to each and every citizen; the budget will contain items of spending that are valued less than the corresponding tax obligation. This conclusion holds even if each budgetary project, considered independently, is "efficient" in the strictly allocative sense. There is, of course, no assurance that all majority-approved projects will be allocatively efficient, especially in the absence of smoothly working monetary side payments. The introduction of logrolling possibilities allows for the enactment of projects that benefit specific minorities, but this does not modify the general conclusion about budgetary frustration.9 The budget is, of course, symmetrical; outlays must be financed. And essentially the same process as that sketched above would apply to majority-approved departures from strict generality in tax distribution. Suppose that an initial proposal is made to reduce the tax shares of a majority of citizens, while increasing the shares of the minority. Anyone in the latter group senses the loss, and he seeks relief by organizing a somewhat different majority, insuring his own membership, that will support additional departures from tax generality. As the process continues, each person may be placed in the position where he feels that the whole tax structure is "unfair" and "inequitable," which translates into the notion that the "loopholes" available to others than himself are unwarranted.

The direction of overall budgetary bias which majority-voting decision processes may generate is wholly irrelevant to my argument at this point. It does not matter whether the results are budgets which are "too large'' or "too

9. For elaboration of this analysis, see Buchanan and Tullock, The Calculus of Consent.

small'' by normal efficiency criteria, or that offsetting biases produce overall budget sizes that are "just right.'' If the productive state operates strictly within the procedural norms laid down for it in the constitutional stages of decision, and even if its provision and financing of genuinely public goods and services represents the most efficient institutional arrangements possible, the individuals who are the final recipients of benefits and the final bearers of costs may feel that they are being coerced. And coerced here in a somewhat different sense than that which must be felt by any person who is required to live up to contractual terms that he has himself agreed to at one time. Even if the contractarian basis for governmental action is acknowledged in the abstract, so long as departures from unanimity are descriptive of the collective decision rules, the individual's sense of being compelled to abide by unacceptable terms must be treated as fact. This sense of coercion is enhanced precisely because of the internal nature of the productive state, precisely because the basis is seen to be contractarian. The individual may accept "rules" enforced by the protective state as being exogenous to his own influence. He abides by law because it is there, and he may see no way that his own behavior can modify this. He may not be so willing to abide by democratically evolved budgets, on either the spending or taxing side, because he is encouraged to consider his own influence on budgetary outcomes, his own participation in democracy at work.

This fiscal frustration with government that is experienced by the citizen necessarily increases as the size of the governmental sector grows, relative to that of the private or market sector of the economy. As government, and notably the central government, commands a larger share of the economy's total resources, as more specific functions are taken over collectively, the citizen's personal benefit-cost criteria are increasingly violated. Consider an example. If government limits itself to an enforcer role, all exchange is private and voluntary. The individual's ability to opt out of any particular agreement guarantees that enforced acceptance of unfavorable terms is minimal. (This principle holds true even if all markets are not fully competitive; the degree of monopolization will, of course, affect the comparability as well as the number of alternatives that each market participant faces.) If the government takes on a productive role, and if it assumes responsibility for the complex exchange process embodied in the provision of public goods, the average or representative citizen must anticipate that he will rarely, if ever, optimally prefer the particular budgetary package that he will be required to enjoy and to pay for. Given almost any budgetary package, the citizen must expect that he would prefer expansion in some items, contractions in others, even within the same revenue constraint. And, overall, he may prefer that the total outlay be larger or smaller than that to which he is subjected. On the taxing side, the citizen will, quite straightforwardly, prefer that his own cost-shares be reduced relative to those of others in the community. As the total size and complexity of the budget increases, the individual may become increasingly disappointed with governmental performance, even if all functions are carried out efficiently in the small.

Individual opportunity losses increase with increasing centralization in the public sector in much the same way as with increasing budget size and complexity. It has long been recognized that the individual's sense of participation in collective choice is relatively greater in localized jurisdictions, rationally so because the influence of a single person on group outcomes is inversely related to group size. A less familiar but still elementary fact is that governmental process is necessarily closer to genuine voluntary exchange at the local level because of the relatively greater freedom of migration. The limits to tax-budgetary exploitation of the individual are reached more quickly in local governmental units than in central governments. Migration thresholds need not be high in a multicommunity national economy that is characterized by high resource mobility, a description that has fitted the United States in the twentieth century.

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