Friday, June 29, 2012

How does democracy manage to survive?

In recent posts I have been discussing the rational irrationality of voters – Bryan Caplan's concept explaining how it can be rational for people to cling to irrational beliefs on political issues because there is a miniscule probability that the vote of any individual will be decisive in changing the result of an election. In my last post I provided some evidence that voter irrationality tends to expand the role of government. People who say that politics is not at all important to them are more likely than others to say that ‘the government should take more responsibility to ensure that everyone is provided for’. Many of these people exercise their right to vote even when there is no compulsion for them to do so.

It is not surprising, therefore, that democratically elected governments have a tendency to take on responsibilities that they can’t cope with. When voters demand that governments take more responsibility to ensure that everyone is provided for politicians have an incentive to respond by increasing government spending and regulatory interventions to help the needy and to protect jobs. If governments don’t raise taxes to cover increased spending, their debts grow until they are eventually unable to meet interest and repayment obligations, or to pay any other bills. If governments keep on raising taxes or imposing additional regulation to ensure that everyone is provided for they must eventually dampen incentives for productive activity to such an extent that incomes (and tax revenues) begin to fall. In either eventuality it seems reasonable to expect voter irrationality to lead to economic collapse and eventually to the collapse of democratic government.

The scenario sketched out above occurs frequently enough, but not as often as might be expected. Democracy seems to have been a fairly robust form of government in many countries, despite the rational irrationality of voters. Why is it so?

Front CoverThere are several possible answers to this question but the one that Joseph Schumpeter gave about 40 years ago in ‘Capitalism, Socialism and Democracy’seems to me to deserve more attention.  Schumpeter suggested that democracy doesn’t actually exist. He provided a definition of democracy consistent with the way most people would think democracy should function and then proceeded to show that democracy doesn’t exist in those terms. He then redefined democracy in a manner more consistent with the way governments that have the ‘democratic’ label attached to them actually function.

Schumpeter’s first definition of democracy was:
‘that institutional arrangement for arriving at political decisions which realizes the common good by making the people itself decide issues through the election of individuals who are to assemble in order to carry out its will’.

That definition seems to me to capture the expectations that most people would have of the way democracy is meant to work. Democracy is often defined simply as ‘government by the people’, but if the people are to govern they must have a collective ‘will’ and a mechanism for this to be carried out to realize a ‘common good’.

 In showing that a democracy of that kind can’t exist Schumpeter made several points:
  • There is no such thing as a common good that all people could agree upon. Differences of principle on questions involving ultimate values cannot be reconciled by rational argument.
  • There is no common will; opinions differ on the means that should be used to pursue agreed objectives.
  • The psychology of crowds and groupthink are opposed to rational consideration of issues. 
  • Incentives for rational decision-making that discipline individuals in their daily life in the home and in business are absent in political decision-making.

Schumpeter placed a lot of emphasis on the final point, explaining that it gives rise to what we now refer to as rational irrationality:
‘All this goes to show that without the initiative that comes from immediate responsibility, ignorance will persist in the face of masses of information however complete and correct. It persists even in the face of the meritorious efforts that are being made to go beyond presenting information and to teach the use of it by means of lectures, classes, discussion groups. Results are not zero. But they are small. People cannot be carried up the ladder.
Thus the citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyses in a way which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again’.

According to Schumpeter, citizens are prone to ‘extra rational or irrational prejudice and impulse’ in political matters. He argued that this made them particularly vulnerable to influence by interest groups. Citizens are more vulnerable to political persuasion than to commercial advertising because they have less opportunity to test the claims that are made.

Schumpeter’s second definition of democracy was:
‘that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote’.

This captures the idea that the central feature of democracy, as actually practiced, is a competition for leadership. Schumpeter argued that democracy could only succeed in those terms if it was constrained in various ways. In particular, he argued that the ‘effective range of political decision should not be extended too far’. He seems to have had in mind parliamentary rules, such as those that ensure the government (political leadership) retains a high degree of overall budgetary control, as well as ‘constitutional’ arrangements that remove aspects of policy administration requiring particular expertise (e.g. monetary policy) from the political arena.

It is interesting that the emergence of stagflation in the 1970s led to fears that democracy might not be able to survive in the longer term unless democratic politics was constrained. (I have in mind particularly the discussion by Friedrich Hayek in 'Law, Legislation and Liberty' Vol.3, Chapter 16.) The economic reforms introduced during the 1980s and 90s reduced such concerns in some countries by giving greater independence to central banks and making governments more accountable for budget outcomes. In Australia, such reforms have taken monetary policy largely out of the political arena and made failure to maintain budget balance a much greater political liability for governments. In my view, further moves should be made in this direction to shield economic policies from political pressures that exploit voter ignorance and irrationality.  For example, better government could be achieved by adoption of a convention that advice from the Productivity Commission will be sought as a matter of course prior to legislative changes in a range of policy areas. I don’t imagine that there would be much opposition from the community at large to adoption of such a convention.

However, in most democratic countries, including Australia, there would be a fairly widespread reluctance to accept Schumpeter's advice that democracy should be constrained to such an extent that the only involvement of citizens is participation in the election of a leader. It would probably be considered laughable these days for an economics professor to try to tell voters that ‘they must understand that, once they have elected an individual, political action is his business and not theirs’.

Joseph Schumpeter probably went too far in claiming that democracy can only succeed if voters refrain from telling politicians what to do after they have been elected. He would have been on safer ground in suggesting that democracy can only succeed if citizens are willing to show some respect for political leaders who take positions that are politically unpopular. It would also be fairly safe to argue, as suggested here a few weeks ago, that political leaders who prepare the ground for reform by attempting to raise the level of public discussion of issues will often be more successful than those who show great courage in attempting to forge ahead ignoring opposition. I doubt whether Paul Keating actually had much success in explaining the J curve to the Australian public (when he was Treasurer in the 1980s) but his attempt to do so probably won him some respect.

 Cartoon by Nicholson from “The Australian” newspaper:

Wednesday, June 27, 2012

How concerned should we be about voter irrationality?

I heard Gary Gray, a minster in the Australian government, hold forth last week about the 1.5 million Australians who have a right to vote but are not on the electoral roll. He referred to this as ‘a blight on our electoral roll and the integrity of our system’. Such comments may be understandable within the context of the compulsory voting system in Australia, but does compulsory voting make sense? Would it not be more sensible to discourage people from voting if they do not see exercising their political rights as having sufficient importance to take the simple steps necessary to enrol and vote?

As I noted in a recent post it can be rational for voters to cling to irrational beliefs on political issues because the cost is low - there is a miniscule probability that the vote of any individual will be decisive in changing the result of an election. This explains the persistence of a wide disparity between views of voters and experts on many issues and why views of voters are often internally inconsistent e.g. simultaneously supporting reductions in government spending while supporting increases in many individual areas of spending.  It seems reasonable to expect that people for whom politics has no importance would be most prone to cling to such irrational positions.

How likely is it that people who have no interest in politics could have a decisive impact on election results? Figure 1, constructed from World Values Surveys in the period 2005-07, suggests that it is very likely. A considerable percentage of people in high-income democracies say that politics is not at all important in their lives. The percentages are relatively high in Italy, France and Britain, and relatively low in Sweden, Norway and Japan.

There is no reason why everyone should view politics as having some importance in their lives. You might expect, however, that people would be unlikely to vote unless forced to if politics had no importance to them. Figure 1 suggests, however, that a relatively high proportion of these people do vote in most of the countries shown.

Some people might suggest that it probably doesn’t make much difference if people vote even when politics has no importance in their lives because random votes would tend to cancel out. Unfortunately, however, there is evidence that the votes of such people are not random. Figure 2 suggests that those for whom politics is ‘not at all important’ are more likely than others to say that ‘the government should take more responsibility to ensure that everyone is provided for’. Just think about that for a moment. How can they expect governments to take on more responsibilities if people like themselves have little interest in politics, which is largely about holding governments accountable for the way they exercise their responsibilities?

Perhaps some readers might be thinking that the people who say that politics is not at all important in their lives might actually take some interest in politics, particularly at election time. After all, some of us sometimes show some interest in sports on TV that we would claim are not at all important in our lives. The results of the World Values Surveys shown in Figure 3 suggest, however, that the extent to which voters are interested in politics is closely related to its importance to them. The Figure has been constructed from responses for the countries shown in Figure 1. (The columns add to 100% on the depth axis.)

Voters who say that politics is not at all important in their lives tend to have relatively low confidence in political parties – 43% saying that they have no confidence at all in political parties, versus 19% for all voters. That might make some readers wonder whether their desire for governments to take on more responsibility could be explained by relatively high confidence in the civil service. While the percentage with a great deal of confidence in the civil service is higher than the average for all voters – 4% versus 3% - the percentage with no confidence at all in the civil service is substantially higher – 18% versus 9%.(The data are for the countries shown in Table 1).

Some other characteristics of voters who say that politics is not at all important in their lives might be of interest. Their self-positioning on the left-right political spectrum is not markedly different from that of other voters. They are less likely to say that democracy is absolutely important (47% versus 60% for all voters) and more likely to say that it is good to have experts make political decisions.  They tend to be disproportionately either young (15-24) or old (65 or older); less well educated; and female (57%). They are less likely to rate the state of their health as very good (24% versus 30% for all voters) and more likely to rate it as poor or very poor (33% versus 24%). They tend to be conservative in their views on social issues (divorce, abortion, homosexuality and prostitution).They have a greater tendency to rate the fight against crime as an important goal (29% versus 19% for all voters). They are less likely than other voters to be members of religious, sport or recreation, or charitable organizations and are less likely to rate friends as very important. They are much less likely than other voters to agree that ‘most people can be trusted (29% versus 46%)
Should restrictions be introduced on the right to vote in an attempt to exclude people who have no interest in politics? It is not obvious how this could be done. Removal of compulsory voting requirements would make sense in Australia as a step in that direction. The experience of other countries suggests, however, that making voting voluntary would not do much to discourage people who have no interest in politics from voting.

It might be desirable to promote a cultural change away from the view that voting is a civic duty towards the view that people should refrain from voting unless they have some interest in politics. Policy outcomes would probably be worse than at present, however, if the political field was left to be fought over by people who are strongly interested in politics because of their links to narrow interest groups. A battle among interest groups could be predicted to benefit the groups that able to marshal their members effectively at the expense of broader community interests.

In order to work satisfactorily, democracies need a substantial proportion of citizens who do not have strong links to narrow interest groups to inform themselves about public policy issues, to take part in public discussion of such issues and to encourage others to do likewise. To the extent that this is happening it can probably be most readily explained in terms of public-spirited identity perceptions – i.e. individuals who see themselves as being the kind of person who does that kind of thing and gaining satisfaction from acting in that way. How could more people be encouraged to do this? 

Friday, June 22, 2012

Should the media be 'fair and balanced' or 'free and transparent'?

Wayne Swan appeared to be speaking like a statesman when he recently said:
‘Nothing could be more important to the quality of our political debate and our national conversation than having fair and balanced reporting.
And to have fair and balanced reporting you do need a degree of independence at the editorial level to make sure that it is not unduly influenced by commercial considerations.’

Swan was discussing whether Gina Rinehart, now a substantial shareholder of Fairfax, should be required to sign a charter of editorial independence as a condition for representation on the Fairfax board of directors. He was fuelling concerns that Rinehart might seek to trash the reputation of the big city dailies – perhaps the Sydney Moaning Herald could become the Sydney Mining Herald – or to close down these loss-making ventures. It seems more reasonable to speculate that Rinehart’s objective is simply to profit directly from her media investment while, at the same time, redressing what she would perceive as editorial bias. 

However, the question that needs to be considered is whether there is some kind of public policy issue involved here, as Swan seems to imply. Alternatively, should politicians view this as a matter for resolution between Rinehart and representatives of other shareholders, taking into account the possible impact of their actions on the reputation of their papers and the views of the journalists’ collectives only to the extent that they consider such matters are relevant?

I think John Roskam, executive director of the IPA, clarified the issues masterfully in the Financial Review (the best masthead owned by Fairfax) this morning:
‘Swan is wrong. Dead wrong. There is something more important than fair and balanced reporting – and that’s free reporting. Let’s be absolutely clear.
Swan’s “fair and balanced” reporting has never existed, doesn’t exist and never will exist. Fairness is entirely in the eye of the beholder. It’s a travesty of the historical record to claim that democracy needs a fair and balanced media’.

A free media involves freedom of ownership, freedom of owners to run their business, freedom of conscience for editors and journalists, and freedom of speech. Everyone should have the freedom to buy and sell shares in media outlets as they wish. The owners of media should have the freedom to dictate editorial policy (or to leave editorial policy to the editors they appoint) irrespective of the wealth of the wealth of the owners or the interests that they represent. Editors and journalists should have the freedom to seek employment with media owners whose views are compatible with their own, or to set up their own media outlets. Owners of different publications should have the freedom to criticize the outputs of other publications.

It is remarkable that some of these freedoms are already restricted in Australia and others are being threatened by the current government.

If there ever was a case that particular media outlets have market power that enables them to exert undue influence on public opinion it has surely evaporated with the internet now providing access to multiple sources of information and opinion. In particular, the influence of media moguls with particular industry or political interests is moderated by the scrutiny of other media players looking for evidence that editorial opinion could be biased. In my view that is a much healthier situation than exists with respect to publicly owned media such as the ABC, where ruling class groupthink thrives despite obvious efforts to promote the appearance of fairness and balance. Media freedom promotes transparency; media regulation promotes opacity.

I wonder whether Wayne Swan would be expressing a similar opinion about the importance of editorial independence for the quality of political debate if the AWU, or some other trade union, attempted to take a controlling interest in Fairfax or some other media company. 

Sunday, June 17, 2012

When is a sense of entitlement justified?

I have been having a discussion with Jim Belshaw about the meaning of entitlement, stemming from my recent post ‘What are Australians angry about?’  On Saturday Jim wrote:
‘It seems to me that that word entitlements has become, to use an ugly but useful modern term, a code word for a much broader ideological debate. Entitlements used to mean the fact of having a right to something or the amount to which a person has a right. This is the neutral meaning. Now it has acquired a heavy semantic overload’.

I agree. When I wrote: ‘I think the problem is the growth of a sense of entitlement to be looked after by governments’, I was referring to growth in what I see as an unwarranted sense of entitlement. 

It seems to me that we have almost reached a stage where people say: ‘I’m unhappy, so what’s the government going to do about it?’ Governments seem only too willing to encourage this. A recent government intervention in Australia involves screening kids for mental illness at three years of age. No doubt doctors will discover that a lot of kids are unhappy and then ‘aorta politics’ will take over. We will soon hear a lot more people saying ‘aorta’ be doing more to help us. 

However, people are sometimes justified in expressing a sense of entitlement – or righteous indignation - when something they value is taken away from them. It would probably be reasonable to guess that moral intuitions about natural rights stem from the efforts of our tribal ancestors to protect their food supplies. (Incidentally, this doesn’t seem to be covered by Jon Haidt’s schema of moral foundations discussed in my last post.) A sense of entitlement is also related to our sense of fairness and our desire to punish people (including political leaders) who have shown themselves to be untrustworthy.

It seems to me that the central issue in considering whether a sense of entitlement is justified is whether the expectations involved are reasonable. It might be useful to attempt to rank expressions of entitlement in terms of the reasonableness of the expectations involved.

Property rights deserve high ranking in terms of the reasonableness of expectations that they will be protected. There is even a constitutional provision, as readers who have seen ‘The Castle’ would know, that when the Commonwealth acquires property compensation must be ‘on just terms’. Property rights are constrained in various ways. Land owners do not usually own the minerals beneath their land in this country, so it is hardly reasonable for them to expect to be able to prevent mining on their properties. But it is reasonable for them to expect compensation for the costs and inconveniences they experience when mining takes place. I would have thought land owners could have a reasonable expectation of being able to do what they wish with trees growing on their properties, but governments have taken a different view.

Another area deserving high ranking in terms of reasonableness of expectations concerns contractual obligations entered into by governments.  Australian governments have a good reputation of meeting interest and repayment obligations when they borrow money (despite Jack Lang's efforts to tarnish this reputation in the 1930s). Australians can have a reasonable expectation that governments in this country will meet obligations to employees. Until recently, Australian governments also had a pretty good record in not raising mineral royalty charges beyond levels agreed with mining companies prior to mining, but sovereign risk has escalated since the Commonwealth government has acted to appropriate an additional slice of mineral rents. In my view mining companies have justification for their sense of entitlement to the rents that have been taken from them. It is reasonable for households who have installed solar heating in response to excessively generous incentive programs to expect government agencies to meet their contractual obligations. In my view, householders in New South Wales had justification to be enraged the plans of the newly elected O’Farrell government to renege on those contracts.

Further down the ranking in terms of reasonableness of expectations - although still deserving fairly high ranking in my view - are the political obligations accepted by governments over many decades for provision of various social welfare programs. Age pensions are a prime example. It would be unreasonable, however, to expect that governments would never under any circumstances reduce the benefits provided under such programs. The assistance provided must be limited ultimately by what the community can afford.

Further down the ranking there are programs like the provision of tariff assistance to industries. This arose as a result of rent-seeking by industry, misguided government planning and a view fostered by governments over many decades that assistance would be provided to all industries on a ‘needs basis’. It is the best example of a government-fostered entitlement mentality that I can think of in Australia. Yet, it is understandable that many of those who benefited from this assistance would feel a sense of grievance when it was withdrawn. The assistance regime stayed in place for many decades with little complaint – except for a few people in efficient export industries that were adversely affected, some academics and civil servants, and one politician (Bert Kelly). When assistance was reduced, the culpability of governments in fostering the unreasonable expectation that ‘infant industry’ and ‘temporary’ protection could last forever was recognized by making reductions gradual (over about half a century in the case of the car industry) and providing adjustment assistance in some instances.

As we go further down the ranking of reasonable expectations we come to incentive programs of various kinds. One example that comes to mind is the provision of taxation benefits to encourage investment in private superannuation. I noted in 2010 that this had resulted in total government support for retirees being remarkably similar across a wide range of income levels, despite means testing of pensions. The taxation arrangements for superannuation provide perverse incentives for people to retire early, splurge lump sums and live off accumulated wealth until they become eligible for the aged pension. There is no basis for anyone to have a reasonable expectation that such rorts would be allowed to continue indefinitely. It seems to me that those complaining about recent government action to limit the tax concession are showing an unwarranted sense of entitlement.

Election promises are at the bottom of my ranking of reasonable expectations. However, some election promises do appear to encourage reasonable expectations of what a government might do or not do. For example, Julia Gillard’s promise that ‘there will be no carbon tax under a government I lead' did not sound like a ‘non-core promise’ (to use a phrase made famous by John Howard). At the very bottom of the ranking of reasonable expectations, in my view, are the expectations fostered by a statement by Barry O’Farrell that his party had ‘no plans’ to privatise various things. Rather than a promise, that form of words seems intended to convey a refusal to make a promise.

Having completed this ranking, I now wonder whether election promises deserve higher ranking. The ranking provided above is largely in terms of what seems reasonable to expect on the basis of experience. Political promises probably deserve higher ranking in terms of the standards it should be reasonable to expect of our politicians. I don’t think that people are displaying an unwarranted sense of entitlement when they express disgust with politicians who break promises.