Buchanan & Wagner’s “Democracy in Deficit” and its current applications

Lynne Kiesling

Last week I was honored to spend a couple of days at St. Lawrence University with Steve Horwitz and his students and colleagues. In addition to giving a talk on regulation and technological change in the electricity industry, I gave a guest lecture in an environmental economics class and participated in a reading group that Steve and Jeremy Horpedahl have organized this semester.

In that reading group we discussed Part I of Democracy in Deficit by James Buchanan and Richard Wagner (note if you go to that link you can read the book online, although the hardcover version is quite lovely and high quality). As a non-macroeconomist I have always struggled with the underlying logic of macroeconomics at an aggregate level, and in particular with the logic of Keynesian macroeconomics. I have always had an intuitive sense of my interpretation of macroeconomic models and policy implications, but have never worked through them deeply enough to feel comfortable having a conversation with a macroeconomist (for example, debating Keynesian macroeconomics with my colleague Bob Gordon). The arguments that Buchanan and Wagner develop in Democracy in Deficit give logic and voice to my inchoate ideas.

Steve wrote a concise summary of the Buchanan and Wagner argument in his column in the Freeman today; here’s the nub of the gist:

What Buchanan and Wagner argue is that the legacy of Keynes, whether intended or not, has been to disrupt the old tacitly accepted “fiscal constitution,” by which politicians treated the federal budget largely like a household budget.  Debt was justified for only two basic reasons:  war or similar emergencies and long-term capital expenditures that required large upfront costs.  Such debts were expected to be repaid as soon as possible because long-term indebtedness was considered both economically imprudent and immoral. Why immoral? Because the cost was a burden on future generations that had no say in the matter.

Keynesian economics changed all this by constructing an intellectual justification for viewing the federal budget as a tool for managing the economy rather than a constraint under which politicians operate.  Keynesianism argued that in recessions budget deficits could stimulate aggregate demand and lead to recovery, while in good times surpluses would both prevent excessive growth and pay back the debt.

While plausible in theory, the Keynesian model is institutionally sterile; in other  words, Keynesian models and policy recommendations do not take into account how such models and policies are likely to be implemented in a democratic republic like the U.S. In other words, Democracy in Deficit provides a public choice macroeconomic analysis of Keynesian models and policies. A public choice analysis of Keynesian macroeconomics incorporates (dare I say endogenizes) the objective functions of policymakers, in particular the “vote-seeking” objectives of politicians. That vote seeking means that fiscal constraints are not in the interests of politicians, so they enact deficit-inducing policies to a degree beyond what an institutionally sterile Keynesian model would suggest.

If you combine that incentive with the change in the federal budget from a constraint on politicians to an administrative management tool, you end up with a pretty good model of our current political economy — perpetual deficits instead of counter-cyclical deficits, increasing indebtedness, and an apparent unwillingness among politicians to engage in fiscal responsibility that would reduce our burdens “on future generations that have no say in the matter”.

If you are interested in an accessible analysis of our macro policies, I recommend Democracy in Deficit, as did Will Wilkinson late last week; I echo Will’s conclusion that “Even if you disagree with Buchanan and Wagner about particulars, this book will leave you with a much-improved ability to think through the political economics of fiscal policy.”

Prediction markets for movie box office: Manipulation! Insider Trading! Efficiency! and Twitter!

Michael Giberson

Tyler Cowen links to a story in the New York Times detailing the opposition of the Motion Picture Association of America to two proposed markets for forecasting movie ticket sales.  Of the objections noted in the article, Cowen thinks the key issue for Hollywood is the possibility of a poor market showing making it difficult for a film to get into and stay in theaters.  The article also mentions possible market manipulation and insider trading issues as problems.

Robin Hanson addressed the manipulation arguments a few days ago, “Movie Manipulation“:

My research suggests that speculative markets are remarkably robust to manipulation attempts; the more folks try to manipulate, the more accurate market estimates get on average!  But with limited funding, I’ve only done a limited number of experiments; I can’t prove no one will ever use a speculative market to purposely influence movie perceptions.  And alas this mere possibility of manipulation may seem intolerable.

Part of what the movie industry fears is further loss of influence over pre-release product positioning, but this is clearly an area where “information wants to be free” will overcome the industry’s desire to control the pre-release buzz.

Rumors and reports now spread more efficiently, thanks in part to the internet, and once a film is out the internet gives us “word of mouth on steriods.”  Fast Company reports: “Two researchers at HP Labs, Sitaram Asur and Bernardo Huberman, have discovered that you can actually use Twitter mentions to predict how well a movie will do in it’s first couple weekends of release.”

The Fast Company article notes that Twitter analysis method actually outpredicts the (play money) movie prediction market Hollywood Stock Exchange.  At Midas Oracle, Chris Masse countered, “You could turn Bernardo Huberman’s study around and say that the HSX traders are not yet using Twitter as a source to the full extent possible.”  Now the Twitter angle is public information, that omission will be overcome. (And how soon before Hollywood studios begin mass-Twitter marketing campaigns?)

See also: Deadline,MPAA Organizes Entertainment Community Opposition To Movie Futures Exchange.”