Stephan Haggard 419interfere in sensitive allocational decisions rather than a belief in the primacy
of monetary measures. The actions required to meet monetary targets are usually
fiscal: some combination of increased taxes or nontax revenues and cuts in
expenditures. The principal political dilemma is that no matter how beneficial
these measures may be in the long run for the country as a whole, they entail
the imposition of short-term costs and have distributional implications for
particular groups.
CONTRIBUTIONS AND LIMITS
OF THE NEW POLITICAL ECONOMY
The new, or neoclassical, political economy relies heavily on interest group models
that seek to explain policy, including taxation and expenditure, as the result of
political exchanges between welfare-maximizing constituents and support-
maximizing politicians. On the demand side of the political market are constituents,
conceptualized as individual voters, interest groups, or even bureaucratic groups
within the state itself. The political process consists of spending by these constituents
to influence the size and direction of fiscal redistribution. Rational constituents
will expend resources—on lobbying, political contributions, demonstrations, and
so forth—until the marginal cost of their influence efforts equals the expected
marginal return from securing their desired policy outcome. Where rival
constituencies have conflicting interests, groups expending the most on the influence
attempt will prevail.
Politicians constitute the supply side of the market, though the real “suppliers”
are those groups from whom income and wealth transfers are ultimately sought.
The key insight of the new political economy into fiscal policy is that politicians
view expenditures to their constituents not as costs, but as benefits. They will
thus seek to increase expenditures to constituents to the point at which the political
return is offset by the economic and political costs, including the inflationary
consequences of high budget deficits. The lure of deficits is strengthened by
fundamental asymmetries between spending and taxing decisions: the means of
financing deficits—inflation and borrowing—are less visible than taxation, spread
more widely across the population (inflation), or pushed onto future generations
(borrowing).
The new political economy underlines the incentives facing politicians to spend
and explains puzzles such as the bias against least-cost alternatives and the tendency
for projects to assume unnecessary scale. Ultimately, however, this rent-seeking
approach cannot predict whether central government accounts will be in surplus,
balance, or deficit. Put differently, there is a problem in getting from the microlevel
of a particular expenditure or tax to the macrolevel of aggregate fiscal outcomes.
Discussions of subsidies and state-owned enterprises that draw on rent-seeking
models illustrate this difficulty. Subsidies give politicians an instrument for building
electoral or clientele support. Because they can grow into virtually open-ended
government commitments and are seen as entitlements by their recipients, subsidies
have been a major factor contributing to fiscal deficits in a number of middle-