The Collapse of Venezuela

The idea that politicians may pursue inefficient policies to strengthen their chance to stay in power has a long history. The book of Isaiah describes the rulers of Judah as corrupt “companions of thieves” who “do not bring justice to the fatherless, and the widow’s cause does not come to them” (Isaiah 1:1-31). In the first century BC, the Roman Tribune Clodius passed a law promising a free corn dole to all male citizens; the law led to the draining of the Roman treasury but allowed Clodius to reduce the power of magistrates and send his rival Cicero into exile (Tatum 1999; Watts 2018, p. 209). Holy Roman Empire princes prepared for the Thirty Years’ War by paying for mercenaries with debased currency, throwing early seventeenth-century Europe into a competitive hyperinflation (Kindleberger 1991).

The view that governments should be viewed not as altruistic social planners but as spaces where political actors pursue their own self-interest, leading to policy decisions which are often neither economically optimal nor representative of the popular will, was brought into mainstream neoclassical economics through the contributions of the Virginia school of public choice (Buchanan and Tullock 1962; Olson 1965; Niskanen 1971). Much of the work in this tradition saw electoral politics as inextricably linked with suboptimal economic outcomes, positing that politicians would systematically try to fool voters or use the political system as a smokescreen to deviate resources to special interests (Tullock 1983; Tollison 1988; Magee, Brock and Young 1989). An alternate vision, associated with the University of Chicago economics department, viewed political competition as leading to convergence to efficient outcomes (Stigler 1971; Becker 1976).

Many contributions of the public choice school were based on the premise that voters were irrational and that politicians could systematically deceive them. For example, the earliest political business cycle models argued that the government would have an incentive to pursue expansionary policies by exploiting a short-run Philips curve to generate economic expansions ahead of elections (Nordhaus 1975). In the 1980s and 1990s, scholars working in the rational-choice tradition explored ways to make the findings of systematic politically induced policy distortions consistent with the hypothesis of voter rationality. Signaling models were used to show that under asymmetric information, rational voters could be tricked into believing that some policymakers were more competent than they actually were. For example, Rogoff and Siebert (1988) showed that policymakers could use inflationary financing ahead of elections to pay for a given level of public spending at lower tax rates; voters, uncertain as to whether these lower tax rates were due to the use of inflationary financing or greater policymaker competence in turning tax revenue into public goods, would be more likely to vote for those who implemented distortionary policies ahead of elections. Alesina and Tabellini (1990) showed that under electoral alternation, policymakers could accumulate debt strategically to constrain the choices of their successors, leading governments to incur suboptimally high levels of debt. Coate and Morris (1995) established that politicians could use inefficient public spending projects to transfer income to special interests when voters were uncertain as to the returns to public investment. They did so because voters would be less likely to punish a politician for carrying out a project of uncertain returns than for directly transferring funds to the special interest – even though the direct transfer to the special interest would, strictly speaking, be more efficient.

Some contributions to the political economy literature explicitly bring in the distribution of rewards between losers and winners of the political contest and link it to the likelihood of inefficient outcomes. Alesina and Drazen (1991) model macroeconomic stabilization decisions as the outcome of a war of attrition between groups that defend alternative adjustment programs which differ in the distribution of the costs of adjustment between groups. When the costs of adjustments are equally borne among groups, then stabilization occurs immediately; the more unequal the distribution of costs, the longer the delay of stabilization and the cumulative cost of distortions from not stabilizing. Fernandez and Rodrik (1991) show that when there is uncertainty about the distribution of benefits from reform, efficiency-enhancing reforms may be rejected even when they benefit most people. This will happen when there are large groups that are uncertain as to whether they will be net gainers or losers from reform. In this case, guaranteeing a more egalitarian distribution of the benefits of reform can ensure passage of the reform and the resulting increases in economic efficiency.

(excerpted from chapter 3)