Home > Fiscal Policy, Government Deficit, Taxation > The Corruption in a Democracy

The Corruption in a Democracy

In watching the reporting on the government shutdown, I could not help but be reminded of a comment made by a friend that the ancient Greeks did not regard democracy as a viable form of government. The reason for this view was that the Greeks believed that democracies were inherently corrupt because members of the public would gain access to the public purse by bribing politicians, in one way or another, for subsidies that would line the pockets of the public. The Democrats, and many Republicans, regard all of government spending to be untouchable. In my opinion, many of the spending programs of the government are vote-buying schemes and these are excellent examples of the corruption described by the ancient Greeks. Consider just a few of these spending programs that politicians defend.

Medicare Part D

This is the unfunded entitlement for prescription drugs brought to us by the Republicans during the administration of George W. Bush. Go to the web site for this program and you will notice that the only means-testing in this program is to determine if a person is eligible for extra subsidies if their income is low enough. However everybody is given the subsidy, even the very rich. Does Donald Trump need my help to buy prescription drugs? I think not. This is a vote-buying scheme pure and simple. I can still remember the press reports appearing at the passage of this unfunded entitlement program stating that Republicans were reluctant to go out and discuss the program with their constituents. They should have been ashamed of what they did. It was a disgrace.

Federal Flood Insurance

The federal government provides subsidized flood insurance to the owners of beach-front homes. Are these poor people who own these homes? Last I looked, the poor don’t own beach-front homes. They are owned by the affluent. So in addition to inviting people to live in risky places (this is what economists mean by moral hazard), the insurance program subsidizes the rich. Another example of vote-buying.

Farm Subsidies

I know of no economic theory that explains why these subsidies should exist other than to buy the votes of farmers. Most of these subsidies go to large agribusinesses (the Wall Street Journal once reported that one recipient of these subsidies lived in Washington D.C. where nobody has yet observed a field planted with corn) and so serve no real purpose other than buying back the jobs of politicians.

Fannie Mae and Freddie Mac

These are quasi-public organizations related to the housing industry which have been given substantial bailouts by the taxpayers. There has been talk of eliminating these two organizations but what do you think the home builders and realtors think of these two entities? They see them as beneficial to the housing industry (or themselves) and so would fight any attempt to eliminate these two organizations. It is known that there are other economies where there are no organizations like Fannie Mae and Freddie Mac with home ownership rates comparable to the U.S. This is irrelevant to the realtors and home builders who perceive benefits from the existence of Fannie Mae and Freddie Mac.

I could go on but there is no need to do so. But there is the obvious question to ask: what is it in a democracy that allows the corruption outlined above? The answer is that it goes on in large part because we allow the federal government to run deficits. If the politicians came up with yet another vote-buying scheme but were forced to raise tax rates on somebody to implement the new spending program, the need to raise tax rates would clearly constrain the emergence of new spending programs. Put differently, politicians need not be serious about spending as long as they can run deficits. So a balanced-budget amendment has the benefit of eliminating at least some of the corruption noted by the ancient Greeks.

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Economics One

A blog by John B. Taylor

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