Public Sector Growth: Theories & Influences
Weaknesses in Measuring Lobbyist Influence
It is difficult to measure the influence of lobbyists on public sector action.
Summary of Theories on Public Sector Expansion
Theories on the expansion of the public sector (from an application perspective) include:
- Greater complexity of societies.
- The power of union resources or interest groups.
- Marxist ideology.
Explanatory Theories from a Social Welfare Perspective
These theories refer to structural characteristics, the behavior of politicians and bureaucrats, the existence of fiscal illusion, and so on. They are based on arguments such as:
- Productivity growth in the private sector is lower.
- Politicians and bureaucrats have autonomy to pursue their own interests regardless of voters. They offer policies to specific groups and diffuse costs to stay in power.
The Role of Politicians
The desire to minimize costs in collective decision-making involves delegating responsibilities to politicians because they are professionalized and are supposed to represent the interests of most voters. Economically, political behavior is explained as a case of oligopoly in which a few (politicians) face many (voters). The politician seeks the benefit of the community, but only as long as it guarantees their stay in power. In the electoral process, they look at three variables: unemployment, inflation, and economic growth to achieve electoral support, hence designing their program according to these premises.
Politicians, being better informed than voters, are likely to generate some *political illusion* among voters so that they more clearly perceive the benefits of social policies than the inherent costs. Politicians seek to maximize their own benefit (i.e., the number of votes) to stay in power. Therefore, their actions are oriented toward practical policies whose costs are diffuse (distributed among the whole community) and whose benefits are concentrated (youth, in the case of public housing; the elderly, in the case of pensions, etc.).
In election periods, politicians implement expansionary policies to reduce unemployment and increase the growth rate, even though this may raise inflation. The reason is that voters value changes in unemployment or economic growth more than they value price changes. Once they win the elections, they must address the cost of this expansive policy by controlling inflation.
Proposed solutions to combat the damaging effects of political action related to the electoral cycle are diverse:
- Some believe the degree of state intervention in the economy should be minimal.
- Others believe that providing more information to voters will make them more aware of the consequences of electoral cycles.
- Some opt for a longer duration of legislatures to provide more stability.
- Others advocate for more clearly differentiating the areas of management and politics.
The Role of Bureaucracy
Bureaucracy aims to maximize the budget due to monopoly power in the supply of public services. In social spending, the access to inside information and the ability to exert great influence on politicians allows them to demand a large amount of resources. There is often little concern for improving efficiency.
The Organizational Structure of the Public Sector
The increase in social spending from this perspective has a double meaning:
- The more decentralized the structure, the greater the spending.
- Fiscal illusion causes taxpayers to perceive the real cost of public services as lower when public expenditure is financed mainly through indirect taxes. This leads to greater social spending as costs are underestimated and benefits are overestimated. If the same amount of spending is financed through direct taxes, it can give rise to tax objection movements.