Abstract
This study revisits the Buchanan-Wagner hypothesis in reference to the deficit-spending dynamics of Turkey in the period 1924 to 2008, during which the government was expanding along with the developing national economy and democracy. The empirical analysis of the hypothesis is based on the autoregressive distributed lag approach to cointegration, which is not only quite new in the literature on the Buchanan-Wagner hypothesis but also superior to other single-equation cointegration approaches. The prevailing empirics for the Buchanan-Wagner hypothesis reveal deficiencies in several respects, as they ignore the mixed orders of integration in regressors, the endogeneity of regressors, and the encompassing dynamic structure in the short and long runs. Within this context, the findings of this study imply the validity of the hypothesis for Turkey, providing empirical evidence on the premise that budget deficits financed by nontax sources are the main driving force behind the continuously increasing public spending in Turkey. This evidence is argued to be a reflection of the fact that the perceived tax price of public goods and services decreases with debtfinanced budget deficits over time.
Highlights
Most of the empirical studies on the Buchanan-Wagner hypothesis (Niskanen 1978, Provopoulos 1982, Tridimas 1985, Khan 1988, Diamond 1989) inherently contain serious econometric deficiencies in the estimation of the theoretical model depicted by Eq 6, because these studies were produced before the advances in the cointegration approach
The conventional empirical test of the Buchanan-Wagner hypothesis is based on the log-linearized form of Eq 6, which originates from the public good demand schedule of a median voter aggregated for society, consistent with the economic theory of majority rule
This causes biased short- and long-run estimates, because the regression coefficients in the long-run relationship given by Eq 8 are estimated by the implicit restrictions of αi = 0 and βi = 0 for i ≥ 1, whereas the short-run relationship given by Eq 9 is estimated by the restrictions π = 0, φs = 0, and ψs = 0 for s ≥ 1, as observed in most of the studies in the literature on the Buchanan-Wagner hypothesis
Summary
The controversy on the size of the public sector is rather old. It matured in the 1960s with the works of the public choice school theoreticians as a response to the so-called “Keynesian biases.” The federal budget deficits of the United States (US) constitute the basis of these works. The roots of the controversy go back to the works of a German political economist, Adolph Wagner (1838-1917), whose contribution is identified as the “law of expanding state activity.”. This “law” refers precisely to regularities in the absolute and relative expansion of the government services produced for communal purposes with the development of emerging industrial societies Buchanan (1967), in which the growing budget size is explained through the link between the individual choice and fiscal institutions in the democratic process This view was embodied further by James M. Since questioning the presence of a relationship running from budget deficits to public spending has been called the Buchanan-Wagner hypothesis in the literature
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