Who are the volunteers in the battle against budget deficits?

Abstract

Individuals differ in the net benefits that they receive from government activity depending on their taste for public goods, on the taxes that they pay, and on government demand for goods produced by specific factors that they own. Concentrating on ownership of specific factors as the major source of heterogeneity of the population, it is argued that deficit reduction will be decided on the basis of special economic interests rather than on wider macroeconomic issues. This study attempts to quantify the public-choice decision concerning a reduction in government expenditures which, in full equilibrium, would ‘crowd in’ an equal amount of investment expenditures. Using the 1977 U.S. input-output tables, each of the 85 industries is identified as a potential net gainer or loser of output as variable factors are reallocated in the wake of an assumed 10% reduction in federal government expenditures on goods and services (i.e., $14.3 billion). At one extreme is the military hardware industry as the largest loser and at the other extreme is the new construction industry as the largest gainer. The 90.5 million workers in these 85 industries are assumed to have some ‘attachment’ to their current industry and therefore vote for or against deficit reduction on the basis of their self-interest. It is found that the median voter experiences a net loss. Introducing voting costs reinforces this result because losses are more concentrated than gains. The paper ends with an attempt to identify characteristics that lead to high dependence on government contracts: they are labor-intensiveness and the wage rate.