Should Fiscal Policy be Set by Politicians?

Transcription

1 Should Fiscal Policy be Set by Politicians? E. Maskin Harvard University Jean Monnet Lecture European Central Bank Frankfurt September 29, 2016

2 European Union an enormous success 2

3 European Union an enormous success led to unprecedented peace 3

4 European Union an enormous success led to unprecedented peace except for war in former Yugoslavia (civil war) no armed conflict in Europe for over 70 years 4

5 European Union an enormous success led to unprecedented peace except for war in former Yugoslavia (civil war) no armed conflict in Europe for over 70 years led to unprecedented prosperity 5

6 European Union an enormous success led to unprecedented peace except for war in former Yugoslavia (civil war) no armed conflict in Europe for over 70 years led to unprecedented prosperity Europe in ruins after Second World War 6

7 European Union an enormous success led to unprecedented peace except for war in former Yugoslavia (civil war) no armed conflict in Europe for over 70 years led to unprecedented prosperity Europe in ruins after Second World War now GDP/capita in EU is about $34,000/head 7

8 European Union an enormous success led to unprecedented peace except for war in former Yugoslavia (civil war) no armed conflict in Europe for over 70 years led to unprecedented prosperity Europe in ruins after Second World War now GDP/capita in EU is about $34,000/head GDP/capita in EMU countries is $38,000/head 8

9 European Union an enormous success led to unprecedented peace except for war in former Yugoslavia (civil war) no armed conflict in Europe for over 70 years led to unprecedented prosperity Europe in ruins after Second World War now GDP/capita in EU is about $34,000/head GDP/capita in EMU countries is $38,000/head that s better than any other region of the world except North America 9

10 Within EU, European Monetary Union especially successful 10

11 Within EU, European Monetary Union especially successful single currency promoted 11

12 Within EU, European Monetary Union especially successful single currency promoted higher GDP/capita 12

13 Within EU, European Monetary Union especially successful single currency promoted higher GDP/capita more trade 13

14 Within EU, European Monetary Union especially successful single currency promoted higher GDP/capita more trade more growth 14

15 Within EU, European Monetary Union especially successful single currency promoted higher GDP/capita more trade more growth European Central Bank important institution in success 15

16 Within EU, European Monetary Union especially successful single currency promoted higher GDP/capita more trade more growth European Central Bank important institution in success stabilizing influence similar to Federal Reserve in US 16

17 Within EU, European Monetary Union especially successful single currency promoted higher GDP/capita more trade more growth European Central Bank important institution in success stabilizing influence similar to Federal Reserve in US provided crucial liquidity and helped prevent deflation in the aftermath of financial crisis 17

18 Within EU, European Monetary Union especially successful single currency promoted higher GDP/capita more trade more growth European Central Bank important institution in success stabilizing influence similar to Federal Reserve in US provided crucial liquidity and helped prevent deflation in the aftermath of financial crisis recent recessions in Europe likely much worse without the Bank 18

19 But serious flaw in design of EMU 19

20 But serious flaw in design of EMU although monetary policy (setting interest rates and money supply) has been centralized - - in hands of ECB 20

21 But serious flaw in design of EMU although monetary policy (setting interest rates and money supply) has been centralized - - in hands of ECB no corresponding centralization of fiscal policy (taxation, public spending, debt) 21

22 Flaw sharply exposed after financial crisis 22

23 Flaw sharply exposed after financial crisis debt crises and bailouts in Greece only most dramatic example 23

24 Flaw sharply exposed after financial crisis debt crises and bailouts in Greece only most dramatic example EU slow to react to these crises and reactions not fully adequate 24

25 Flaw sharply exposed after financial crisis debt crises and bailouts in Greece only most dramatic example EU slow to react to these crises and reactions not fully adequate fact that monetary policy was centralized made things worse for Greece 25

26 Flaw sharply exposed after financial crisis debt crises and bailouts in Greece only most dramatic example EU slow to react to these crises and reactions not fully adequate fact that monetary policy was centralized made things worse for Greece when got into debt trouble couldn t devalue currency 26

27 since 2008, some steps taken to unify European fiscal policy 27

28 since 2008, some steps taken to unify European fiscal policy but fair to say that fiscal policy still far less consolidated than monetary policy 28

29 So, what should be done? 29

30 So, what should be done? will argue that success of ECB provides model for fiscal policy 30

31 So, what should be done? will argue that success of ECB provides model for fiscal policy specifically, create a nonpolitical body that has power to: 31

32 So, what should be done? will argue that success of ECB provides model for fiscal policy specifically, create a nonpolitical body that has power to: set binding spending and revenue targets in member countries 32

33 So, what should be done? will argue that success of ECB provides model for fiscal policy specifically, create a nonpolitical body that has power to: set binding spending and revenue targets in member countries then up to countries how to meet targets 33

34 So, what should be done? will argue that success of ECB provides model for fiscal policy specifically, create a nonpolitical body that has power to: set binding spending and revenue targets in member countries then up to countries how to meet targets make fiscal transfers across member countries 34

35 So, what should be done? will argue that success of ECB provides model for fiscal policy specifically, create a nonpolitical body that has power to: set binding spending and revenue targets in member countries then up to countries how to meet targets make fiscal transfers across member countries that is, power to set fiscal parameters taken out of politicians hands and given to technocrats 35

36 will give formal rationale for proposal in a little while 36

37 will give formal rationale for proposal in a little while but first let me try to justify it informally 37

38 in democracy, three ways of making public decisions 38

39 in democracy, three ways of making public decisions direct democracy 39

40 in democracy, three ways of making public decisions direct democracy public makes decisions itself 40

41 in democracy, three ways of making public decisions direct democracy public makes decisions itself representative democracy 41

42 in democracy, three ways of making public decisions direct democracy public makes decisions itself representative democracy public officials make decisions 42

43 in democracy, three ways of making public decisions direct democracy public makes decisions itself representative democracy public officials make decisions officials are accountable public can throw them out of office 43

44 in democracy, three ways of making public decisions direct democracy public makes decisions itself representative democracy public officials make decisions officials are accountable public can throw them out of office bureaucracy 44

45 in democracy, three ways of making public decisions direct democracy public makes decisions itself representative democracy public officials make decisions officials are accountable public can throw them out of office bureaucracy public officials make decisions 45

46 in democracy, three ways of making public decisions direct democracy public makes decisions itself representative democracy public officials make decisions officials are accountable public can throw them out of office bureaucracy public officials make decisions officials are unaccountable cannot be thrown out of office by public 46

47 direct democracy 47

48 direct democracy goes back to ancient Athens (if not earlier) 48

49 direct democracy goes back to ancient Athens (if not earlier) plays role in most modern democracies 49

50 direct democracy goes back to ancient Athens (if not earlier) plays role in most modern democracies most notorious recent example: vote by U.K. to leave EU (Brexit) 50

51 direct democracy goes back to ancient Athens (if not earlier) plays role in most modern democracies most notorious recent example: vote by U.K. to leave EU (Brexit) referenda used quite frequently in Switzerland and some U.S. states (e.g., California) 51

52 direct democracy goes back to ancient Athens (if not earlier) plays role in most modern democracies most notorious recent example: vote by U.K. to leave EU (Brexit) referenda used quite frequently in Switzerland and some U.S. states (e.g., California) but even in Switzerland and California, direct democracy used for only tiny fraction of public decisions 52

53 direct democracy goes back to ancient Athens (if not earlier) plays role in most modern democracies most notorious recent example: vote by U.K. to leave EU (Brexit) referenda used quite frequently in Switzerland and some U.S. states (e.g., California) but even in Switzerland and California, direct democracy used for only tiny fraction of public decisions good reasons for that 53

54 Public officials more expert in public decision-making than ordinary citizens 54

55 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it 55

56 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it specialize in it (for many, a full-time job) 56

57 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it specialize in it (for many, a full-time job) learn by training and by doing 57

58 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it specialize in it (for many, a full-time job) learn by training and by doing have greater incentive to be expert 58

59 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it specialize in it (for many, a full-time job) learn by training and by doing have greater incentive to be expert ordinary citizen has little effect as individual on public decisions 59

60 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it specialize in it (for many, a full-time job) learn by training and by doing have greater incentive to be expert ordinary citizen has little effect as individual on public decisions so why incur time and effort to become skilled and informed? 60

61 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it specialize in it (for many, a full-time job) learn by training and by doing have greater incentive to be expert ordinary citizen has little effect as individual on public decisions so why incur time and effort to become skilled and informed? thus, representative democracy has big advantages over direct democracy 61

62 Public officials more expert in public decision-making than ordinary citizens selected (or self-selected) for their ability and interest in it specialize in it (for many, a full-time job) learn by training and by doing have greater incentive to be expert ordinary citizen has little effect as individual on public decisions so why incur time and effort to become skilled and informed? thus, representative democracy has big advantages over direct democracy J. Schumpeter: The private citizen expends less disciplined effort on mastering a political problem than he expends on a game of bridge 62

63 in democracies, many public officials accountable (have to run for reelection) 63

64 in democracies, many public officials accountable (have to run for reelection) in Europe, members of national legislatures and European Parliament 64

65 in democracies, many public officials accountable (have to run for reelection) in Europe, members of national legislatures and European Parliament French President 65

66 in democracies, many public officials accountable (have to run for reelection) in Europe, members of national legislatures and European Parliament French President but many officials not publicly accountable 66

67 in democracies, many public officials accountable (have to run for reelection) in Europe, members of national legislatures and European Parliament French President but many officials not publicly accountable permanent secretaries in U.K. 67

68 in democracies, many public officials accountable (have to run for reelection) in Europe, members of national legislatures and European Parliament French President but many officials not publicly accountable permanent secretaries in U.K. European Commissioners 68

69 in democracies, many public officials accountable (have to run for reelection) in Europe, members of national legislatures and European Parliament French President but many officials not publicly accountable permanent secretaries in U.K. European Commissioners President of ECB 69

70 What induces public officials to act on behalf of public? 70

71 What induces public officials to act on behalf of public? (1) desire to be reelected / continue to hold power 71

72 What induces public officials to act on behalf of public? (1) desire to be reelected / continue to hold power if doesn t perform well, thrown out of office 72

73 What induces public officials to act on behalf of public? (1) desire to be reelected / continue to hold power if doesn t perform well, thrown out of office but motive doesn t apply to unaccountable officials 73

74 What induces public officials to act on behalf of public? (1) desire to be reelected / continue to hold power if doesn t perform well, thrown out of office but motive doesn t apply to unaccountable officials (2) desire to carry out agenda 74

75 What induces public officials to act on behalf of public? (1) desire to be reelected / continue to hold power if doesn t perform well, thrown out of office but motive doesn t apply to unaccountable officials (2) desire to carry out agenda wants to be remembered for accomplishing agenda 75

76 What induces public officials to act on behalf of public? (1) desire to be reelected / continue to hold power if doesn t perform well, thrown out of office but motive doesn t apply to unaccountable officials (2) desire to carry out agenda wants to be remembered for accomplishing agenda wouldn t need accountability if agenda coincided with maximizing social welfare 76

77 What induces public officials to act on behalf of public? (1) desire to be reelected / continue to hold power if doesn t perform well, thrown out of office but motive doesn t apply to unaccountable officials (2) desire to carry out agenda wants to be remembered for accomplishing agenda wouldn t need accountability if agenda coincided with maximizing social welfare official may have objective different from social welfare (noncongruence) 77

78 Possibility of noncongruence implies representative democracy (requiring reelection) has two potential benefits to public over bureaucracy: 78

79 Possibility of noncongruence implies representative democracy (requiring reelection) has two potential benefits to public over bureaucracy: (1) may induce official to act on behalf of public (even if noncongruent) 79

80 Possibility of noncongruence implies representative democracy (requiring reelection) has two potential benefits to public over bureaucracy: (1) may induce official to act on behalf of public (even if noncongruent) (2) allows public to weed out official whose interests shown to be noncongruent with theirs 80

81 But accountability also has serious drawback: 81

82 But accountability also has serious drawback: official may pander to public opinion in order to gain reelection 82

83 But accountability also has serious drawback: official may pander to public opinion in order to gain reelection accountability may discourage using expertise that representative democracy premised on 83

84 possibility of pandering means that bureaucracy may be better for public s welfare than representative democracy 84

85 possibility of pandering means that bureaucracy may be better for public s welfare than representative democracy when is bureaucracy likely to be better? 85

86 possibility of pandering means that bureaucracy may be better for public s welfare than representative democracy when is bureaucracy likely to be better? when public has hard time judging outcome of policy 86

87 possibility of pandering means that bureaucracy may be better for public s welfare than representative democracy when is bureaucracy likely to be better? when public has hard time judging outcome of policy effects of policy are complicated and/or stochastic 87

88 possibility of pandering means that bureaucracy may be better for public s welfare than representative democracy when is bureaucracy likely to be better? when public has hard time judging outcome of policy effects of policy are complicated and/or stochastic effects are delayed 88

89 Hard for public to judge effect of monetary policy 89

90 Hard for public to judge effect of monetary policy raising or lowering interest rates has a multidimensional and complex effect on economy 90

91 Hard for public to judge effect of monetary policy raising or lowering interest rates has a multidimensional and complex effect on economy other things affect economy too, so role of monetary policy not obvious 91

92 Hard for public to judge effect of monetary policy raising or lowering interest rates has a multidimensional and complex effect on economy other things affect economy too, so role of monetary policy not obvious most important effects of policy often felt only after considerable lag 92

93 Hard for public to judge effect of monetary policy raising or lowering interest rates has a multidimensional and complex effect on economy other things affect economy too, so role of monetary policy not obvious most important effects of policy often felt only after considerable lag Same true of fiscal policy 93

94 Hard for public to judge effect of monetary policy raising or lowering interest rates has a multidimensional and complex effect on economy other things affect economy too, so role of monetary policy not obvious most important effects of policy often felt only after considerable lag Same true of fiscal policy raising or lowering public spending has complex and multiple effects on macroeconomy 94

95 Hard for public to judge effect of monetary policy raising or lowering interest rates has a multidimensional and complex effect on economy other things affect economy too, so role of monetary policy not obvious most important effects of policy often felt only after considerable lag Same true of fiscal policy raising or lowering public spending has complex and multiple effects on macroeconomy often not felt (or at least not measured) for years 95

96 Hard for public to judge effect of monetary policy raising or lowering interest rates has a multidimensional and complex effect on economy other things affect economy too, so role of monetary policy not obvious most important effects of policy often felt only after considerable lag Same true of fiscal policy raising or lowering public spending has complex and multiple effects on macroeconomy often not felt (or at least not measured) for years e.g. Obama stimulus plan in 2009 was not judged success by most economists until 3 or 4 years later 96

97 So far, nothing to distinguish Europe from other democracies, e.g., U.S. 97

98 So far, nothing to distinguish Europe from other democracies, e.g., U.S. but additional problem with current fiscal system in Europe: 98

99 So far, nothing to distinguish Europe from other democracies, e.g., U.S. but additional problem with current fiscal system in Europe: if Chancellor Merkel argues that Greece should be bailed out (or not bailed out) 99

100 So far, nothing to distinguish Europe from other democracies, e.g., U.S. but additional problem with current fiscal system in Europe: if Chancellor Merkel argues that Greece should be bailed out (or not bailed out) she may make argument on basis of what is good for Europe 100

101 So far, nothing to distinguish Europe from other democracies, e.g., U.S. but additional problem with current fiscal system in Europe: if Chancellor Merkel argues that Greece should be bailed out (or not bailed out) she may make argument on basis of what is good for Europe but her own constituents are only in Germany 101

102 So far, nothing to distinguish Europe from other democracies, e.g., U.S. but additional problem with current fiscal system in Europe: if Chancellor Merkel argues that Greece should be bailed out (or not bailed out) she may make argument on basis of what is good for Europe but her own constituents are only in Germany so has strong reason to ignore what is good for Europe and focus on Germany 102

103 So far, nothing to distinguish Europe from other democracies, e.g., U.S. but additional problem with current fiscal system in Europe: if Chancellor Merkel argues that Greece should be bailed out (or not bailed out) she may make argument on basis of what is good for Europe but her own constituents are only in Germany so has strong reason to ignore what is good for Europe and focus on Germany not a problem that President Obama faced when deciding on stimulus plan 103

104 Model 104

105 Model 2 periods 105

106 Model 2 periods period 1: decision between a and b 106

107 Model 2 periods period 1: decision between a and b period 2: decision between a and b 107

108 Model 2 periods period 1: decision between a and b period 2: decision between a and b a and b need not be describable in advance 108

109 Model 2 periods period 1: decision between a and b period 2: decision between a and b a and b need not be describable in advance need not be same in periods 1 and 2 109

110 will assume electorate homogeneous 110

111 will assume electorate homogeneous alternatively, electorate heterogeneous but maximizing welfare of majority maximizing social welfare 111

112 will assume electorate homogeneous alternatively, electorate heterogeneous but maximizing welfare of majority maximizing social welfare electorate 112

113 will assume electorate homogeneous alternatively, electorate heterogeneous but maximizing welfare of majority maximizing social welfare electorate gets payoff 1 from each right decision 113

114 will assume electorate homogeneous alternatively, electorate heterogeneous but maximizing welfare of majority maximizing social welfare electorate gets payoff 1 from each right decision gets payoff 0 from each wrong decision 114

115 In each period p = prob that electorate attaches to a being right choice 115

116 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice 116

117 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little 117

118 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little if p 1, electorate knows a lot 118

119 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little if p 1, electorate knows a lot magnitude of p reflects amount of information that electorate has 119

120 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little if p 1, electorate knows a lot magnitude of p reflects amount of information that electorate has likely to be low for technical decisions 120

121 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little if p 1, electorate knows a lot magnitude of p reflects amount of information that electorate has likely to be low for technical decisions monetary policy 121

122 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little if p 1, electorate knows a lot magnitude of p reflects amount of information that electorate has likely to be low for technical decisions monetary policy tax policy 122

123 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little if p 1, electorate knows a lot magnitude of p reflects amount of information that electorate has likely to be low for technical decisions monetary policy tax policy likely to be high for matters of values 123

124 In each period p = prob that electorate attaches to a being right choice Assume p ½; a is popular choice if p ½, electorate knows little if p 1, electorate knows a lot magnitude of p reflects amount of information that electorate has likely to be low for technical decisions monetary policy tax policy likely to be high for matters of values gay rights 124

125 under direct democracy, electorate itself chooses between a and b (and so a will be chosen) 125

126 under direct democracy, electorate itself chooses between a and b (and so a will be chosen) if official makes decision, then 126

127 under direct democracy, electorate itself chooses between a and b (and so a will be chosen) if official makes decision, then π = prob that official is congruent with electorate (has same preference ranking of a and b as electorate) 127

128 under direct democracy, electorate itself chooses between a and b (and so a will be chosen) if official makes decision, then π = 1 π = prob that official is congruent with electorate (has same preference ranking of a and b as electorate) prob that official has noncongruent (opposite) preferences 128

129 Assume π ½ 129

130 Assume π ½ magnitude of π 130

131 Assume π ½ magnitude of π reflects ability of nominator to screen officials 131

132 official knows which action best for her (and which maximizes society s welfare) 132

133 official knows which action best for her (and which maximizes society s welfare) reflects her expertise 133

134 official knows which action best for her (and which maximizes society s welfare) reflects her expertise her payoff depends on 134

135 official knows which action best for her (and which maximizes society s welfare) reflects her expertise her payoff depends on her decision 135

136 official knows which action best for her (and which maximizes society s welfare) reflects her expertise her payoff depends on her decision gets payoff G(>0) from choosing preferred action 136

137 official knows which action best for her (and which maximizes society s welfare) reflects her expertise her payoff depends on her decision gets payoff G(>0) from choosing preferred action gets payoff 0 from choosing other action 137

138 official knows which action best for her (and which maximizes society s welfare) reflects her expertise her payoff depends on her decision gets payoff G(>0) from choosing preferred action gets payoff 0 from choosing other action her benefit from being in office: R 138

139 official knows which action best for her (and which maximizes society s welfare) reflects her expertise her payoff depends on her decision gets payoff G(>0) from choosing preferred action gets payoff 0 from choosing other action her benefit from being in office: R payoff from holding power 139

140 official knows which action best for her (and which maximizes society s welfare) reflects her expertise her payoff depends on her decision gets payoff G(>0) from choosing preferred action gets payoff 0 from choosing other action her benefit from being in office: R payoff from holding power perks of office 140

141 Official in office for 2 periods has payoff U1+ R+ U2 + R, 141

142 Official in office for 2 periods has payoff U1+ R+ U2 + R, where U i = payoff from period i decision (G or 0) 142

143 After period 1, electorate 143

144 After period 1, electorate learns whether first period decision was right or not with probability q 144

145 After period 1, electorate learns whether first period decision was right or not with probability q learns nothing with probability 1 q 145

146 After period 1, electorate learns whether first period decision was right or not with probability q learns nothing with probability 1 q if official accountable, official has to run for reelection 146

147 After period 1, electorate learns whether first period decision was right or not with probability q learns nothing with probability if official accountable, official has to run for reelection if loses, replaced by official who is congruent with prob π 1 q 147

148 After period 1, electorate learns whether first period decision was right or not with probability q learns nothing with probability if official accountable, official has to run for reelection if loses, replaced by official who is congruent with prob π 1 q if official unaccountable, remains in office for second period 148

149 Case I: q 0 (electorate gets little information about optimality of first-period decision) 149

150 Case I: q 0 (electorate gets little information about optimality of first-period decision) this likely when decisions are complicated and stochastic 150

151 Case I: q 0 (electorate gets little information about optimality of first-period decision) this likely when decisions are complicated and stochastic effects delayed 151

152 Case I: q 0 (electorate gets little information about optimality of first-period decision) this likely when decisions are complicated and stochastic effects delayed under direct democracy, electorate chooses a or b itself expected welfare DD = W = 2 p 152

153 Case I: q 0 (electorate gets little information about optimality of first-period decision) this likely when decisions are complicated and stochastic effects delayed under direct democracy, electorate chooses a or b itself expected welfare under bureaucracy W B = 2π DD = W = 2 p 153

154 under representative democracy 154

155 under representative democracy in unique* pure-strategy equilibrium, official chooses a in first period regardless of her preferences or its optimality * assuming small proportion of officials always choose favorite alternative 155

156 under representative democracy in unique* pure-strategy equilibrium, official chooses a in first period regardless of her preferences or its optimality this is pandering * assuming small proportion of officials always choose favorite alternative 156

157 under representative democracy in unique* pure-strategy equilibrium, official chooses a in first period regardless of her preferences or its optimality this is pandering official reelected if and only if she chose a * assuming small proportion of officials always choose favorite alternative 157

158 under representative democracy in unique* pure-strategy equilibrium, official chooses a in first period regardless of her preferences or its optimality this is pandering official reelected if and only if she chose a suppose she prefers b * assuming small proportion of officials always choose favorite alternative 158

159 under representative democracy in unique* pure-strategy equilibrium, official chooses a in first period regardless of her preferences or its optimality this is pandering official reelected if and only if she chose a suppose she prefers b 0 + R+ G+ R if she chooses a > G+ R if chooses b * assuming small proportion of officials always choose favorite alternative 159

160 under representative democracy in unique* pure-strategy equilibrium, official chooses a in first period regardless of her preferences or its optimality this is pandering official reelected if and only if she chose a suppose she prefers b 0 + R+ G+ R if she chooses a so will pander > G+ R if chooses b * assuming small proportion of officials always choose favorite alternative 160

161 under representative democracy in unique* pure-strategy equilibrium, official chooses a in first period regardless of her preferences or its optimality this is pandering official reelected if and only if she chose a suppose she prefers b 0 + R+ G+ R if she chooses a so will pander DD W = p+ π > G+ R if chooses b * assuming small proportion of officials always choose favorite alternative 161

162 to summarize 162

163 to summarize DD W = 2 p B W = 2π RD W = p+ π 163

164 to summarize DD W = 2 p B W = 2π RD W = p+ π so either W DD or RD B RD > W W > W 164

165 to summarize DD W = 2 p B W = 2π RD W = p+ π DD RD B RD so either W > W or W > W decisions should not be taken by accountable officials when q low 165

166 to summarize DD W = 2 p B W = 2π RD W = p+ π DD RD B RD so either W > W or W > W decisions should not be taken by accountable officials when q low this is formal justification for unaccountability in technical fiscal policy 166

167 if q big enough [ q > (2 R+ G) / (2R+ 2 G)] then in unique* equilibrium 167

168 if q big enough [ q > (2 R+ G) / (2R+ 2 G)] then in unique* equilibrium official chooses right (welfare-maximizing) alternative regardless of her own preferences 168

169 if q big enough [ q > (2 R+ G) / (2R+ 2 G)] then in unique* equilibrium official chooses right (welfare-maximizing) alternative regardless of her own preferences official reelected if and only if 169

170 if q big enough [ q > (2 R+ G) / (2R+ 2 G)] then in unique* equilibrium official chooses right (welfare-maximizing) alternative regardless of her own preferences official reelected if and only if signal indicates her decision optimal 170

171 if q big enough then in unique* equilibrium official chooses right (welfare-maximizing) alternative regardless of her own preferences official reelected if and only if signal indicates her decision optimal or [ q > (2 R+ G) / (2R+ 2 G)] 171

172 if q big enough then in unique* equilibrium official chooses right (welfare-maximizing) alternative regardless of her own preferences official reelected if and only if signal indicates her decision optimal or no signal [ q > (2 R+ G) / (2R+ 2 G)] 172

173 if q big enough then in unique* equilibrium official chooses right (welfare-maximizing) alternative regardless of her own preferences official reelected if and only if signal indicates her decision optimal or no signal [ q > (2 R+ G) / (2R+ 2 G)] in this case, representative democracy much better than either bureaucracy or direct democracy 173

174 if q big enough then in unique* equilibrium official chooses right (welfare-maximizing) alternative regardless of her own preferences official reelected if and only if signal indicates her decision optimal or no signal [ q > (2 R+ G) / (2R+ 2 G)] in this case, representative democracy much better than either bureaucracy or direct democracy but requires high value of q 174

175 claimed that fiscal parameters (amount of tax revenue and spending) should be decided apolitically 175

176 claimed that fiscal parameters (amount of tax revenue and spending) should be decided apolitically why not tax rates and spending too? 176

177 claimed that fiscal parameters (amount of tax revenue and spending) should be decided apolitically why not tax rates and spending too? who is taxed? 177

178 claimed that fiscal parameters (amount of tax revenue and spending) should be decided apolitically why not tax rates and spending too? who is taxed? what public goods are chosen? 178

179 claimed that fiscal parameters (amount of tax revenue and spending) should be decided apolitically why not tax rates and spending too? who is taxed? what public goods are chosen? Answer: these depend on public s preferences about redistribution and public goods 179

180 claimed that fiscal parameters (amount of tax revenue and spending) should be decided apolitically why not tax rates and spending too? who is taxed? what public goods are chosen? Answer: these depend on public s preferences about redistribution and public goods not a purely technical decision 180

181 My proposal admittedly is radical 181

182 My proposal admittedly is radical But, in my view, EMU needs quite radical reform to correct imbalance between fiscal and monetary centralization 182

183 My proposal admittedly is radical But, in my view, EMU needs quite radical reform to correct imbalance between fiscal and monetary centralization World better off if EMU survives and flourishes 183

184 My proposal admittedly is radical But, in my view, EMU needs quite radical reform to correct imbalance between fiscal and monetary centralization World better off if EMU survives and flourishes but this won t happen automatically 184