Autocratic, Democratic, and Optimal Government.

• Author: Wagner, Richard E.
• Position: Book Review

Autocratic, Democratic, and Optimal Government

William A. Niskanen

Cheltenham, U.K.: Edward Elgar, 2003, 138 pp.

This book seeks to compare the effects on aggregate income of three forms of government, which William Niskanen labels as autocratic, democratic, and optimal. To do that, Niskanen develops a small aggregate model with five variables and six parameters that he estimates with data from 1964-99 and calibrates for 1996. The central idea behind this model is conveyed in his representation of the aggregate production function: Y = a[(1+G).sup.b][(1-R).sup.c]. According to this formulation, aggregate output per capita is equal to some natural rate denoted by a, as modified by the various fiscal activities denoted by G and R, where G is the level of per capita government consumption spending exclusive of defense and R is the average tax rate. Natural output is independent of regime, with differences in income across regimes arising through their effects on G and R.

Niskanen models the different political regimes as equilibria whose outcomes can be represented as the solution to some maximization problem. An optimal government is one that maximizes average net disposable income. A democratic government is one that maximizes the net disposable income of the median voter. An autocratic government is one that maximizes the net income the ruling clique extracts from the remainder of the population; this extraction, in turn, is the difference between the tax revenues the regime collects and the amounts it spends on public services, military activities, and interest.

This is a work in macro public finance, in that it seeks to construct relationships directly among such aggregate variables as incomes, tax rates, and transfer payments, as against seeking to generate those aggregates from the bottom up, so to speak. In its macro character, moreover, it is strongly reminiscent of real business cycle (RBC) theorizing. It adopts a form of natural rate theorizing, it invokes a representative agent as an explanatory device, and it models equilibria that are punctuated by exogenous shocks. In RBC theorizing those shocks are mostly to technology; in Niskanen's formulation, they are a form of preference shock, as a regime shift changes the identity of the representative agent whose preferences dominate the political equilibrium. This book could easily be incorporated into a macro course by someone who was looking for a different context with which to...