June 2, 2010

Civic Participation and Government Spending

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Economic theory suggests that the role of government is to spend resources to provide public goods and services that would be unprovided or underprovided by the private sector and to fix other market failures. Furthermore, Hayek (1944) suggested that one function of government is to provide a safety net. While, in theory, these rationales should be behind government spending, in practice, a number of alternative factors drive spending and the growth in government spending. These include citizen demand for government spending, fiscal illusion, institutional arrangements, and interest-group pressure (see, for example, Rodrik 1998, Besley & Case 2003, Rice 1986). These explanations provide alternative rationales for government spending; in many cases, these drivers may lead to outcomes that concentrate benefits on certain groups while reducing total economic welfare.

This paper will review the economics and, more specifically, public choice literature to evaluate some of these theories that explain government spending. Using state panel data from 1980–2008, this paper builds on the literature to empirically test the effect of citizen participation in the political process, measured by voter turnout and the effect of campaign contributions by individuals on state government spending. While individual political contributions and voter turnout are a measure of participation in the political process, they are also indicators of potential rent-seeking efforts or changes in the voting pool that could lead to redistributive policies. The paper will also discuss the implications that these results, controlling for other factors, have on government spending.

Our analysis of the effects of political engagement on government expenditures adds to an extensive and well-established literature on the drivers of government spending. While past work has discussed the effects of economic, geographic, and institutional factors, to the best of our knowledge, previous research has not studied the effects of both political contributions and voting activity on government size. This paper thus contributes to the literature by analyzing how civic participation, evidenced by voting, contributions, and the interaction of the two, influences government spending.