Tsebelis G. Veto Players: How Political Institutions Work
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TABLE 7.4A
Impor. laws Laws/year veto players
qual.
veto players
ave.
Ag. contr.
(qual)
Ag. contr.
(Table 4.1)
Import. Laws 1.000
Laws/year 0.084 1.000
veto players
qual.
-0.454 0.285 1.000
veto players
ave.
-0.307 0.305 0.836 1.000
Ag. contr.
(qual)
0.386 -0.594 -0.620 -0.490 1.000
Ag. cont.
(Table 4.1)
0.213 -0.529 -0.704 -0.528 0.889 1
Sweden included with 375 bills/year
TABLE 7.4B
Impor. laws Laws/year veto players
qual.
veto players
ave.
Ag. contr.
(qual)
Ag. contr.
(Table 4.1)
Import. Laws 1.000
Laws/year -0.278 1.000
veto players
qual.
-0.454 0.436 1.000
veto players
ave.
-0.307 0.506 0.836 1.000
Ag. contr.
(qual)
0.386 -0.552 -0.620 -0.490 1.000
Ag. cont.
(Table 4.1)
0.213 -0.328 -0.704 -0.528 0.889 1
Sweden included with 56 bills/year
TABLE 7.4C
Impor. laws Laws/year veto players
qual.
veto players
ave.
Ag. contr.
(qual)
Ag. contr.
(Table 4.1)
Import. laws 1.000
Laws/year -0.235 1.000
veto players
qual.
-0.461 0.430 1.000
veto players
ave.
-0.279 0.496 0.835 1.000
Ag. contr.
(qual)
0.527 -0.606 -0.654 -0.534 1.000
Ag. cont.
(Table 4.1)
0.424 -0.419 -0.791 -0.623 0.893 1
Sweden excluded
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CHAPTER 8: MACROECONOMIC POLICIES
This chapter discusses issues like deficits, budgets, inflation, and growth. A more
appropriate title would have been “macroeconomic outcomes.” The reason is that the phenomena
covered in this chapter are the results not only of conscious government choices (like
environmental or labor policies), but also of a series of other factors, that escape the control of
national governments. For example, unemployment policies decided by a previous government
might under specific conditions strain the budget of a country, increase the deficit, increase
inflation, etc., without any action by the government in power. Similarly, an exogenous shock
like the change in the price of oil may have an impact on unemployment without the interference
of any specific government decision.
While in the previous chapter we were able to focus on government lawmaking and
ignore the specific outcomes, here we will do the opposite. We will look at outcomes directly,
and try to infer the effect of specific policy decisions (instruments) by introducing a series of
control variables to eliminate as much of the noise as possible.
In this chapter there are two important results of the veto players theory as presented in
the previous two parts. First, that policy stability does not refer only to legislation, but also to
outcomes (states of the world). Second, that the veto players theory enables research not only on
single dimensional phenomena, but also on multidimensional ones. Indeed, while most of the
studies referred to in this chapter are in fact single dimensional empirical tests of the veto players
theory, one particular phenomenon that we will study in this chapter, the structure of budgets, is
multidimensional. The study of the structure of budgets will reveal that one-dimensional
approximations may sometimes produce weak or mistaken conclusions. This finding supports the
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point made several times in this book that multidimensional spaces need to be studied as such,
and cannot always be reduced to a single dimension.
This chapter is based on existing literature and will be divided in three parts. The first
focuses on budget deficits. The second and longer part, addresses the composition of budgets.
The last part reviewes the effects of veto players on growth, taxation, and inflation.
I: COLLECTIVE ACTION VS. INERTIA EXPLANATION OF BUDGET DEFICITS.
In the late 1970s and 1980s almost all OECD countries started trying to reduce the budget
deficits generated by the oil shocks. Some of them “stabilized” their policies and reduced their
deficits faster than others. The macroeconomics literature studied stabilization, and produced a
series of explanations, that I will classify into two major approaches. The first (I will call
collective action), argued that the more parties participated in government, the higher the budget
deficits, because each one of them wanted to serve its own privileged constituency, and as a
result, increased spending (and deficits) was the only possible compromise among different
government partners. The second (I will call inertia), argued along with the thesis presented in
this book that more government partners find it more difficult to change (reduce) the size of the
deficit and stabilize. It is interesting to note that the first approach makes sharper predictions than
the second: according to collective action, more government partners implies higher deficit (and
debt), and fewer implies lower deficit and debt; however inertia expects more government
partners slow down the pace of adjustments. Because the period under study was characterized
by an attempt to reduce deficits, the empirical implications of the two theories were identical,
and some times researchers do not pay attention to the underlying theoretical differences.
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1. Collective Action Approach:
The key notion in the collective action literature is the common pool problem. The
essence of the common pool problem is that in a decentralized policy-making government, where
each spending ministry only has authority over his own portfolio, the cost of over-spending is
shared with other ministries. Therefore, each ministry is motivated to over-spend to please his
constituency at the expense of other ministries. In other words, since each ministry internalizes
only part of the cost of rising spending on their own goods, all of the groups have an incentive to
spend more than the optimum so as to appropriate more resources for their benefits. Thus,
individual rationality leads to a collective irrationality, where the resultant budget deficit is
radically different from the cooperative solution. In sum, the collective action literature argues
that the more dispersed the decision-making authority, the higher the budget deficit will be. The
proposed solution, accordingly, is to completely centralize decision-making authority by
delegating the decision-making power to an independent agent, such as a strong minister of
treasury.
The collective action approach has received some empirical support. For example, in a
panel study including 20 OECD countries from 1960-1995, Kontopoulos and Perroti (2000)
found that government spending and public debt are significantly higher in countries where there
are more coalition partners and spending ministries in the government. Roubini and Sachs
(1989b) argue that coalition governments will have a bias towards higher levels of government
spending relative to majority party government. Moreover, the idea of the common pool problem
has also been widely studied in budgetary procedures. For instance, the empirical evidence in
von Hagen and Harden (1995) and Hallerberg and von Hagen (1999) suggest that countries in
which budgetary decision-making authorities are centralized are less likely to suffer from budget
deficits.
2
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2. Policy Inertia Approach:
Unlike the collective action approach, which is based on an n-person prisoners dilemma,
the policy inertia approach emphasizes the possibility that there may not exist a consensus to
change an unsustainable status quo when there are too many parties in government. Alesina and
Drazen (1991) first developed a “war-of-attrition” model of delayed stabilization and
demonstrated the difficulty in reaching a collective decision to implement fiscal adjustments due
to the disagreement among different social groups about how to distribute the fiscal burden.
Spolaore (1993) extended the war-of-attrition model to coalition government and shows that a
coalition government is more likely to delay fiscal adjustment than a single-party government.
The rationale is that unlike the ruling party in a single-party government, which can easily shift
costs to outside members, governing parties in a coalition government will likely disagree or
veto any fiscal policy that is against their constituencies’ interests. Accordingly, the policy
inertia approach argues that delays in the adjustment or the elimination of existing deficits might
result from struggles between coalition partners (or the social groups they represent) about who
will bear the necessary costs/cuts in budget spending, even if these players agree that current
debt requires adjustments. In short, the distributional struggle among different groups leads to
deadlock in the policy-making process, which, in turn, delays the implementation of policing
aimed at eliminating the budget deficit. Moreover, it predicts that delayed stabilization and
prolonged deficits are more likely to occur in fragmented and polarized social/political system.
The empirical evidence in favor of the policy inertia approach is strong but by no means
unanimous. Roubini and Sachs (1989 a) found that large deficits are positively associated with
weak governments in OECD countries. Cosetti and Roubini (1993) and Alesina and Perotti
(1995) expand Roubini and Sachs structure model and confirm Roubini and Sachs’ finding.
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With respect to American politics, Poterba (1994) and Alt and Lowry (1994) presented
evidence on the effect of divided governments in the states. They considered the policy response
to fiscal shocks and found that the adjustment is slower in states with divided control than in
states with unified control. Their results are remarkably similar in spirit to those of Roubini and
Sachs on OECD economies: in both cases, coalition or divided governments do not create budget
deficits, but rather, procrastinate the adjustment to shocks. Krause (2000) focused on the fiscal
performance of the United States. He finds that the degree of ideological policy divergence
among political institutions (the President, the House and the Senate) plays a notable role in
explaining fiscal budget deficits in the United States during the post-war period.
On the other hand there is some empirical evidence that disputes Roubini and Sachs’
findings. For example, Edin and Ohlsson (1991) only found a positive relationship between
public debts and minority governments. Furthermore, DeHaan and Sturm (1997) re-examined the
finding of Roubini and Sachs (1989) and Edin and Ohlsson (1991), and found contradictory
results: the growth of government debt and the level of government spending are not related to
the Roubini-Sachs power dispersion index, nor to the variant thereof as suggested by Edin and
Ohlsson.
Given that the set of countries studied by both the collective action and the stabilization
literature were aiming at reducing budget deficits the empirical results of both theoretical
approaches were identical. However one particular study was able to produce an empirical result
that contradicts the collective action literature. Robert Franzese, (1999) who covers 21 countries
over 35 years, came to the conclusion that multiple veto players delay changes to budget deficits
regardless whether these deficits were high (in countries like Italy) or low (in countries like
Germany and Switzerland). Given the scope of Franzese’s analysis I will discuss it more in
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detail. First, Franzese tests seven different political economy theories of public debt. Second, he
operationalizes the veto players variables in a precise way and in agreement with what I have
described in this book. Third, he produces a particularly significant finding I will describe below.
A. Different political economy theories. Franzese presents the following theories: First,
the government composition and delayed stabilization theories. In these theories he includes two
different variations: the “influence” theory according to which the parties in government exercise
an influence proportional to their size, and the “veto-actor” theories which are the ones presented
in this book. Second, the wealth and age distributions and the inter- and intra- generational
transfer of debt. Third, the electoral and partisan political-budget cycles. Fourth, the strategic
manipulation of debt to alter future government policies. Fifth, the multiple constituencies and
distributive politics. Sixth, the tax structure complexities and fiscally- alluded voters. Seventh,
the central bank autonomy and reduction of debt financing.
Given that these theories are non-nested, that is, none can be expressed as a restriction of
the other by setting some of the coefficients to zero, Franzese uses J-tests (Davidson and
MacKinnon (1981)) to compare their predictive power. The procedure for J-tests is the
following: for two models Z=f(X,*) and Z=g(Y,*) one estimates first Z=f(X,*) and includes its
predictions ^Z in the estimation of the second Z=g(Y, ^Z, *). If the coefficient of ^Z is non-
significant, then the second hypothesis encompasses the first, that is, there is no additional
significant information covered by the first hypothesis. The procedure is repeated by reversing
the two theories. It is possible that both theories encompass each other, or none of them
encompasses the other. So, the only conclusive test is when one of them encompasses the other
but not vice versa. Given that the theories tested by Franzese discuss completely different aspects
of budget deficits, it turns out that the most frequent comparative result is that each of the models
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does not encompass the others, or, to use Franzese’s terms: “the data insist that each of the
theories adds explanatory power to any of the others.” There are, however, some exceptions, and
I will present one of them in Franzese’s terms (1999: 155): “First, and most theoretically
interesting, the data do not reject that the veto-actor conception of the weak-government model
encompasses the influence conception; conversely, the data easily reject that the influence
conception encompasses the veto-actor. Moreover, reading across the first two rows, the veto-
actor conception more strongly rejects being encompassed by any of the others, while, reading
down the first two columns, it is less strongly rejected as encompassing the others. Thus,
Tsebelis’ (1995) veto-actor conception of fractionalization and polarization clearly dominates the
influence conception.”
In my opinion, the reason for this clear result in favor of my theory is that my model is
more general than other competing explanations like influence, bargaining, or exclusive
jurisdictions of ministers. Indeed, each one of these theories imposes additional restrictions and
comes to sharper predictions than veto players (see Introduction, p.7).
B. Operationalization of veto players. While most of the literature treats minority
governments in an idiosyncratic way ((some as a dummy variable (Edin and Ohlsson 1991, de
Haan and Sturm 1997), some as a worse case of coalition governments (Roubini and Sachs
1989)), Franzese uses either the number or the distance of different veto players in a single
dimension as his independent variables. As a result, his analysis is consistent with the arguments
in this book, and his findings corroborate the veto player theory.
C. Effects of “fractionalization” and “polarization.” These are the names that Franzese
gives to the number of veto players and the range of the government coalition (in a single
dimension). Franzese tested for both variables at the same time, and found that deficit adjustment
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is a negative function of the number of veto players, but does not depend on the range of
government coalitions. Given that the two variables are correlated, it may be the case that each
one of them would be significant if tested alone. It may also be the case that the underlying
phenomenon is multidimensional (in this case the number of veto players may be a better proxy
than the range of a coalition in a single dimension).
But the most interesting result is that when testing for the size of a deficit as a function of
the size of debt (which in fact is nothing but accumulated deficits) he concludes (199: 173) that
“a standard deviation increase in fractionalization (+1.2 parties) centered on the mean (i.e. from
1.5 to 2.7 parties) increases deficits .18% of GDP, but the same number of parties increase
produces a .19%GDP deficit reduction (emphasis in the original) at low debt.” In other words,
Franzese finds that multiple parties in government preserve the status quo more effectively
whether this means that deficits will continue to be high (in countries like Italy) or low (in
countries like Switzerland). This finding is evidence against the collective action theories and in
favor of the inertia approaches. Given that both approaches were tested with data from a period
when governments were attempting to reduce deficits, crucial experiments between the two
approaches are very difficult to be found, so Franzese’s study is the only one with this additional
attribute.
While the above literature focuses exclusively on the size of the deficit (with the
exception of Alesina and Perotti (1995)), one can focus instead in the composition of the budget
and see how different items are financed as a function of the composition of the government. I
will devote the major part of this chapter to this point, because the composition of budgets is by
definition a multidimensional phenomenon, and as a result, is likely to require multidimensional
indicators for its study.
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II. THE STRUCTURE OF BUDGETS.
Veto players expects budgets to change from year to year at slower pace as the size of
government coalitions expands and their ideological distances increase. Along these line of
argument Bawn focused on specific items in the budget of the Federal Republic of Germany
form 1961 to 1989. She analyzed the budget into two digit categories, and from these categories
she identified items favored by the SPD and the CDU-CSU. In the first category she included
spending on educational grants and loans, professional education, art and cultural education,
labor market policy, sports, the environment, municipal community service, urban renewal,
mining and manufacturing, and aid to East Germany. In the second, she included defense, non-
university R&D, housing, improvements in agricultural structure, infrastructure investments,
roads, rivers and harbors, aviation and shipping (all the last items on the grounds that they are
infrastructure/business pork items). She also identified a series of ambiguous items, but these did
not affect her analysis.
The Liberal Party was assumed to want to minimize spending throughout this analysis.
As a result, on SPD items the preferences ranged from the Liberals (low) to the Christian
Democrats (middle), to the Socialist (high), while on CDU-CSU items the preferences ranged
form Liberals (low) to Socialists (middle) to Christian Democrats (high). Bawn’s analysis
identified the range of each one of the coalition governments, and identified the items for which
an increase or decrease in budget was to be expected with a change in government. For example,
when the SPD enters in government in 1966 replacing the Liberals, budget items in the SPD list
are expected to increase because the country moves from a coalition desiring low spending in
these items to a coalition requiring high spending. On the contrary, when the SPD, CDU-CSU
coalition is replaced in 1969 by the SPD, Liberal Coalition, no change in the SPD budget items is
expected (despite the fact that the SPD controls now the Chancellorship). Bawn forms a series of