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VOTING ONESELF INTO A CRISIS

Published online by Cambridge University Press:  08 January 2016

Hans-Jörg Beilharz  and
Hans Gersbach
Hans-Jörg Beilharz
Affiliation:
International University of Applied Science Bad Honnef, Bonn
Hans Gersbach*
Affiliation:
CER-ETH–Center of Economic Research at ETH Zurich and CEPR
*
Address correspondence to: Hans Gersbach, CER-ETH–Center of Economic Research, ETH Zurich, Zurichbergstr. 18, 8092 Zurich, Switzerland; e-mail: hgersbach@ethz.ch.
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Abstract

We suggest that voters' lack of recognition of complex economic links may give rise to economic policies that eventually lead to a crisis. We consider a two-sector economy in which a majoritarian political process determines governmental regulation in one sector: a minimum nominal wage. If voters recognize general equilibrium feedbacks, workers favoring market-clearing wages will form a majority across sectors. If voters take into account only direct effects in the regulated sector, not only workers that enjoy minimum wages but also workers in the other sector are willing to vote for wage rises in each period. The reason is that they expect higher real wages for themselves, too. The political process leads to constantly rising unemployment and tax rates. The resulting crisis may trigger new insights into economic relationships on the part of the voters and may reverse bad times.

Keywords

Awareness of General Equilibrium EffectsUnemploymentDemocraciesCrises
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 4 , June 2016 , pp. 954 - 984
Copyright
Copyright © Cambridge University Press 2016 

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