Tsebelis G. Veto Players: How Political Institutions Work

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expectations on the basis of this veto players analysis in a single dimension. Several of them are

counterintuitive. All of her expectations are corroborated in her empirical analysis.

König and Tröger (2001) essentially replicate Bawn’s findings for a longer period of

time, and using estimated preferences of the different parties. Their approach is an improvement

upon Bawn because instead of assuming that the Liberals want to minimize spending they take

them at their own word, and estimate that they are willing to spend on some budget items.

However both Bawn’s and König and Tröger’s analysis cover only one country, and through the

astute selection of budget items they reduce the policy space into a single dimension. Such a

choice is impossible when one considers all the budget items. Tsebelis and Chang (2001)

considered this problem.

For Tsebelis and Chang (from this point forward, referred to as TC) the composition of

budgets is altered in two different ways. The first one is deliberate in the sense that the current

government wants to increase or decrease the size of spending (the budget) and spend a higher or

lower percentage of it in some area: for example, by increasing the defense budget, or by shifting

expenses from defense to education. The second one is automatic, in the sense that existing

legislation (whether introduced by the current or previous government) has economic

consequences: increasing unemployment affects the composition of the budget because of

specific provisions in the social security legislation. Of course, the size of the budget change will

depend on the specific provisions of legislation in each country.

In order to differentiate between the deliberate and automatic structural change of

budgets, TC include a series of control variables in their study. First, they include inflation,

unemployment, percentage of dependent population (individuals over 65 years old), and rate of

growth because fluctuations in these variables may affect the Social Security component of the

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budget. Second, they include a series of country dummy variables, because legislation in one

country may provide different solutions and have different effects on the countries budget. Their

basic finding is that the deliberate change in the structure of budgets (that is, government

spending) in advanced industrialized countries depends on the composition of governments and

the ideological distance between the previous and the current government. Specifically, the more

diverse the government coalition (the bigger the ideological distances among parties), the less

change occurs in the structure of budgets. In addition, the bigger the alternation, the more

significant the change in structure. These findings are consistent with the findings in Chapter 7

but there is one significant difference: the study by Tsebelis and Chang is multidimensional.

Indeed they consider the party positions in two different dimensions, and calculate “ideological

differences” and “alternation” of veto players in a two dimensional space.

According to Proposition 1.4 (and as Figure 1.7 indicates) if the unanimity core of a

political system contains the unanimity core of another political system, changes in the status

quo will be more difficult in the first case than in the second. In addition, given that budgets are

determined by the government in place, it is easy to identify the position of the “status quo” as

far as budgets are concerned. So, for the problem at hand, TC were able to test whether the

possibility of change is a function of the position of the status quo. In fact, the further away the

status quo is located from the preferences of the veto players, the bigger the possible departure

from the status quo.

The dependent variable used in the TC study is the changes in the structure of budgets in

advanced industrialized countries. The budget of each country allocates resources in a series of

areas, so it was conceptualized as a vector in an n-dimensional Euclidean issue space. It consists

of a sequence of percentages (in order to control for its size) allocated to different jurisdictions:

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, a

, …..,a

). Each year there is a different budget allocation, so TC indexed each sequence by

the time it was selected. As a consequence, the difference between two budgets can be

represented by the distance between the composition of the budgets of two successive years.

TC tested whether the differences in the annual composition of the budgets of each country

were a decreasing function of the ideological distances of the existing veto players (ID), and an

increasing function of the ideological distance between successive governments, that we called

alternation (A) in chapter 7. Note that ID is the multidimensional extension of what we called

“range” in the previous chapter.

The reason that they use current government characteristics instead of the characteristics of

the government in power the previous year (which voted the budget) because according to the

literature, the current government has means to alter the existing budget. In particular, a

comprehensive study of budget rules in European Union countries by Hallerberg et. al. (2001)

identifies a series of ways a current government can amend the budgetary structure. First,

Finance Ministers in most EU countries

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can either block expenditure or impose cash limits.

They also have the to power to allow funds to be transferred between chapters, and the

disbursement of the budget in the implementation stage has to be subject to Finance Ministers'

approvals. Second, there is a set of formal rules that enable governments to deal with

unexpected expenditure and revenue shocks. In particular, 11 of 15 EU states grant governments

the power to take necessary actions if they encounter unexpected fiscal shocks. For example,

Denmark requires governmental action to correct the structure of the budget if either

expenditure is higher than expectation or revenues are less than expectations. Finally, most EU

countries (with the exception of Finland, Greece, and Luxembourg) allow a carryover of funds

into the next budgetary year. Hallerberg et. al. (2001) also note that the degree of governmental

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discretion over the current budget can be very substantial: in theory, the UK simply allows

100percent of unspent funds to be moved forward into the following year.

Hallerberg et. al.’s findings are replicated in presidential systems. In the study of state

governments’ budgetary policy in the US, Alt and Lowry (1994) and Porteba (1994) suggest that

it is the current government that determines the final formation of budget allocation. Their

argument is that after a budget is passed, revenues and expenditures may diverge from

expectations and lead to unexpected deficits. Under such a scenario, the current government can

alter the budget decision so that the unexpected deficits can be avoided. Specifically, Porteba

suggests that many state constitutions prevent state governments from running deficits, and states

also vary in the policies that are available to eliminate a deficit and satisfy balanced-budget rules.

For example, some states are allowed to borrow and close the current budgetary gap. Some

states can also draw down their general fund balances to cover budget deficits. Similarly, Alt

and Lowry argue that the states have a variety of balanced-budget laws that might influence

fiscal policy, and some of the laws explicitly nullify unfunded expenditures

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. So, in the TC

study each government is considered responsible for the budget realized during the year it was in

power.

TC derived their dependent variable from the Government Finance Statistics Yearbook of

the International Monetary Fund. In this dataset, all budgetary expenditures for each individual

country are itemized into nine main categories: general public service, defense, education, health,

social security and welfare, housing and community amenities, other community and social

services, economic services and others.

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This happens in 11 out of 15 EU countries.The exceptions are Finland, the Netherlands, Spain and Sweden.

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Actually, they tested both current and previous year’s governments and did not find any association between

previous government and current budgets, which can be explained because budgets change very slowly (at the

margin) and current governments clearly have the means to impose such modifications.

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The independent variables were constructed exactly as in the previous chapter. In

addition to the data concerning the first dimension, TC also used a second dimension from Laver

and Hunt (1992). Laver and Hunt scored parties on the basis of their “pro friendly relations to

USSR vs. anti.” Note that this dimension is different from the left-right dimension. In fact, the

pair-wise correlation between the ideological distances based on these two dimensions in the

dataset only slightly above 0.5. However, parties scoring high in this second dimension are

parties of the left.

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The two-dimensional “ideological distance” and “alternation” variables. On the basis of

Proposition 1.4 we needed to know whether the unanimity core of one government is included in

the unanimity core of another. In a single dimension this is an easy task: one compares the length

of the core of two coalitions (the “range” as we did in Chapter 7). In two or more dimensions,

however, such a straightforward measure does not exist. For example, it is not true that if the

unanimity core of coalition A covers a larger area than the unanimity core of coalition B then A

necessarily includes B (that is the relevant criterion according to Figure 1). For example, if a

coalition has two distant members, (which by definition means that its unanimity core is a

straight line and therefore covers an area of zero) it can make decisions more easily than a

coalition with three members located close to each other (which covers a small but positive area).

As a result, TC approximate the ideological distances of different coalitions in two dimensions

by using the range of these coalitions in each dimension, and calculating their average. For

alternation, the selection of the indicator was easier because we knew the position of the middle

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Some examples from our dataset: in 1988 when the Schluter cabinet in Denmark experienced a government

reformation from a coalition of the Conservatives, the Liberal and the central Democrats to a coalition of the

Conservatives, the Liberal and the Radical Liberals, we find that the ideological range in the second index changes

from 1.6 to 5, while the ideological range in the first index only changes from 5.6 to 4.9. Similarly, in Australia,

1983, when the Fraser cabinet (which consists of the National party and the Liberal party) was replaced by the

Hawke cabinet (the Labor party), the ideological position of government in the second index shifted from 12.59 to

7.29, while the ideological position in the first index only changed from 14.86 to 10.10.

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point of the range in each dimension, so the distance between two governments could be

calculated by the Pythagorean theorem.

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Note that this formula produces positive distances

regardless of whether the successor government is to the left or to the right of the predecessor in

the first dimension, or their relative positions in the second dimension.

It is interesting to compare this approach to the one used in Chapter 7. In Chapter 7 the

problem was one-dimensional, and as a result it was possible to calculate range and alternation

exactly. Here the problem is multi-dimensional, ideological distance (the equivalent of range) is

calculated by approximation. Indeed, there are multiple possible measures of the variable, and

none of them captures the information required in Proposition 1.4 exactly. While it is more likely

that a veto player configuration with higher ID score (as calculated by TC) will include one with

smaller ID score, inclusion is not guaranteed. So, multiple dimensions do not lead according to

my approach to “chaos” as in the social choice literature, but to a more complicated model which

preserves the one dimensional intuitions, just like collective veto players in Chapter 2 led to a

more complicated analysis that can be approximated quite well by the analysis of Chapter 1.

INSERT TABLE 8.1

The first test TC performed was for negative effects of ideological distances on the change

of budgets along with heteroskedastic outcomes (high variance associated with low ideological

distances). They used multiplicative heteroskedastic regression (like in Chapter 7) and estimated

two models, the first including ideological distance, and the lagged dependent variable (to take

care of the time component) for the expected value of budget distance, and the ideological

distance for the error term. As evident from Table 8.1, ideological distance has a negative

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112

AAA ?? where A

and A

are alternation in the first and second dimension.

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coefficient both for the expected value of budgetary distance and the error term as predicted. The

second model includes the same variables with the exception of ideological distance (in both

equations). A likelihood-ratio test indicates that the probability that the expectation of negative

coefficients in both equations is false is less than 5 percent.

INSERT TABLE 8.2

TC then introduced two kinds of control variables to isolate deliberate budget

modifications from automatic ones: first, they introduced (differences in) unemployment,

growth, inflation, and the size of dependent population (individuals over 65 years old). Second,

they introduced dummy variables for all countries in order to eliminate automatic modifications

of the budget due to existing legislation.

The results of estimation are summarized in Table 8.2. The results are consistent with the

predictions of the veto players theory: both coefficients of ideological distance and alternation in

this model are significant and signed according to expectation. Moreover, the size of

standardized coefficients of ideological distance (-0.18) and alternation (0.17) suggests that the

effect of the veto players structure is not only statitically significant but also substantively

important. Droping the variables

POP65,

GROWTH,

INF (since these coefficients in Model

1 are insignificant) and rerunnig the regression to check for robustness presents exactly the same

results (model 2).

In conclusion, all the empirical evidence presented by TC validates the hypothesis that

despite the factors that account for the automatic change of budgetary structure, the deliberate

change of budgetary structure can be explained by governmental ideological distance and

ideological differences between governments. Specifically, a government coalition is associated

with more significant change in the budget if the members of this government are less

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ideologically diverse or if its ideological position is more divergent from the previous

government. In other words, the budgetary structure tends to lock itself into the existing pattern

in political systems with ideologically distant veto players; in contrast, the budgetary structure

tends to be more flexible in political systems with ideologically similar veto players.

INSERT TABLE 8.3

TC also investigate how the ideological distance and alternation affect budget structure in a

disaggregated level. Their results, that are summarized in Table 8.3 suggest that the ideological

distance and alternation also explain the change in each budget categories well. In fact, there is

only one out of the nine budget items (Housing and Community Amenities) with wrong signs

(but not significant) and all the rest have the expected signs. One out of the eight remaining cases

(other community and social services) has the expected sign but no significance; and in all other

cases both coefficients have correct signs and at least one of them is significant. Ideological

range significantly affects six out of nine budget categories; and alternation has a significant

effect on four out of nine budget categories. In particular, they find that among these nine

budget categories, the change of education, health and social security are especially sensitive to

both the effects of ideological distance and alternation.

INSERT TABLE 8.4

Finally, TC replicate their model checking for each one of the underlying dimensions

separately, and find that the two-dimensional model significantly outperforms the one

dimensional models. As shown in Table 8.4, the addition of the second dimension improves

significantly the results of the alternation variable in the first dimension. Conversely, the addition

of the first dimension improves significantly the results of both the ideological distance and the

alternation variables in the second dimension. In short, the results in Table 8.4 suggest that the

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structure of budget is better captured and described by our two-dimensional veto players

indicators than by any one of these dimensions.

III. OTHER MACROECONOMIC OUTCOMES

In this part I will present three different studies with different dependent variables:

inflation, taxation and gorwth. The expectation of veto players theory is the same regardless of

the dependent variable: significant changes of outcomes will be associated only with few and

ideologically congruent veto players. Among the independent variables used in these studies

there is one that is highly correlated with veto players. In addition, the arguments in these articles

are either implicitly or explicitly related with the arguments made in this book. I will present

these studies sequentially, and explain the relationship between their findings and the theory

presented in this book.

A. Federalism and Inflation. The theoretical expectation generated from the analysis in

this book is that changes in inflation will be lower in federal countries than in unitary ones.

Indeed, as we saw in chapter 6 federalism is associated with an increased number of veto players

(ceteris paribus). Treisman (2000c) studied inflation in 87 countries during the 70s and 80s. He

was comparing three different expectations for the relationship between federalism and inflation

generated by different theories (in his words, commitment, collective action, and continuity). The

“commitment” theories expect lower inflation in decentralized countries, because the multiple

actors involved in decisionmaking reduce the ability of central government to inflate for political

purposes. The “collective action” theories expect higher inflation in federal countries, because

the multiple actors involved will engage into local fiscal free riding. What Treisman calls

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“continuity” theories is the veto players theory we have already described.

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Treisman’s

concludes early in the article: “strong support for the continuity hypothesis. In general, average

inflation rates tended to rise during the 1970s and 1980s in both unitary and federal states.

Although there was a general upward drift, the rise was less in federations with low inflation in

the previous period compared to similar unitary states, and the rise was greater in federations that

started from high inflation compared to similar unitary states.” (Treisman 2000c: 844). The rest

of the analysis aims at identifying the mechanisms for accounting for these outcomes. According

to Treisman there are two major reasons. First, “Federal structure by increasing the number of

veto players required to change the system of control over central bankers, tends to lock the

degree of central bank independence, whether high or low.” Treisman (2000c: 851). Second,

political systems differ in the degree to which imbalances are pushed from the local to the

regional and then the national level (which Treisman calls “fiscal conductivity”).

“Decentralization… appears to reduce change in the degree of conductivity, whether high or

low.” (Treisman (2000c): 853).

B. Taxation and Veto Players. According to the theory of this book, any significant

change in taxation will be possible only with few veto players. Hallerberg and Basinger (1998)

studied the change in taxation that occurred in OECD countries in the late 1980s. All OECD

countries reduced taxes for the highest income individuals, and for enterprises. Considering the

size of each one of these two reductions as a dependent variable Hallerberg and Basinger try to

identify the cause of this change. In their analysis they consider a series of variables from the

economic literature that should have an impact on theoretical grounds. First, they include capital

mobility since countries may be forced to lower their tax rate to prevent capital flight as capital

becomes more mobile (Tiebout 1956). Second, they take into account trade dependence since

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In fact, Treisman uses the veto players terminology frequently in this article.