Democracy Versus Economic Growth

by Richard W. Rahn

Washington Times
May 16, 2011

Is democracy incompatible with long-run economic growth? One’s initial reaction may be that this is a silly question, but in this day of a global debt crisis, it is worth recalling the warnings of America’s Founding Fathers that when the people find they can vote themselves benefits, that will bring along the end of the republic.The Founders understood the problems of democracies and why all of the previous democracies had failed, going back to ancient Athens.

A fundamental flaw with majoritarian democracy is that politicians get votes by promising their constituents benefits, particularly when they can promise those benefits will be paid by others or future generations. As the old line has it, “Any politician who promises Peter benefits to be paid by Paul will always have the vote of Peter.” The inherent problem with this model is that as the number of Peters who must be satisfied grows, more and more costs are shifted to the Pauls, who eventually rebel by not working or leaving. The United States may have reached the tipping point, where half of the population pays almost no income tax and the top 1 percent of taxpayers pay almost 40 percent of the tax revenue. The nation already has about the most progressive tax system in the world, so it is doubtful that the remaining taxpayers can be squeezed much further.

The United States is the world’s oldest continuous democracy, and it succeeded in being so by not being constituted as a democracy but as a federal republic. The American Founders feared the momentary passions of the majority, so they instituted an elaborate set of checks and balances in an attempt to ensure that rapid fundamental change would be most difficult. The system was designed for gridlock to protect individual liberty and economic opportunity. Despite its imperfections, the system basically worked until four years ago, when the political class used the financial crisis (caused by faulty government policies) to ramp up deficit and debt to unsustainable levels.

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