Hunting the whale: more evidence on state government Leviathans.

1. Introduction

In his paper "Has Leviathan Been Bound?" Bryan Caplan (2001) presents a model of a government that expands further or faster than its citizens desire, or a Leviathan government (Brennan and Buchanan 1980). Caplan allows that a conservative party's ideology may serve to partially constrain government growth. A Leviathan government is one that seeks to expand its own power because acquisition of more power is inherently appealing to governments. Caplan uses expenditures or revenues as proxies for power. Using cross-sectional time-series data from the United States, he presents evidence that state governments are "Leviathans," partially but incompletely constrained by ideology. That is, ideological positions that political parties find difficult to abandon serve to limit the government's urge to expand its power. Using the same data, he compares his model to ideological models of government and to unconstrained Leviathan models of government. In ideological models, political parties exist to further a particular set of beliefs or policy positions. In a model with an unconstrained Leviathan, political parties would adopt or abandon any set of policies or core values in order to expand their power. Caplan's evidence indicates that his partially constrained Leviathan model fits the data best.

In support of his Leviathan hypothesis, Caplan's key prediction is that spending and revenue collection will decline as state legislatures become more competitive. Stated otherwise, as one party increases its control over state government, thereby facing less and less effective political competition, government expenditures and revenue collection will rise, ceteris paribus. Caplan's data support this conclusion. He also finds that, as they consolidate political power, Republicans increase spending and tax collection by less than do Democrats. Caplan interprets this as evidence of an ideological constraint on Republican-controlled state governments' Leviathan tendencies.

Caplan's (2001) evidence is presented in levels of real spending and spending as a percent of state income. However, as he points out, even though government spending and taxation could grow, provided they grow more slowly than state income, the government's share of the state economy would fall. A state government that occupies a declining share of a state's economy is not entirely consistent with Leviathan governmental behavior. Therefore, we choose to focus exclusively on state spending as a percent of state income.

As one party consolidates its control over a state legislature, a logical extension of Caplan's model is that expenditure and revenue collection ought to increase at an increasing rate. That is, as a given party's opposition becomes less likely to win legislative control, the winning party becomes more able to indulge its Leviathan preferences; hence, government size should not only increase (Caplan's original hypothesis) but increase at an increasing rate as well.

Our paper has two aims: (i) to replicate Caplan's results using a different time period with additional controls and (ii) to test our extensions of Caplan's hypothesis. More specifically, our second aim is to determine whether government size increases at an increasing rate as a party consolidates legislative control. To answer these questions, we assemble a data set similar to Caplan's original data set.

We fail to replicate Caplan's (2001) result that state governments are Brennan and Buchanan (1980) power maximizers. Our evidence also fails to support our hypothesized extension of Caplan's hypothesis: that the relationship between government size and political power is convex rather than linear. Further complicating matters, our significant and contrary results have a set of intuitively appealing interpretations. Taking our results together with Caplan's results, a murky picture emerges. From these results, we conclude that the issue of whether political parties are power maximizers, vote maximizers, or ideologues remains inconclusively answered. Ultimately, we view our results as suggestive, not conclusive. Specifically, the results suggest that the Leviathan theory requires more empirical testing; only after additional investigation may we understand the role political party power plays in determining state governments' income shares.

2. Caplan's Leviathan

Caplan's model is in the vein of imperfect political competition, wherein voters treat political parties as differentiated products (e.g., Lindbeck and Weibull 1987; Dixit and Londregan 1995, 1996, 1998; Grossman and Helpman 1996). The utility of Caplan's voters depends on the consumption of public and private goods and on their "taste" for a particular party. Two competing political parties offer differentiated platforms. Although both parties are power-maximizing Leviathans, the parties seek to maximize "party utility" (1) subject to remaining in office. A voter then selects the party whose platform maximizes her utility.

Whether there is certainty or uncertainty about which party is likely to secure legislative control, the model solves for a government of larger size than that most preferred by voters, independent of the victorious party's identity. Furthermore, the winning party wishes to expand government size even further but is constrained by the existence of a competing party that siphons away voters should the victor expand government "too far." Thus, Caplan's model predicts that as a party's probability of electoral victory increases, that is, the opposing party offers less effective competition, the winning party will expand government size even further away from the voters' preferred level.

For empirical purposes, Caplan measures the size of government with real, per capita total government expenditure and with real, per capita total expenditure as a fraction of state income. He proxies the probability of a party's electoral victory with the variable Distance, which has enjoyed wide use in the literature (e.g., Anderson and Tollison 1991; Grier, McDonald, and Tollison 1995; Wallis 1996). Distance is the proportion of seats held by the ruling party greater than 0.5, that is, half. For example, if the Democrats are the ruling party, first calculate DemPercent as

DemPercent = # Democrats/(# Democrats + # Republicans).

Then define Distance as

Distance = [absolute value of DemPercent - 0.5,

obviously defined over the interval (0, 0.5).

Caplan regresses his size variables on Distance and a list of ceteris parihus variables. Caplan (2001) summarizes that

the preliminary evidence for the Leviathan hypothesis is

surprisingly positive and robust. It does not matter how one

measures the size of government or Distance. Both total spending

and total taxation always appear to be increasing [and

statistically significant] functions of Distance as the model

predicts. (p. 835)

However, he also finds that Democrats increase government size more than Republicans, even after accounting for electoral margin size. Thus, Caplan adopts an intermediate approach between an ideology model and a pure Leviathan model, wherein ideology and the preference for power augment each other for Democrats but pull in opposite directions for Republicans. Caplan presents evidence supporting the hypothesis that state governments are partially ideologically constrained power maximizers. Furthermore, his evidence supports a Leviathan model against competing hypotheses that state governments are (i) unconstrained Leviathans, (ii) ideologues, (iii) perfectly constrained Leviathans adjusting to shifting voter preferences, (iv) perfectly constrained Leviathans, and (v) simple vote maximizers.

In a model of perfectly constrained Leviathan, political parties have the urge to expand their power; however, there is no slack in the political agency relationship between parties and voters. Therefore, the changes in government size are caused by changes in voter preferences over government. It is the issue of whether voter preferences change that differentiates (iii) from (iv). Simple vote-maximizing parties adopt policy positions designed to maximize their vote shares but not necessarily government expenditures or revenues.

3. Implications of Caplan's Leviathan

Leviathans want to increase government size, to tax more, and to spend more; that is the nature of Leviathan. However, the parties' Leviathan preferences are held in check by the existence of an effective opposition and a "small government" ideological bias in the case of Republicans. (2) Caplan estimates a linear equation, but we argue that the relationship should be convex. Consider that Leviathans want to raise and spend more and more money. Therefore, as the "brakes of political competition" come off, that is, as the probability of opponent victories declines, the winning party should increase government size at an increasing rate. (3)

This provides us with an avenue to refine Caplan's theories. We should be able to fit a convex curve to our data rather than a linear equation as Caplan did. Considering the question graphically and somewhat loosely, (4) Caplan estimated the relationship in Figure 1. However, because of a party's preference for maximizing government's size, we postulate that the victorious party will increasingly indulge this preference as the losing party falls increasingly into disfavor with the voters. Thus, we should find evidence to support the relationship in Figure 2. The econometric solution to such problems typically is to fit squared terms as additional regressors, for example, to fit both "Distance" and "Distance squared."