Question

Answer the following questions about politics and government budget activities.

a. Wolff (CP-4) argued that there are conflicting financial demands on the government’s budget by the two different social classes (the rich and business vs. middle-income and poor) in capitalist economies. What are they and why are they different?

b. Wollf (CP-4) argued also that the contradiction between these two conflicting demands shapes politics. That is, “elected officials have neither raised taxes nor cut spending enough to bring them into balance.” Would you consider this outcome as “vote-maximizing politicians representing the median voter”(as described in your textbook? Why (not)?

Answer 1

Solution(s):

The two financial demands on the government's budget are:
I haven't read the paper/study by Wolff, hence giving my own inputs:

1. To increase Government spending- which mainly goes into Welfare schemes, which benefits usually the poor and lower middle income groups. These schemes impose some burden on the budget as these are mainly recurring and revenue expenditures- subsidies, Direct income support, farm price support, food for work programmes etc.

2. The second group that is rich and the business class advocates lower taxes, so as to enable them to attain higher levels of disposable income. Since, these guys have all basic necessities covered, they prefer to spend their additional income (saved from taxes) on buying certain luxury goods and raise their standard of living.

(b) This contradiction puts politicians in a dilemna, as they have to assess the size and nature of demands of both these groups and also the state of the economy, i.e. whether running a fiscal deficit by increasing G or reduction in taxes to boost consumption is favourable.
Hence, a natural outcome of this balancing act/ trade off is Higher fiscal deficits, as they are unable to either raise taxes or reduce them which hamper the effect functioning of the economy. However, politicians. However, there is a limit to fiscal deificit which can be maintained, hence democratic systems and its vote maximising politics, often provide a medium to effectively transfer power to the opposition parties.

Hope this helps.
In case there is something additional in the paper, please mention it in comments and I shall revert with he explanations,