Question

According to Buchanan and Wagner, why is there a political bias toward expansionary fiscal policy and not contractionary fiscal policy?

Short answer

According to Buchanan and Wagner, there is a political bias towards expansionary fiscal policy because such policies - by increasing public spending or reducing taxes - can stimulate economic growth, improve public services, and increase public support and votes for politicians. Meanwhile, contractionary fiscal policies, although they can control inflation and reduce deficits, can also decrease public spending and increase taxes, which can be seen as unpopular measures.

Step-by-step solution

Buchanan-Wagner Hypothesis

The Buchanan-Wagner Hypothesis postulates that politicians and policymakers have a bias towards expansionary fiscal policies as they increase public spending to win voters' favor. It essentially focuses on the political motivations behind fiscal decisions.

Understanding Fiscal Policy

Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence a country's economy. It is divided into two types - expansionary and contractionary. Expansionary fiscal policy involves the government expanding its spending or decreasing taxes to stimulate economic growth, while contractionary fiscal policy involves reducing spending or increasing taxes to slow economic growth.

Motivations for Expansionary Fiscal Policy

Politicians and policymakers may prefer expansionary policy as it can directly impact economic parameters like employment, income and hence, public sentiment. Governments can increase spending on public services which can win them support and votes from the public. On the other hand, contractionary fiscal policy, although potentially helpful for controlling inflation and reducing deficits, can sometimes be seen as unpopular due to its impact on reducing public spending and increasing taxes.