Direct Democracy Reuven Brenner February 13, 1998

Supply-Side University Economics Lesson #5

Memo To: SSU Students
From: Reuven Brenner
Re: Direct Democracy

[The guest lecture this week is by Professor Reuven Brenner of the McGill School of Management. It is adapted from his most recent book, Labyrinths of Prosperity, and from an article in the Journal of Applied Corporate Finance. In last week's lesson, we noted that Dr. Brenner, who I consider the best business economist in the world, is also the leading expert on the Swiss form of democracy. We of course recommend the entire book for your enjoyment and enlightenment.]

As every student of business knows, "sunk costs" are "irrelevant." That is, money already spent on worthless projects should not affect decisions to undertake valuable projects in the future. In this sense, the value of what corporations or governments do is determined not by how much money they have spent, but by the expected benefits from both current and contemplated expenditures. In finance theory, this principle is well known and it explains why stock market players pay little attention to book values when evaluating companies. They do so because book values are useful as estimates only of how much capital investors put into the company. Whether or not corporate management succeeds in creating value depends upon people's collective judgment of managements' ability to produce adequate future returns on that capital.

The stock market renders such judgments every day for individual corporations. But who judges the value of governments' spending of taxpayers' funds? In theory, of course, it is the voting public through the electoral process. But, as everyone knows, the reality in most Western democracies today is that the public has relatively little direct control over either fiscal matters or the projects that governments decide to finance.

Can we devise a political counterpart to the stock market that would provide ongoing evaluations of the effectiveness of government projects and its fiscal policies? In this lesson, I use the example of Switzerland to suggest that the institutions of referendum and initiative can be used to discipline the public sector in a manner similar to that in which the stock market disciplines corporate management. "Referendum" means that laws and resolutions made by representatives must be submitted to the people for acceptance or rejection. "Initiative" means that people have the right not only to vote on proposals, but also to initiate the enactment of new laws or constitutional amendments, and to alter and abolish old ones. The information technology is in place so that the introduction of these institutions is feasible - although as recent Canadian experience shows (discussed later) - care must be taken about the rules governing these institutions.

Referenda and initiatives - often referred to collectively as "direct democracy" - have the power to discipline governments at all levels by separating the powers to tax and to spend. Of course direct democracy will make occasional mistakes; but it is only by mistakes that we learn. Nevertheless, by giving the public veto power over specific spending programs, direct democracy can prevent persistence in error by governments, much as stock markets and financial institutions prevent persistence in error by private business.

To use another financial metaphor, referenda and initiatives would provide the political equivalent of "project finance" - that is, the evaluation and funding of projects on a stand-alone basis. By forcing all projects to stand on their own merits, we could put an end to the present political "logrolling" process in which legislative compromises routinely sacrifice the larger public wishes to an array of special interests.

Imagine an economy in which the private sector's annual income is $10 million. In the first year, it consumes $8 million and saves $2 million, which is then invested in a computer factory that produces a future income of $2 million a year. Assume that in all subsequent years the private sector consumes all its income. If the government neither spends nor taxes, both income and consumption in future years will be $12 million.

Suppose instead that the government borrows the $2 million in the first year to spend on additional civil servants and that the private sector uses all its savings to buy government bonds rather than invest in a factory. In this case, total consumption in the first year, public and private, will be $10 million instead of $8 million; and it will stay at $10 million in all future years. Although consumers receive an income of $200,000 from interest on the treasury bonds (assuming a 10-percent return), that income is financed by annual taxes of $200,000. Thus, the higher consumption in the first year was bought at the price of lower consumption in the future. This example summarizes the so-called neoclassical view of deficits, which serves as the rationale for economists' opposition toward them.

In the above example, the national debt is a burden on future generations insofar as the government spends it on superfluous civil servants (the expenditure on whom is viewed as consumption),  rather than make an investment. But, if the government instead uses its funds to finance investments - and the tax-paying public really views them as investments, as opposed to accountants merely classifying them as such - then the effect is the same as for the investment in the private computer factory.

Assume, for example, that the government is spending money on houses, roads, schools and expected immigration (think about Israel). In this case, the government's current deficits or debts can be compared to those incurred in a leveraged buyout. The investments are financed by the immigrants' expected future incomes, and the government borrows because it anticipates added revenues from its expenditures.

As another example, suppose that because of an increase in either the crime rate or in fear of terrorism, the government spends the additional $2 million on law enforcement. This additional $2 million expenditure may not crowd out any private investment; it could even induce people to invest more or at least prevent investments from diminishing further. In this case, the increased government expenditures lead to expectations of unaltered or even diminished taxation in the future.

Thus, in order to evaluate the economic impact of increased government expenditures, one must look at what the public expects to get for its money at a particular moment of time. (And this will not be revealed by either the registered book value of government expenditures or the category in which economists and statisticians classify them). The above arguments also suggest that there cannot be such a thing as a "general theory" that would provide reliable answers to any of the following questions:

- How does the general level of a government's expenditures, in particular its debts and deficits, affect either the total production of goods and services, or the national income earned from production?

- How do the debt and deficits affect employment?

- How do the debt and deficits affect the allocation of resources between current consumption and investment?

The reason that no general answers can be given to any of these questions is simple. An increase in either government expenditures, debts, or deficits can have a positive, negative, or neutral effect on national income, employment, or interest rates; increased deficits might increase current consumption and diminish investments, or they might not. It all depends on what the government does with the money and on the timing of its expenditures. One cannot add up all government expenditures and discuss the impact of the resulting sum on the economy: One part of the sum might have been a good investment, another a waste.

Of course, there are many statistical analyses that have attempted to discover and estimate produce numbers concerning relationships between government expenditures, deficits and various aggregates. But, as one would expect, such studies have provided no clear answers. Deficits have not been shown to be systematically related to either higher inflation, higher interest rates (either nominal or real), or lower private investments.

Indeed, macroeconomists have asked the wrong questions to start with. What they should have done is evaluate, case by case, project by project, the consequences of various government expenditures in their historical context. That is indeed what the institutions of referendum and initiative could have accomplished. It is also similar, as noticed earlier, to the practice of "project financing" that merchant banks have used for centuries.

Why did economists add up the different expenditures to start with and in what context did they think such aggregate sums to be relevant?

Debates about debts, deficits, macroeconomic issues have been shaped by the views and, even more, by the vocabulary of Keynes's General Theory. Keynes was the first economist to suggest that one should look at the level (and not the specific kind) of government's expenditures and deficits to explain macroeconomic behavior. Keynes suggested that increases in deficits, public debts, and government expenditures can be used systematically by governments to prevent troubled times. This argument has since been revealed by the experience of many national economies to be wrong, even though its policy implications happened to be right during the 1930s.

Indeed, many prominent economists of the time agreed with Keynes that in the circumstances of the 1930s spending on public works, even just digging "holes in the ground" (as Keynes put it), was the solution. The critics did not disagree with Keynes's idea about the occasional usefulness of public works, but with the novelties: both the definitions and the theories Keynes put forward to justify government expenditures on such works (in fact as I demonstrate below, such an idea has ancient roots). But they did object to the "novelties" in his "general theory." They were unpersuaded by both the definitions and the theories Keynes put forward to justify government expenditures on such works. What troubled most, however, was Keynes's elitist suggestion that depressions will routinely occur in decentralized economies unless politicians (with the help of their economic advisers) intervene to "manage demand."

What, in Keynes's view, causes a crisis of increased unemployment and why must governments intervene by spending on public works? Although people's weakened propensity to consume and a rise in interest rates can lead to such outcomes, Keynes attributes the problem to a "sudden collapse in the marginal efficiency of capital." Once expectations of lowered marginal efficiency of capital have fallen, Keynes adds, they are:

... not easy to revive, determined as [they are], by the uncontrollable and disobedient psychology of the business world. It is the return of confidence to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism. This is the aspect of the slump which bankers and businessmen have been right in emphasizing, and which the economists who have put their faith in a "purely monetary" remedy have underestimated.

This view led Keynes to his conclusion that public works, even of doubtful utility, may pay for themselves over and over again at a time of severe unemployment. (There is not even a hint in Keynes that such collapse could be triggered by the effect of mistaken government policies).

To support this conclusion, Keynes reminds his readers that such policies have been pursued since ancient times:

Pyramid buildings,...even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better...Just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance... Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities...pyramid building as well as the search for precious metals... The Middle Ages built cathedrals and sang dirges...

From these comments, we can infer that Keynes either did not read much history, or did not read it carefully. The reason for these policies in those ancient times, and the reason for their occasional success, was not to offset "sudden drops in the marginal efficiency of capital" caused by the caprices of private investors, but something entirely different.

The Classical View of Public Works

How to deal with the poor is a question that many rulers and leaders of governments since antiquity have asked themselves, and many writers since ancient times have tried to answer. These writers agreed on the following: The poor and those falling behind have less interest in maintaining the status quo and thus are also the greatest menace to its maintenance. Having less at stake, they are more prone to violence, more likely to commit crimes against other people's property, and more likely to bet on revolutionary ideas to rationalize their plunder, diminishing political stability and incentives to invest. Rulers, politicians, and representatives of the commercial middle classes recognized that spending on the protection of property and punishment of violators was not always sufficient, and that giving a stake in the system by transferring wealth to the poor and opening opportunities for them was at times necessary and beneficial. It could prevent disorder by sustaining hopes and the possibility of self-betterment.

Keynes's statement on the pyramids echoed English economists' traditional lines of argument. Sir William Petty, a well-known English commentator of the seventeenth century, proposed using tax money for the construction of useless pyramids on the Salisbury Plain and for "entertainments, magnificent shows, triumphal arches." His view had nothing to do with employment and manipulating aggregate demands in the short run, but with helping to deal with the poor in the long run. The observers of the seventeenth century were preoccupied with persistent unemployment of the same people, leading to poverty and crime, and they attempted to devise lasting remedies.

Sir William thought that, since the poor must be provided for, it is better for them and for society that they be employed and paid, rather than given charity. Even if the work consisted of bringing "the Stones at Stonehenge to Tower Hill," it could "keep their minds to discipline and obedience, and their body to a patience of more profitable labours when need shall require it," lest they lose the faculty of laboring. Sir William's view was representative. During the second half of the seventeenth century as well as before all economic and political tracts - Botero's classic, The Reason for State, is another typical example - discussed employment and public works in similar fashion. The general view was that "between the dislocation of the past and the expectation for the future," governments must throw a bridge for the dependent poor by either employing or helping to retrain them. The nature of their employment seemed secondary to some observers then, as it seemed later to Keynes, and as it seems to observers today.

Circuses and pyramids, cathedrals, and Paris's famous great boulevards are examples of public works carried out having the explicit goals of either giving employment to the poor or preventing disorders and rebellions. The great Elizabethan poor laws also sprang from the preoccupation with the maintenance of order and the management of the poor. Though the poor laws were criticized, observers were critical of the way they were administered, rather than with the objective - rather like popular attitudes toward welfare today. However, none of the arguments for or against such interventions had to do with short-run policies and aggregate demands.

Instead, observers held views that ranged between the following two extremes when discussing these policies. Those at one pole of the debate viewed expenditures on the poor, through public works or otherwise, as beneficial since they maintained stability by giving a stake to those on the bottom and in the long run helped form an educated and disciplined population. Those at the other extreme, however, viewed such policies as undermining long-run prosperity -not only by breeding idleness and a sense of entitlement, but also by strengthening existing bureaucracies and creating new ones, diminishing the incentives to invest (because they could lead eventually to higher tax rates), and delaying necessary adjustment to change.

As often happens, the truth about public works - and about public spending generally - was recognized by most classical economists as lying somewhere between these two extreme views. But this raised the practical issue: What was the intermediate point at which stabilizing policies - in the aforementioned sense of the word -themselves become burdens on prosperity? These were two questions to which nobody had yet found answers. This brings us to the promise held out by referendum and initiative.

The Political Remedy for Preventing Persistence in Error

Whether investments are truly "investments" depends not on how economists and governments count them but on whether or not the tax-paying citizens expect to earn back, directly or indirectly, more than their cost over a certain horizon. Economists can count government expenditures on infrastructure and education as investment if they please. But a road that is rarely used, an airport that lacks traffic, schools and colleges that graduate illiterate students, and government-sponsored films, books, "scientific" publications and music that are never watched, read, or heard. None of these provide a return to society that would justify the social resources devoted to them. Although counted as "investment," they are nothing of the kind: They are forms of consumption that benefit the few at the expense of the many.

Of course, bad investment decisions by private firms are also counted as investment -- for a while. The difference is exactly that: How long?

Whereas enterprises having access to financial markets only, and no finances or guarantees from governments, go bankrupt if they persist in error (since financial markets or institutions will not give them additional credit), governments do so more slowly, and waste continues to be counted as investment. As just one piece of evidence, Canadian polls in 1992 revealed that the citizens thought the federal government wasted 47 cents of every tax dollar.

But, without the institutions of referendum and initiative, people cannot force governments to respond to such perceptions. Referenda and initiatives could also provide answers to another important question confronting governments - how to decide between investment and current consumption. To illustrate the question, let's make the patently unrealistic assumption that each item the government calls "investment" would indeed turn out to be investment rather than waste. Assume that the government did thorough and accurate cost-benefit appraisals for all proposed roads, schooling and hospitals, and that all such calculations, taken separately showed that they would all be good investments. This does not mean that all these projects should be carried out.

People also want to enjoy life today, and an investment of any kind today means that private consumption must be deferred.
Which project, then, should be carried out? Choosing the one with the highest expected return is not a practical guide, since, as we can infer from the above, governments cannot make such calculations. Once again, the institutions of referendum and initiative provide a solution. Even if voters make a mistake, later initiatives can correct them. Let us take a closer look next at these institutions and the circumstances that may favor their emergence.

The Swiss Solution

The institutions of referendum and initiative have been practiced by the Swiss for more than 100 years. The principle of referendum -- again, the providing for the submission of laws and resolutions made by the representatives to the people for acceptance or rejection -- was incorporated into the Swiss federal constitution that was ratified in 1874. In 1891, an amendment providing for "Initiative" was added to the constitution, stating that people have the right not only to vote on proposals but also to initiate the enactment of new laws or constitutional amendments, and alter or abolish old ones, if at least 50,000 Swiss so request.

The feature of initiative is important, for it distinguishes the Swiss system from that of other nations where politicians only occasionally resort to referenda. In Switzerland these institutions of direct democracy are embedded in the constitution, and act through regular channels. In other countries, referenda are generally used only when politically expedient - as recent events in Canada show. Thus, although the same term is used to describe two very different practices, one should not confuse the occasional plebiscites with the constitutionally guaranteed institutions of the Swiss. The latter system provides a way for systematically correcting mistaken decisions through initiatives, the irregular one does not.

Nor should the institution of initiative be confused with petitions or lobbying. Politicians in other western democracies are free to treat petitions as they see fit. They also can respond far too easily to lobbying by special interests. In contrast, when the institutions of referendum and initiative are in place, politicians have more difficulty in subverting people's will since their actions can be undone. It is no accident, therefore, that politicians have limited roles in Switzerland, and one does not hear much about them. Nor is it accidental that no significant differences divide the policies of the major political parties. Through these two institutions, the electorate is allowed to vote separately on proposals and issues. This prevents painful compromises during votes on both candidates and legislative "packages." As has become embarrassingly clear in the political jockeying over the recent U.S. "crime bill," legislators who back one measure strongly are regularly forced to vote for other measures they disagree with to gain the backing of other legislators for their measure. By preventing such legislative compromises, referenda significantly diminish the power of politicians and bureaucrats and thus the extent of pork-barrel politics.

Here is a sample of issues on which Swiss referenda were held:

- Citizens voted for proportional voting for parliament in 1918, although at first politicians belonging to the majority Radical-Democratic party rejected the measure. In the next elections this party lost 40 percent of its seats;

- A popular initiative in 1946 succeeded in making "urgent" federal laws subject to obligatory referendum within one year, though government and the parliament were against it;

- 76 percent of the Swiss rejected joining the United Nations, although government and parliament wanted to join.

In recent years the Swiss have voted separately on issues such as extra air pollution devices in motor vehicles, lawful abortion, the introduction of VAT (value-added tax) and increasing grants for universities and research. All these initiatives were voted down in national referenda. Other initiatives, concerning consumer protection and equal rights for women and men, and, in 1993, the purchase of airplanes for the military, were accepted. Altogether, of the 216 amendments proposed between 1874 and 1985 on both the federal and the canton level, 111 were accepted and 105 were rejected. Of the 111, eight were popular initiatives and fourteen were counter proposals. On the federal level alone there were 147 obligatory referenda (on constitutional issues), and 103 optional ones (on laws), and 104 initiatives between 1848 and 1990. Among the latest was the referendum on closer ties with the European Community. The Swiss decided against, with majorities rejecting the proposal in 23 out of 30 cantons.

The options of referendum and initiative diminish the power of politicians, the influence of bureaucrats, and, hence, the incentives of lobbying groups to organize. These institutions impose stricter controls on government spending and allow for quicker correction of misguided policies. These combined effects imply a greater correspondence between political decisions on publicly supplied goods and voters' preferences (though it does not necessarily imply either less taxation or less regulations). This is indeed what Swiss researchers found when they looked at the evidence concerning publicly supplied goods across the Swiss cantons.

Consider, then, how such a system would deal with some recent issues in the United States. The Corporation for Public Broadcasting is asking for a 50 percent increase in government funding for 1993 through 1996, bringing it to about $1 billion (about 17 percent of its budget). George Will, a columnist, is the most visible and vocal opponent of the subsidy, and the former chairman of the corporation, Sharon Percy Rockefeller, is its advocate, each claiming to represent the "common" man and woman. It is hard to know how the Congress will vote on the issue because of the usual package deals of pork-barrel politics.

The alternative under the referendum and initiative system would be simple: ask people what they want. (Much as I love opera, my guess is that the majority would say "no" since today there are plenty of cheap substitutes for the CPB, cable, videos and ordering of programs by phone. The link between government-sponsored culture, taxation and real culture will come up a number of times later in the volume).

The far more weighty issues of government expenditures on R & D, health, schooling, and even Social Security could be decided in the same fashion. Consider the funding of large-scale R & D programs. Economists frequently cite the funding of "basic" research as a necessary role of governments (since the private sector would presumably not do it). Yet, in a recent book entitled The Technology Pork Barrel (Brookings Institute, 1991), Linda Cohen, Roger Noll, and their co-authors find that federal R & D programs have been proven an enormous waste of taxpayers funds:

On the basis of retrospective benefit-cost analysis, only one program - NASA's activities in developing communication satellites...can be regarded as worth the effort. But that program was killed....The photovoltaics program made significant progress, but it was dramatically scaled back for political reasons....The remaining four programs were almost unqualified failures. The supersonic transport (SST) and Clinch River Breeder Reactor were killed before they produced any benefits, and Clinch River, because of cost overruns, absorbed so much of the R & D budget for nuclear technology that it probably retarded overall technological progress. The space shuttle...costs too much, and flies too infrequently. The synthetic fuels program produced one promising technology...but billions were spent on another pilot and demonstration facilities that failed.

The title of the book summarizes the source of failure. Once again, referendum and initiative could provide a remedy. Even if people favored some government role in subsidizing R & D, they could initiate votes on specific programs, requiring that spending on failed experiments be ended and that successful ones not be shut down because of political games.

Thus the referenda and initiatives on separate issues would lead to a far closer relationship between fact and measurement, between actual well-being and the data that are supposed to reflect it - and would restore power to voters. There is no surprise in today's low turnouts during elections: people know that they do not have control on government spending, democratic principles notwithstanding. When people are given the chance to approve public spending on education, on anti-pollution devices, or on particular R & D projects, they will vote and will reveal their preferences and more readily correct those situations when preferences change, or when the government's relative efficiency in offering a service falls below acceptable levels.

In western countries today, we have no idea what we are measuring when looking at the governments' vastly increased expenditures on even health and education. Much of it may reflect the costs of maintaining a large bureaucracy and the power of lobbying and interest groups, rather than providing higher quality health care or education. How can one otherwise explain the fact that in Denmark (with a population of 5.1 million) fifty bureaucrats supervise about 180,000 teachers, whereas in Quebec (with a population of 6.9 million) 5,000 bureaucrats supervise 90,000 teachers? (With predictable results: Quebec has the highest high school drop out rates in Canada, close to 40 percent).

Can Other Nations Become Like the Swiss?

One typical objection to adopting the Swiss system in other countries is that people must first become Swiss before agreeing to them. This may sound funny, but it turns out to be just another play on words. Closer inspection reveals that the Swiss were not so "Swiss" before agreeing on the widespread use of these institutions. Rather, these institutions turned them into the calm, civilized, prosperous, peaceful Swiss that we are accustomed to today.

Until the beginning of the nineteenth century they had their share of religious conflicts -- like all other Europeans. In the 1830s there were protests against the aristocratic governments, and in 1831 serious conflicts arose in the Cantons of Basle, Schweiz, and Neuchatel -- on grounds similar to those in the rest of Europe. In 1847 twelve and a half cantons joined the Federal cause, seven joined the Secessionists (one and two half-cantons remained neutral), and the Swiss fought their Civil War of 1861-64. The Secessionists lost. The subsequent constitutional reforms led to the 1874 document that identifies the Swiss political system today. This document, and the rules it delivered and enforced, forged the federation of people speaking German, French, Italian (and the small number of Romansch) into the current Swiss tribe. Hopefully other countries will not have to fight to get there, but learn from the initial Swiss mistakes.

It would be a mistake to think that the tribe ceased to have internal conflicts; in fact the linguistic ones have been particularly troublesome. But these too were solved through a sequence of referenda. Consider, as an illustrative case, the carving out of a new, French-speaking canton of Jura from the German canton of Bern in 1974. Bern had a German majority that was continuously complaining that the government was spending more on each Juran than on other citizens, and that the Jurans were already better off than the average French-Swiss citizen. Nevertheless, a strong French-Juran separatist movement emerged, although they represented only 7% of the canton's population.

To decide the issue according to federal law, a simple majority referendum was not enough, and a number of referenda had to be held: One for Jura as a whole; one for "border" communities; and others for each district in which 20% of the electorate petitioned for it. In 1974, the Jurans gained a small majority (54.2%) and got their canton, which was accepted in the Confederation in 1978 following a national referendum. In 1975, three French-speaking border districts voted to leave Jura and became part of Bern, but in additional referenda eight border communities voted to enter Jura and one voted to stay in Bern.

Linguistic tensions were not the only ones leading to movements of internal borders. Taxes were another source, which led to the creation of two half-cantons, Basle-Town and Basle-Country. The Country decreased taxes, while the Town canton increased them. The first prospered, the other lost 13 percent of its population, stagnated, and eventually, also reduced taxation. While these occurrences are not common in Swiss history, they are feasible. It is their feasibility that checks the powers of the cantons' government.

In other words, moving borders on paper rather than forcing people to move with their feet -- a far more costly undertaking -- allowed the Swiss to shape the provision of public goods and control their government's spending. It is conceivable, for example, that the US "flight to the suburbs" could have been prevented by such carving of borders on paper -- and that referenda and initiatives also could have prevented the extensive building of highways which subsidized the movement. If so, the "inner city" problem might have been prevented. The existence of these institutions also could have prevented higher taxes on city residents and businesses to pay for bloated bureaucracies and spending benefiting narrow interests, since voters would have recognized that businesses could move out of government's fiscal grasp by setting in place initiatives to redraw borders.

Other Objections

There are, of course, several other common objections to adopting features of the Swiss federal system. One is that the institutions of referendum and initiative are far too costly to operate in more populous countries, like the U.S. But this is not a serious objection in technologically advanced nations. Innovations in communication technologies -- the option of electronic highways -- has lowered dramatically the costs of operating such institutions. At the same time, the costs of large governments and persistence of mistaken policies -- which might be eliminated by shifting toward referenda and initiatives - appear, if anything, to have increased. It may turn out that the major benefit of the innovations in communication technology will be the shift toward the practice of direct democracy.

Another concern is that such a system could lead to the rule of mobs and threaten individual and human rights. But such concerns are unfounded: it has not happened where the system has been properly practiced. Moreover, what danger there is to human rights can be eliminated by restricting the range of subjects on which initiatives and the plebiscites can be held, which would exclude fundamental rights - as is the case of the Swiss.

Perhaps the most serious objection to transporting the Swiss system, however, is the difficulty of overcoming the inevitable resistance by politicians themselves. As noted, referenda and initiative strike a blow against lobbying, and dependence on political maneuvers. They deprive politicians of their role as favor brokers. They also undermine the positions of all those groups depending on governments for their financing, including the advocates of the centralized, all-problem-solving state, and undercuts the bureaucracies established by them; the latter can never be sure of what they will be allowed to do in office or how long they will be allowed to stay there. There is also less money in pork barrels, since taxpayers have the option to vote on every project proposed by their governments. Such changes can also be expected to weaken adherence to party lines, since the referenda on separate issues diminish incentives to form inflexible alliances. In short, we should not be surprised that few politician are advocating institutional changes that would permanently curtail their own power.

Signs of the Future: The Prospects for Direct Democracy

Nevertheless, one of the significant political changes of 1992 was that many important decisions in various parts of the world were decided by referenda. In March 1992, white South Africans voted for reform. In June, Danes defeated the European Community's Maastricht treaty. In September, the French approved the treaty, although barely. In October, Canadians overwhelmingly vetoed a wishy-washy, mish-mash document that politicians tried to pass off as significant constitutional reform but which only promised to suffocate every loudly whining group with commitments.

A few weeks later, voters in different parts of the United States responded to 69 ballot initiatives -- more than at any time since 1932. If voters in Colorado refused to approve special rights for homosexuals in a November 1992 referendum, Oregonians rejected a measure to declare homosexuality "wrong, unnatural and perverse." On June 2, 1992, a nonbinding referendum on the division of California into two states appeared on the ballots. It was approved by 55 percent of the voters: in 27 out of 31 counties the proposal gained a majority. In fact, in California any issue now can be put to a state-wide vote if 615,958 signatures are collected.

In Ireland, people voted on the issue of abortion. In June 1991, 96 percent of the 63 percent of Italians who went to the polls voted yes in a referendum designed to reduce corruption in elections. The referendum was initiated by Mario Segni, a dissident Christian-Democrat, and was opposed by the leaders of the big parties. Another referendum scheduled for 1993 designed to change the voting system for the Senate. President Boris Yeltsin of Russia held a referendum on April 11, 1993, for Russians to decide on the allocation of powers between president and parliament. The fact that all these referenda took place and that many others are planned does not mean that politicians suddenly favor giving people more power. People have always wanted greater control over their political institutions. A survey on February 12, 1993, in Canada showed that 3,982 answered Yes and only 62 No to the following question: "Are you in favor of having the Initiative, Referendum and Right of Recall placed upon the Statute of Books of your own province?" In spite of such overwhelming opinion in their favor, the institutions were not introduced.

So why did we see this sudden shift in 1992? One answer is that politicians have decided to rely on referenda not because they want to see them become a permanent institution, but to win approval of bold departures and embarrass the opposition (and gain more power, as in Mr. Yeltsin's case); or to evade the responsibility for a difficult decision (Ireland's abortion case).
In spite of this skeptical reservation, there now is reason for cautious optimism that significant changes in political institutions may be on their way. It may happen not because politicians want them, but because the governments' coffers are empty and their ability to tax has diminished significantly during the last ten years. Historical evidence from all fields of human activity - in science, technology, or political affairs - suggests that radical innovations have rarely been carried when the establishment had access to finance.

Although new ideas have been continuously offered, they were shelved, discarded, or ridiculed -- finally executed only when orthodoxy was threatened and risked, or actually faced default. The resulting financial crisis destroys traditional alliances, and drastic innovations come to life. Keeping this regularity in mind, we can see greater chances that political innovations will be carried out today because the coffers of many governments are empty. The ability to tax has diminished, thereby diminishing the prospects of securing credit, and their economies are falling behind others. In other words: in the political sphere too, "necessity" is the mother of inventions or, if not invention, the rediscovery of a very old idea: direct democracy.